STORY TOOLS

• E-mail story
• Comments
• iPod friendly
• Printer friendly

More Business

• Goodland is back in business
• Business Buzz: October 7
• TAX SECRETS: Multiple owners, multiple problems?

Share and Enjoy [?]

The techniques I developed for studying turbulence, like weather, also apply to the stock market. When the weather changes, nobody believes the laws of physics have changed. Similarly, I don’t believe that when the stock market goes into terrible gyrations its rules have changed. — Benoit Mandelbrot, Mathematician, 1924-present.

Last weekend we watched our friend’s dogs while they went to Busch Gardens for a few days. While playing with the dogs I found myself thinking of the roller coaster SheiKra, and it’s similarities to the stock market.

SheiKra if you don’t know is a 70 mph, adrenaline-pumping experience. It’s all power and speed as it twists and plunges — SheiKra offers three minutes of over-the-edge excitement on more than half a mile of steel track. But then it stops; ride over.

It was just this past July 19 that the Dow Jones Industrial Average (an unmanaged index of 30 widely held securities) closed at 14,000.41. Since then, its triple-digit gyrations have screamed up and down 11 times out of the last 16 trading days. The Dow’s close on Aug. 10 at 13,239.54 is in fact nearly 60 points higher than its Aug. 3 close. Nevertheless, those triple-digit swings and an overall drop of 760.87 points, or 5.4%, since the high have created a very jittery market. If the financial markets were a roller coaster, thrill-seekers would be cutting in line to go for a ride.

Since there is no magic solution to deal with the gyrations, let’s look at a few techniques that may help.

Diversify

Asset classes typically perform differently under different market conditions, spreading your assets across a variety of different investments such as stocks, bonds, and cash equivalents (e.g., money market funds, CDs, and other short-term instruments); can help reduce your overall risk.

Ideally, a decline in one type of asset will be balanced out by a gain in another, but diversification can’t eliminate the possibility of market loss.

One way to diversify is through asset allocation. Asset allocation involves identifying the asset classes that are appropriate for you and allocating a certain percentage of your investment dollars to each class (e.g., 70 percent to stocks, 20 percent to bonds, and 10 percent to cash equivalents). Consider a model or sample allocation based on your investment objectives, risk tolerance level, and investment time horizon.

Think longterm

It’s easy to become too focused on day-to-day returns. Instead, keep your eyes on your longterm investing goals and your overall portfolio. Although only you can decide how much investment risk you can handle, if you still have years to invest, don’t overestimate the effect of shortterm price fluctuations on your portfolio.

Nervous investors sometimes seem to rush from one extreme to the other. They tend to sell when news of yet another bank possibly in trouble because of the sub prime lending troubles surfaces. They buy when they hear that central banks around the globe have injected approximately $135 billion into the banking system.

No one can predict the future. Some analysts point out that a traditional true “correction” would mean a 10 percent drop from the high. Others, such as Raymond James Chief Investment Strategist Jeff Saut, suggest investors should be getting a “buy” list together. In the meantime, economic figures suggest the U.S. economy is, in fact, on a relatively solid footing, notwithstanding the housing industry’s problems.

The most successful investors may follow the day-to-day drama of the markets, but they keep their perspective as longterm investors. Properly diversified, disciplined and relatively conservative in their investment practices and outlook, our investors anticipate longterm success.

If you have questions about these volatile markets, don’t hesitate to contact me. I always look forward to hearing from you.

---

Darcie Guerin is a financial adviser and branch manager at Raymond James & Associates Inc. at 606 Bald Eagle Drive, suite 401, Marco Island. Contact her at Darcie.Guerin@raymondjames.com, 389-1041 or toll-free (866) 343-0882.