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What we learned from a once-in-a-generation stock market decline

Investing in today’s volatile market requires a total commitment to investing. We may see a strong rally and then the market may plummet for days. This kind of roller coaster ride has shaken investors’ confidence to the core. My message is to have patience and commit to investing based upon solid fundamentals. Market momentum can change in the blink of any eye; if decisions are based upon solid fundamentals you can deal with the facts and not the emotion of investing.

    There can be opportunity in crisis - take a strong look at the improving economy and the decline in the stock market. In 1999, emotion ruled a market higher than earnings per share could sustain. In 2002 emotions are overlooking an improving economy and discounting the potential for earnings to resume. Do you want to invest in a 10-year treasury note that is close to a 50-year low in yield and be safe, or make an investment decision based upon facts and fundamentals? Your portfolio could include fixed income products and equities depending upon your risk tolerance, goals and time horizon.

    Consider the events in the 1990 financial crisis. The fervor in commercial real estate in the 1980s led to real estate markets that tumbled as much as 75% in some areas. The banks, savings and loans and insurance companies who had financed the deals were left holding the bag in many cases. The Gulf Crisis in August of 1990 led to a full-fledged panic in financial stocks. Several financial stocks that were already down sharply went into a free fall. Many people doubted the viability of the banking system itself; uncertainties were voiced as to whether it could withstand the shock of trillion-dollar real estate losses. While not every company made it out of the crisis, most of the financial institutions with strong earnings track records, good fundamentals and adequate capital did survive. As a group, financial stocks went on to outperform the S&P 500 throughout the remainder of the decade. Investors who fled from financial stocks in 1990 gave up the opportunity to enjoy significant gains down the road.

    We have witnessed what could be a once-in-a-generation stock market decline. What have we learned? Never under-diversify. Don’t put all your eggs in one basket. Build an investment portfolio that includes stocks representing a broad range of industries, a mix of Treasury, corporate and municipal bonds, and cash for special needs.

    Plan ahead and never lose sight of your goals. Goals such as retirement can seem so far off or maybe just around the corner. It is important to plan accordingly. How are you going to supplement your retirement income up to 60%? You could take advantage of the tax savings in retirement plans or Individual Retirement Accounts; remember Uncle Sam usually doesn’t give you back your money once you have paid him. A solid investment portfolio has potential to grow substantially given time and a thoughtful discipline.

Nancy Hadley is an investment representative with D.A. Davidson in downtown Sandpoint.


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Nancy Hadley

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