Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Thursday, August 12, 2010

Expect More Days Like Yesterday

Yesterday, the Dow Jones Industrial Average (DOW) dropped 265 points, 2.5 percent, to 10,378.83. It is now negative for the year. This is naturally unsettling for investors, yet not at all surprising with all the uncertainty both in the U.S. and abroad. The market has been up and down all year. It seems that just when the market starts to make a move upward, some news comes out that sends it right back down.

Yesterday, the Euro dropped 2.3 percent, the S&P 500 dropped 2.82 percent, the Dow Jones Transportation Index dropped 4.27 percent and the Russell 2000 Index of small cap companies dropped 4.02 percent. All thirty components of the DOW were down, yesterday.

The media, of course, always has an explanation for the daily ups and downs for the market. Yesterday, it was a continuing concern about a global economic slowdown. While we sometimes roll our eyes at some of these daily pronouncements, it seems clear that few investors have any confidence that our economy will return to better days, anytime soon.

We expect to see continued high volatility such as we saw yesterday, with the market jumping on signs of good news and pulling back hard on signs of bad news. We worry about a double-dip recession but remain convinced that the best thing for investors to do is stay broadly diversified.

If the market swings keep you awake at night, you need to consider reducing your equity exposure, so that you don’t panic during a market downturn. Being out of the market when it rallies can be just as damaging as being in it when it crashes. In some respects, being out of the market is worse, because the fearful investor often doesn’t buy back in until the market has recovered much of its losses. Such a sell low, buy high reaction is very harmful to one’s portfolio.

So make sure your portfolio isn’t overly aggressive, so that you can ride out the volatility. There are many more bumps in the road ahead.


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