Posted on: Sunday, May 23, 2004
Drop in Dow not a good reason to sell stocks
By Lorene Yue
Chicago Tribune
CHICAGO — Nothing tests investment mettle better than a stock market drop.
News that a bomb killed a member of Iraq's governing council jarred Wall Street last Monday, sending the Dow Jones Industrial Average down more than 100 points after the opening bell. Meanwhile, investors, already uneasy about political turmoil in the Middle East, dialed their financial advisers and brokers for advice.
Their response: Sit tight.
Experts aren't saying to ignore bad news, which stretches from politics to fears of rising interest rates, to surging oil prices and inflation. Just don't overreact.
"We've definitely seen investor reaction to news over the past two months," said John Nersesian, of Nuveen Investments in Chicago. "I wouldn't call it panic and I wouldn't call it deep concern, but I would call it interest."
The impulsive response is to pull back from the stock market and find more conservative places to stash cash, but history shows that isn't necessarily the best approach.
A week after Sept. 11, 2001, the Dow bottomed out for the year at 8,235.81 points after hitting 11,000 in May. But then the blue-chip index began a three-month climb. Investors who bought in at the low point reaped a nearly 22 percent return by the end of the year compared to those who pulled out and then spent the rest of the year trying to catch up.
"People can't time fast enough," said Roger Ibbotson, of Ibbotson Associates in Chicago. "After the news is out, it's too late."
So what's a shaky investor to do?
Don't let news reports dictate investment choices. Instead:
• Conduct a strategic review. Make sure investment strategies reflect current goals. Saving for a child's college or retirement? Set the guidelines and stick to it, but don't forget to make adjustments for any life changes such as marriage, divorce or children.
• Re-evaluate risk tolerance. Don't boast of being a long-term investor, only to panic the minute the stock markets head south. Can't take the downturns? Then take another look at risk tolerance.
"Everybody talks about the long term, but that doesn't mean they don't stress out," said Neal Price, of Mesirow Financial Investment Management in Highland Park, Ill. He measures clients by their academic risk tolerance, the amount of money they can afford to lose, and their emotional risk tolerance, the amount of money they can bear to lose.
• Review asset allocation. Do current investments match the investment strategy or has chasing hot sectors turned a portfolio into a tangle? Do some cleaning and organizing and make sure funds are where they should be to reach financial goals.
