Tuesday, February 27, 2007

Dow Drops 416 Points....Is It Time To Panic?

It wasn't a very fun day for the markets! Yesterday former Fed Chief Alan Greenspan undermined current Fed Chief Ben Bernake by predicting a recession before year end and then a revival of the "Asian Flu" hit China today as their stock markets took a bath, dropping 8% and obliterating nearly $100 billion. Oh yes, there were also more sellers than buyers today, thus a drop. Poor technology on behalf of the Dow didn't help things either; they failed to keep up with market orders and when they did we got a 200 immediate point drop.....which scared the hell out of a lot of people!

Let's take a step back for a moment and look at the big picture.

Today's market drop is not unusual, in fact it is normal. The Dow Jones dropped by 3.29%, (incidentally the S & P 500 dropped by only 50 points or 3.47%, yet you don't hear that being reported) a percentage drop that has happened on many, many occasions in the Dow's history. You probably won't even remember it 12 months from now. I know you won't remember it twelve years from now.

This is how markets work, it is not abnormal and you shouldn't panic (I say shouldn't, but most people feel emotion.....so, go ahead, panic for a moment, then stop, everything will be O.K.). I understand how difficult it can be to hold onto a portfolio when it is falling; yet it is the best thing you can do long term (assuming it is diversified and you have a long time frame). None of us know when the market will go up or down and attempting to time it is futile.

The markets have been on an upward march for some time now and perhaps they are about to take a breather, I don't know. What I do know is that the long term march of the markets is up and the only way to take advantage of it is by being invested in it.

You are going to see a lot of news stories today attempting to scare you (Financial Pornography), just ignore it. The number one factor in determining how you will fare over time in the markets is your behaviour during times of panic and crisis. If you panic and sell you will be following the crowd and your returns will be low, if you stay put and duke it out, you'll end up with returns that will easily beat your neighbor and most people who invest. Behaviour matters and this is the time when YOUR behaviour is tested, don't fail this test.

There are always things to be pessimistic about (listen to my last podcast) and there will always be "good" reasons to sell; but history tells us that giving into pessimism leads to bad returns. I encourage you to listen to my latest podcast (ironically recorded for an incident as this, just last week). It is located by clicking here. If you really want to go for a ride and see how out of whack markets can get and how statistically improbable they act, I encourage you to listen to my November 15th podcast titled "Misbehaviour and Risk".

I encourage you to give me a call with any questions or concerns.

Scott Dauenhauer, CFP, MSFP, AIF