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Stick to the plan?

Personal Finance | Investors have three options in the current financial panic

Issue: "Not over till it's over," Nov. 1, 2008

The cornerstone to prudent financial planning is a thorough analysis of the timeline, risk tolerance, and goals you have. Your goal should be to match your needs through suitable and appropriate solutions.

The appropriate solution in certain cases will frequently involve investments that contain certain degrees of risk and volatility. Volatility is the movements up and down in the value of an investment between the time it is purchased and the time it is sold. Investors do not like volatility, but they do like good returns. Sadly, risk and reward are positively correlated. In fact, this is the defining theme of the investment universe. If high returns were available without any risk, then everyone would buy them, and the high return would no longer exist. This is a tricky balance, and it is a major part of financial planning.

This entire year, but especially the last six weeks, have proven like few times in human history the need for balancing risk and reward. The mortgage meltdown and housing collapse has had a trickle-down effect that has decimated the credit markets, drastically lowered stock market prices, and created an overall panic in the economy.

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No one this side of glory knows exactly what will happen next. What we do know is that history tells us that stock markets tend to perform very well coming out of bear markets and times of economic recession. Many times, selling your investments after major market dips has the effect of making permanent the losses that are really "short term volatility."

The challenge for an investor is not to let his emotions make his decisions for him, as panic and fear are never good drivers of sound financial decisions. If your plan matches your goal and timeline with a suitable solution, then this market noise will pass, and your plan will not be undermined. Of course, it is easy to feel like the solution was not appropriate when markets behave like they are now. With this kind of volatility, there are three things investors can consider doing:

(1) Stay the course. Believe in the plan. Tune out the media. Avoid letting short-term problems interfere with long-term goals.

(2) Take advantage of the problems to be opportunistic. Re-balance your portfolio to add to the investments that are down, and trim from the investments that are up. Add fresh cash to depreciated assets if possible. Seek to make long-term lemonade out of short-term lemons.

(3) Sell. Make your losses permanent. End the headache, and simultaneously render it impossible to lose more money, but also to make any of the money back.

Each one of these options is likely the right thing for some readers of WORLD. For most, I suspect option 1 is the right decision. For some, option 2 is probably appropriate and wise. For a few, option 3 may just be the only thing to do in the face of emotional fear and psychological agony.

Regardless of which option is best in your situation, remember where we place our trust. No market volatility will ever change the age-old truism, that "some trust in chariots, and some in horses, but we will trust in the name of the Lord our God (Psalm 20:7)."

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