in a Down Market
In This Chapter
▶ Taking care of your investments when the market is on the decline ▶ Keeping a level head amid the doom and gloom
Unless a lot of other breaking news occurs on a particular day, sharp because of the down periods. As I discuss in Chapter 2, risk and return go hand in hand. If you want wealth-building investments that provide superior long-term returns, you must be willing to accept risk (that is, volatility and down periods). You should take sensible precautions — with diversification being the star of the show — to reduce your risk.
Although other wealth-building investments, such as real estate and small business, go through significant declines, you generally see few headlines on their daily price movements. A good reason for this lack of headlines is that no one reports on the pricing of real estate and small businesses minute by minute every business day, as is done with stock prices.
Keep Your Portfolio’s
Perspective in Mind
If you follow my advice, your portfolio will consist of diversified stock holdings, including some international stocks and some bonds. Having a diversified portfolio can help in a down market because some investments will increase as others decrease, thus balancing the losses.
One of my counseling clients called me when the stock market was dropping precipitously during the summer of 2002. “I just saw that the S&P 500 is now down 28 percent so far this year, and the NASDAQ is down 34 percent. Should I sell?”
He was quite surprised when I crunched some numbers and determined that his portfolio of stocks and bonds was down just 8 percent for the year. Now, mind you, I wasn’t trying to minimize or trivialize the fact that he had lost money so far that year. However, he overlooked the fact that the bonds in his portfolio had actually increased in value, as had some of his stock funds that were invested in value-oriented stocks. See Chapter 8 for tips on how to build a...