When Good Markets Go Bad

When Good Markets Go Bad
by Takara Alexis

The markets have nearly rebounded to the historic highs reached in 2000, but investors have not forgotten the emotional confusion of the tech bubble burst and its aftermath. History tells us the markets will cycle down once more eventually; we just don't know exactly when. When that downturn comes, a financial plan, an investment strategy (how you get to the big picture) and a trusted financial professional can make the difference between staying the course and bailing out too soon.

Not surprisingly, researchers have found that the human brain wants to be happy and will in fact bend our perceptions of reality to that end. Faced with evidence that we have made a mistake in judgment, our brain denies, rationalizes, blames and defends, because admitting mistakes ruins our self esteem and makes us unhappy.

Faced with investment decisions, our brain seeks for ways to support its chase for happiness. We stuff ourselves with information - from the media, from the stock ticker, from cocktail party conversations - and take on a sense of achievement that we have superior knowledge. We do not. We have a surplus of information.

That false sense of knowledge causes us to make an investment based on performance from the past - despite prospectus disclaimers warning us that past performance doesn't promise future gain. We buy what's popular - because our brain tells us that many people can't be wrong. We resist selling investments when performance indicates we should - because we do not want to admit we were wrong. And we invest in stocks just because we know the name or, worse yet, because we work for the company.

If you've fallen pray to these financial defects in the past, now is the time to examine your financial strategy. That starts with a financial professional you can trust to be the voice of reason when you start to freak out about your portfolio. That trusted advisor should be assisting you develop a financial plan that starts with determining your life goals, not just a target amount for your investments. Be upfront when it comes to your assets, your liabilities, your hopes and your fears so your advisor gets a comprehensive picture of what you wish to accomplish.

To put your plan into action, you need an investment plan that fits your time frame, money needs and risk tolerance. With your financial expert, decide which investment vehicles are most acceptable for your profile. That includes understanding what criteria or scenario should prompt you to sell an investment, hold it or purchase more.

When the inevitable happens, and the markets retreat, don't lean on the media, your friends or even the major indexes for your next move. Look to the financial plan and investment strategy you and your financial professional developed and decide if those should change in the current climate. Good markets will always, eventually, go bad. With preparation, planning and professional financial counsel, that does not have to be true of your portfolio.