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Making the Most of Down Markets
by Marcia Peterson

Rollercoasting stock markets seem to take our emotions along with them for the ride. But you’ve heard all the logical suggestions about dealing with market volatility -- don’t panic, diversify, remember your time horizons. The question is how to actually keep your emotions from getting in the way of sticking with these practical steps.

A clear view of your financial goals, a realistic time horizon, and regular investing are your best friends. Prudent investors will not listen to those who claim they can predict the future or those who are encouraging them to make rash decisions. Emotions and a lack of perspective are your worst enemies when dealing with your investment portfolio.

So, does this mean you should do nothing at all? That depends. If you're rebalancing your portfolio periodically to try to maintain a certain percentage of your assets in each of a variety of investment types, this might be a good opportunity to consider your level of diversification. Rather than abandoning a single asset class entirely, you might look at adjusting your portfolio in a way that spreads your bets across a wider range of asset classes. Of course diversification can't guarantee a profit or insure against a loss, but it might help better position your portfolio for the future. And the silver lining to broad-based market turmoil is that, depending on the types of investments you want to add to your portfolio, you may be able to acquire them at a discount to what you would have paid a year ago.

Overall, one of the best ways to reduce risk is to develop a portfolio that is balanced in terms of the types of assets in which you invest. In other words, don’t put all your eggs in one basket. A portfolio that mixes a variety of asset classes (e.g. cash, bonds, domestic and foreign stocks and real estate) has a lower risk for a given level of return than does a portfolio that consists of only one. Diversification works because it broadens your investment base. It can be achieved by company, industry, type of security, markets or by investment objective.

In addition, regular investing can help you cope with the human tendency of refusing to invest in a declining market, when stock prices may actually be more reasonable. A program of regular investments helps take the emotion out of investing when markets turn particularly volatile, because your long-term strategy doesn’t change. There is no need to make a drastic adjustment. In fact, one of the worst things investors can do when the market dips is take their money out of the market. Doing so often means buying high, selling low, and missing the chance to add to a portfolio when prices are reduced. If you can keep your head while all around you are losing theirs, you may be able to take advantage of remarkable opportunities.

You also need to consider your time horizon. As your needs change, your investment strategy must change as well. If you were relying on your portfolio for income, you will need to make some adjustments. But again, these adjustments should be made prudently, not randomly. Sell a little of what has gone up – there have been a few winners. Take a little more out of the asset classes that have grown the most.

Most importantly, talk to your financial advisor. You really need someone who can help you objectively sort through the choices and select the strategy that is best suited for your financial situation. This is not something you want to do through trial and error or based on emotion. It is good to have someone you can rely on.

Marcia Peterson is a Private Banker for Baylake Bank. Baylake Bank, Member FDIC/Equal Housing Lender, serves its communities from 28 financial centers in Brown, Door, Green Lake, Kewaunee, Manitowoc, Outagamie, Waupaca, and Waushara counties and from its web site at www.baylake.com. For more information call 920.743.5551 or 800.267.3610.