Did You Feel the Pain?

There is an article in New York Time today with the title “Small Investors Feel Less Pain as Stocks Slide” (registration may be required). The main theme of the article can be summarized by this paragraph:

The excesses in the financial markets are now generally believed to reside in complex mortgage securities and other esoteric investments, not in the traditional stock and bond markets where average Americans put their money.

This could be true if we compare the losses of the broad markets in recent weeks to the losses of some hedge funds investing risky assets backed by mortgage securities. However, the article goes on with suggestions that things could get worse before getting better and it’s quite normal for the markets to see a 10% correction during a bull market. A 10% fall from its peak reached on July 19th will put the Dow at 12,600, another 640 points drop from last Friday’s close. If the indexes will indeed fall 10%, will you still maintain your current investment strategy? Will you do anything different?

For worried investors who already felt the pain in this turbulent market, the article suggests safer investments such as Treasury bonds:

Many financial experts suggest investors consider moving their money to less risky investments like Treasury notes and blue-chip stocks, which they expect to now perform better than junk bonds and smaller stocks.

Then again, there are many cases in recent decades that “stocks began to rise again” after declining 6% or more, according to the article. The problem is nobody can predict when things will turn around in the current market conditions. Staying out of the market for too long because of the possibility of more downturns could mean missed opportunities if we look at this market in the future. So what’s the best long-term investment strategy?

Individual investors should figure out how comfortable they are with the risks of their investments, while considering their financial circumstances and investment goals.

And develop an long-term investment plan accordingly.

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