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The Spokesman-Review Newspaper
Spokane, Washington  Est. May 19, 1883

Avoid panic decisions

By Tim Paradis Associated Press

NEW YORK – The volatility that has hammered at the stock market in the past month has led many investors to give up and call in their “sell” orders. Cashing out might feel good at first but a sudden market rally could leave those on the sideline soon feeling regret.

No one can predict what the extraordinary volatility of the past month will bring, but many analysts expect the stock market’s ups and downs will continue. And that’s testing investors’ ability to, if not stand pat, avoid making rash moves – not just out of the market, but back in again, as well.

TrimTabs Investment Research reports that as of mid-October, investors withdrew $55.6 billion from equity funds. That compares with the $94.48 billion added to equity funds in all of 2007.

Many of those who pulled out were understandably scared by the market’s plunges. But these investors perhaps felt flummoxed when they saw the Dow Jones industrials surge a record 936 points, or 11.1 percent, in a single session. While analysts often dismiss such sharp moves as aberrations, the first bursts higher in a recovery can be huge and arrive with little warning. Investors who miss them can find it hard to make up the gains.

For those who decide a hasty exit from the market wasn’t the right move, it’s important not to make matters worse by re-entering the market without a plan.

“This is a horrific market but if you’ve already made a mistake don’t sit on the sidelines and compound the mistake,” said Dan Yu, a certified financial planner at Eisner LLP’s Personal Wealth Advisors group.

Yu and many other financial planners stress that long-term investors should do all they can to avoid making panic decisions and that those who do get out should return to the market incrementally. Putting money back into the market in chunks, rather than all at once, can help investors avoid that sick feeling of seeing the market fall sharply the day after they reinvest.

“Maybe you buy in 25 percent here and then see how you feel the next week,” he said.

Yu said investors should first determine how long they have until they need the money. Money needed in two to three years shouldn’t be in stocks, he said.

Longer-term investors need to be prepared for further swings in the market. The back and forth has kept market watchers guessing since Wall Street peaked a year ago. If the pros are getting jostled by the market, everyday investors are no doubt perplexed as well.

“If you’re diving in and out, most investors are going to get hurt,” Yu said. “Thousand-point swings from red to green – I don’t know anyone that can handle that and know exactly what to do.”

Ron Florance, director of asset allocation and strategy for Wells Fargo Private Bank, said investors too often fail to think about their long-term goals and let opportunity pass them by.

“Allowing the hysteria to drive your investment strategy is just a disaster in the making,” he said. “Right now, changing your strategy is not a good idea.”