Amid market panic, remember your time horizon

John Osbon - August 9, 2011

All eyes, some red with market fatigue, are on the Dow and other benchmarks. After 10 days of staggering declines, I imagine there are still many investors with their fingers poised on the panic button, ready at the next sign of trouble to get out of stocks. Many have left the party already.

Nobody wants to own stocks right now.

Well, except the buyers. In this huge selloff, every transaction has had both a seller and a buyer. Billions of shares have been snapped up at what must feel to many like a large short term discount. True, sellers had to accept lower and lower prices to unload, but buyers were there.

Who would be crazy enough to buy (or hold) stocks at a time like this, with signs of meltdown all around?

Well, only individuals and institutions that feel stock prices will go up over the time period they expect to hold them. Some are expecting a quick profit on a bounce in the next day or two. Some see the situation stabilizing in coming weeks to the point where stocks again move based on earnings, not macro panic.

Others are in for the long term – 5, 10, or 20 years. If you are one of these investors, the relevant question is not whether the Dow goes up or down today or tomorrow, but how you expect equities to perform over the full time horizon of your portfolio. If you see the total return of stocks continuing its historic trend as a very jagged line with a long-term upward slope, you’re probably disappointed by recent events, but not afraid to hold stocks for the next decade or two.

No matter what camp you’re in, the one truth that may be hardest to accept is that what the market did yesterday is irrelevant to any investment decision going forward. No matter how sickening recent declines may have made you feel, they are water under a bridge that no longer exists. Yesterday is not a predictor for today. And where the Dow was a week ago – no matter how loudly that number rings in your head – has no impact on where it is going next.

Everyone must deal with volatile markets in their own way. What I suggest is taking a deep breath and thinking about your time horizon. When do you need to take money out of the market?  Let that, not doomsday reports on CNBC, guide your decisions.  Give me a call if you want to talk about it.



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