The stock market is volatile.
There’s no way around it — markets, like your business, are cyclical. While historically, the market has been more bullish than bearish, it does retrench more often than investors would like.
During the past 80 years, the market has dropped at least 10 percent eight times. The largest single day drop was 22 percent in October 1987. Recently, the Dow Jones Industrial Average dropped from a January 2000 closing high of 11,723 to a closing low of 9,655 in October 2000, a fall of more than 16 percent.
Even more astonishing was the decline of the NASDAQ, from a March 2000 high of 5,049 to lows in March 2001 below 2,000 — a drop of more than 60 percent.
But the long-term odds of investing in the stock market to enhance your assets are in your favor. The market has experienced nearly twice as many bullish periods as bearish ones over time. Since 1926, it has, on average, been up two out of every three years.
So what can you do to protect your assets and help your employees protect theirs?
Invest for the long term
The stock market can be risky over the short term but it’s important to realize that the risk decreases as your investment time horizon lengthens. A good rule of thumb is that investments in stocks should be funded with money that you don’t anticipate needing for at least five years.
Do not try to time the market. Aside from the very real difficulty of identifying the end of one market phase and the beginning of a new one, the basic emotions of greed and fear work strongly against those who attempt market timing.
Don’t attempt to avoid downturns by jumping out of the market. No one can accurately predict when it will rebound. Remembering why you invested in the first place will keep you calm during times of uncertainty.
Invest systematically
Consider dollar cost averaging, the practice of investing a fixed amount of money in an investment at regular intervals. While this cannot eliminate the risks of investing or guarantee a profit, it does offer a disciplined method of investing in the securities market.
Invest in quality
It doesn’t seem that long ago that investors were enamored with the idea of getting in on as many initial public offerings as possible. IPOs are risky. For those who know how to work with IPOs and understand the risks, they can offer outstanding opportunities.
But for other investors, it isn’t wise to commit a large percentage of your portfolio to IPOs. Instead, consider companies with a history of consistent sales and earnings growth.
Diversify your holdings
Keep your assets spread among investments likely to perform differently under similar market conditions. This is called asset allocation.
Rely on professional advisers
Each investor brings a different outlook and level of sophistication to the markets. However, even the savviest business leader can benefit to some degree from professional advice.
During uncertain market conditions, it helps to have a coherent investment strategy worked out in advance by qualified investment professionals. Then, when the going gets tough, they can help you stick it out.
Arthur Weisman is a financial adviser for First Union Securities. He can be reached at (216) 574-7317.
