If you invest in stocks, you know that the market has been taking investors for a bumpy ride lately. How bumpy? Take a look:
• The NASDAQ composite index, home to many technology stocks, gained 85.6 percent in 1999. For the first two months of 2000, the NASDAQ continued to roar ahead, reaching its peak on March 10. but from that high point, the index fell nearly 54 percent by late December 2000.
• The Dow Jones Industrial Average, largely composed of blue chip, “old economy” stocks, gained more than 25 percent in 1999 But in 2000 the Dow went through a series of sharp ups and downs, and in late December, the index was down by 10 percent for the year.
What’s going on here? In a word: volatility. And it can be unnerving. Now Can you avoid the type of “reactive” investing that is caused by market volatility? Consider the following ideas:
Give diversification a chance to succeed
Diversification is essential to investment success. But it is not a “get-rich-quick” strategy. In a well-diversified portfolio, some of your holdings will be going up, while at the same time others may be going town. This may not lead to sustained periods of tremendous growth, but, over time, you could be protected from downturns that affect just one area, and you’ll give yourself a wider range of opportunities for success..
Don’t overreact to temporary setbacks
Different sectors go through periods of ups and downs. For example, the current market environment has been difficult in general for financial services, retailers, health care companies and consumer goods. Should you sell your holdings in these areas? Before you do, you should realize that these sectors experienced a similar downturn in the early 1990s — and investors who pulled out then eventually missed a period of tremendous growth. Today’s long-term outlook for these sectors remains attractive.
Seek good companies at attractive prices
It sounds simple, but too many people ignore this basic axiom of investing. Try to find those companies whose management is strong and whose products are well-positioned for the future. And look for companies that are reasonably priced, as measured by their price-to-earnings ratio and other factors, Remember, the higher a company’s P/E, the more you are paying for its expected growth — and the greater the downside potential.
Look beyond the “hype”
Sometimes, one particular market sector will seize most of the investing public’s attention. Right now, it’s technology. Unfortunately, attention isn’t always knowledge. The truth is that many areas of technology do offer tremendous promise for investors in the long term. Yet, over the next several years, there also may be a shake-up in some segments, particularly among those companies on the front end of the Internet. As an informed investor you should think about the entire story — not just the headlines.
By following these few basic guidelines, you’ll go a long way toward reducing the jitters that can accompany the stock market’s volatility. And the calmer you are, the better your decisions will be. |
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