Yesterday was a difficult day for the markets with news of Lehman Brothers filing for bankruptcy, Merrill Lynch being bought and insurance giant AIG looking for funding. Central banks injected cash into the system to help with liquidity. It’s a lot to digest, whether you are in the business or are an investor.
In fact the Dow ended yesterday nearly 500 points lower – its worst point drop in more than seven years. Many investors may have been unaware of what was going on yesterday but have no doubt been made aware of it this morning.
This is a time when investors have to remember – or be reminded of – the importance of a long-term view. In the short term emotion will drive the stock market. Over the long term it’s fundamentals that drive it. There is no question that emotion is currently in control.
However as has been pointed out in the past it is time like these, as emotionally difficult as they are, when investors can buy great companies at a discount the very discount that helps power their long term returns.
What Can Investors Do?
Emphasize Asset Allocation.
Faced with the prospect of continued market volatility, investors should review their risk tolerance to ensure it fits with the asset mix of their portfolios. Market performance over the past several months serves to underline the fact that asset allocation and diversification remain two of the most important aspects of investing.
Continue to focus on the long term.
Benjamin Graham once said “In the short-term, the market is a voting machine. In the long-term, it is a weighing machine.”
Day-to-day market moves are driven by emotion as people react to new information. And volatile periods can continue for some time. But investors with a long-term focus will recognize that this period of adjustment will present an opportunity to acquire great investments at attractive valuations.