Neighborhood Notes

Investing in Uncertain Times
by Adina Flynn

A financial environment clouded with economic uncertainty has sent the stock markets into a volatile pattern, resulting in a rocky start to 2008. It is important to remember that fluctuation in the markets is commonplace, including periods with wild swings like we’ve recently experienced.

While many issues affect the markets, one thing particularly true during times like these is that the immediate future can be very difficult to predict. Many commentators and prognosticators may tell you what to expect, but in the short term, it is always a challenge to determine where the market is going. However, history can be an indicator of what might happen in the long run.

Just like old times
Since reaching its most recent peak value of 14,164 on October 9, 2007, the Dow Jones Industrial Average (through Jan. 22, 2008) has lost 15.5 percent of its value. A drop of this magnitude is not unprecedented. On nine different occasions since 1970, the Dow lost 20 percent or more in value from its peak to its trough in a given cycle. The most severe decline occurred in 1974, when the Dow declined more than 33 percent from its peak before beginning a recovery.

In the last ten years, three significant downturns have occurred. In a period of less than two months in 1998, the Dow lost 18.45 percent. In a four-month span of 2001, it dropped 27.36 percent and over nine months of 2002, it declined another 28.98 percent from its peak to its low point. After closing at 7,286.27 on October 9, 2002, the Dow nearly doubled in value within five years before the most recent decline began in October 2007.

Stay focused on your objectives
Volatile markets can be distracting, but an important message for individual investors is to focus on their long-term goals. Historical record show that stocks go through periods of decline, but over time, markets also recover. One risk for many individuals is to lose faith in the long-term benefits of owning stocks, when their goals require they accumulate wealth.

Whether the market will suffer a further decline in the coming weeks and months, or if we’re on the verge of a recovery is hard to predict. A better issue to consider is your investment timeframe and what goals you hope to accomplish within that time period.

Simple steps to take today
If market volatility has your attention, you can try to take advantage of the situation by carefully assessing whether your portfolio appears to be properly positioned. Make sure your investments are appropriately balanced based on the level of risk you are willing to accept during short-term swings like we’re experiencing at this time.

If you have money to invest, it is not necessary to keep it “on the sidelines,” waiting for a more appropriate sign that the markets are in a recovery mode. Some investors make the mistake of waiting too long to jump back into the market and as a result, could miss several opportunities in the markets. An alternative is to consider spreading out your investments over a period of time (6-to-12 months) using dollar-cost averaging. That is one way the market’s volatility can work in your favor. When prices go down, you purchase more shares. When prices are higher, you purchase fewer shares. The result can be that the average price you pay for a share is lower than if you invested a lump sum at a particular point in time. (Dollar-cost averaging does not assure a profit or protect against a loss in a declining market environment, but it can be a sound investment strategy.)

During volatile markets like these, it is important you remain rational and resist the urge to let your emotions drive your decisions. If you are comfortable that your portfolio was on the right track prior to the most recent downturn, it may make sense to hold your position and let time work to your benefit. If historical precedent applies, your portfolio should recover the lost ground and continue growing as it was before the most recent decline began.

Guidance can make a difference
It is at times like these, when markets are most distracting, that the insights of a financial advisor can make a difference. If you have a long-term financial plan is place, now may be a good time to meet with your advisor to track results and determine your portfolio is allocated appropriate to your risk tolerance and timeframe. If you don’t have a long-term financial plan, markets like these further illustrate the benefit you can realize by working with a professional financial advisor to put a plan in place.

The Dow Jones Industrials Average (DJIA) is an index containing stocks of 30 Large-Cap corporations in the United States. The index is owned and maintained by Dow Jones & Company.

Financial planning services and investments offered through Ameriprise Financial Services, Inc., Member FINRA and SIPC.

Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

The views expressed reflect the views of Ameriprise Financial as of 01/31/2008. These views may change as market or other conditions change. This article is provided for informational purposes only and is not intended to provide investment advice or account for individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance. Past performance does not guarantee future results and no forecast should be considered a guarantee either. It is not possible to invest directly in an index.

© 2008 Ameriprise Financial, Inc. All rights reserved.

(01/08)