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Minimizing the emotions of a down stock market

Local Commentary

Posted: July 17, 2008 11:13 p.m.
Updated: September 18, 2008 5:02 a.m.

If you have wondered how to survive in a down market, you are not alone. Many investors worry about selling out too soon and then having trouble getting back into the market.

The strategy of systematic, or regular, investing is a proven way to take advantage of changing market conditions and avoid the futile approach of trying to time the market.

Regular investing can help you cope with the human tendency of refusing to invest in a declining market, when stock prices may actually be more reasonable.

A program of regular investments help take the emotion out of investing when markets turn particularly volatile because your long-term strategy doesn't change. One of the worst things investors can do when the market dips is to take their money out of the market because it often means buying high, selling low and missing the chance to add to a portfolio when prices are lower.

To offset this tendency, the following options can help minimize the emotions of the market:

n Systematic investing - To take advantage of a systematic plan, investors must be willing to stick to their strategy during bad markets. Regular investing does not ensure a profit or protect against loss, but you should consider a willingness to keep investing when share prices are declining.

Dollar cost averaging - Similar to payroll deduction of your company's 401(k) plan, you can have automatic investing for your IRA or non-qualified investment with direct deposits from your checking account. This way you are able to buy more shares when the values are down and fewer when values are high.

Why share balance? - When you invest regularly, you will add shares to your share balance even as your account balance fluctuates up and down. You may not be able to control the market, but you can continue to acquire shares regularly by taking advantage of dollar cost averaging. And, you will get a lower average cost per share over time by purchasing more shares when prices decline.

The bottom line is regular investing can help you take the emotion out of investing in volatile markets. A systematic investment plan and reinvestment of dividends work together to help you potentially build wealth. This approach helps you keep focus on the long-term. Talk to your financial advisor to help you make sure your planning, strategies and financial goals continue to meet your objectives and stay the course.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment, located in Santa Clarita. His column represents his own views and not necessarily those of The Signal.


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