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Money Muse
Money MuseKeep Long-Term Perspective in Times of Crisis
By Marko Tubic
Nov 08, 2001 -- Everyone needs a muse. A muse can be that little voice in the back of one's head, or it can be a person who can see through the moment and tell us what is really the right thing to do. Since money is often the fuel that keeps our lives moving forward, we especially need advice and a calm head here. Getting it is one thing--what to do with it then is the hard part. Money Muse will appear once a month in The Seattle Press.The tragic events at the World Trade Center, the Pentagon and in Pennsylvania shocked the nation and the world. As an individual, you no doubt felt appalled and deeply saddened. But as an investor, you also have to deal with the "aftershock"--specifically, the impact such a horrible event has on the world's financial markets.
There's nothing you or anyone else can do to control world events, or how markets respond to them. Consequently, it's important not to base your investment decisions on today's headlines, no matter how dramatic they may be.
Sadly, there have been other national tragedies in our past, although arguably none as horrific as the events on September 11. Thankfully, we live in a country that is resilient, and the financial markets have historically reflected that. And, over the past four decades, the rebounds have come fairly quickly after the onset of a major crisis. For instance, at the height of the Cuban Missile Crisis--a period of extraordinary fear for most Americans--the Dow Jones Industrial Average fell more than nine percent. Yet, just over two months later, the Dow had gone up nearly 29 percent.
We can also go back to October 1987, when the stock market crashed. At its low point, the Dow was down 34 percent--and yet, two months later, the index had regained a full 15 percent. And in the years since then, the Dow soared from record high to record high.
The point is that the stock market is resilient. Throughout its history, it has trended upwards in the long-term, despite short-term blips, bumps and crises.
Nonetheless, it can still be difficult to maintain your focus in the face of calamity. That's why you should consider the following these basic investment principles:
* Maintain a long-term perspective--Short-term setbacks can be discouraging, but keep in mind that you're not investing for next week or next month. You're investing to achieve long-term goals, such as college for your kids or a comfortable retirement. That's why it's best to look beyond today's events and stay focused on the future. It's easy to do this when times are good--but it takes real discipline to stay on your path when the road gets rough.
* Diversify your portfolio--The best way to protect yourself against short-term market fluctuations is to diversify your holdings. Not all investments respond in the same way to the circumstances. For example, when stocks are down, bonds may be up, or vice versa. By building a diversified portfolio containing stocks, bonds, government securities and money market instruments, you'll give yourself more opportunities for success.
It's natural to feel distraught in the wake of crises or tragedies. Yet, by following these few simple guidelines, you'll be able to take the emotion out of your investment decisions.
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