Coping with Fear

September 18, 2008

Anyone who has tuned into the news recently has seen some scary financial headlines:

News like this makes even the most calm investor think about whether "this time is different" and wonder if it's time to abandon stock markets altogether and bury the cash in the backyard. So let's look at some other facts:

The reality is, all of the news just reinforces our long-held trust in the importance of diversification. And we've got great company-everyone from pension fund managers to the Harvard Endowment Fund to Nobel Prize Laureates. And let us assure you, this is not just what we do for a living, this is how we personally invest our own money. Each of us has a different asset allocation, of course, as do each of our clients. But we buy the same funds that we recommend to you, and use the
same guidelines to manage and rebalance our investments. So to quote Bill Clinton, "we feel your pain!"

The key to being a successful investor is having the discipline and emotional strength to stay invested in markets even when they deliver gut-wrenching drops like these. In fact, many studies have shown that the "best" thing to do when markets are falling is to dollar-cost average in, since you are buying shares at a lower price (like stocking up on mayonnaise when it goes on sale). But that can be too hard for some to do, as it is so contrary to our emotions.

Our emotions and our fears also prompt us to look for a better solution-we feel a need to do something with our portfolios instead of just standing by. The financial industry and media encourage this, because that's how they sell magazines, newsletters and investments. They also tend to emphasize the negative: they write about the plane that crashes instead of the thousands that land safely. They say "the situation could get a lot worse" when the situation could get a lot better, too. We never know what's going to happen in the future.

So how can you cope with your fear, if you have some? Ignore the things you can't control (the markets) and focus on the things you can: spend less, save more, keep a good cash cushion on hand. It may be appropriate for some people to set up a home equity line of credit, even if there is no current need for the cash. Others may benefit from refinancing their mortgage if rates have dropped enough from their original one.

One client's solution: "I guess I just won't open the quarterly fund performance statements when they come in the near future!!" Turn off the 24 hour news channel, listen to music, read a book, take a walk, call a friend. Remember you're a long term investor, that you have a plan that is designed to make your money live as long as you do, so trust the plan. And call us.

Let us know if you have any questions or concerns, or would like to get together for a meeting any time soon. The economic and investment news has been dismal and is likely to continue that way for some time. We continue to have faith in diversification and will keep a close eye on your portfolio.

Deborah L. Thomas, JD, CFP®
Stephen W. Hewitt, JD, CFP®
Benjamin E. Gilbert, CFP®
Jessica M. Howe

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