Financial Forum

This series, Financial Forum, is presented by Pro Advantage Services, Inc., a subsidiary of Pharmacists Mutual Insurance Company, and your State Pharmacy Association through Pharmacy Marketing Group, Inc., a company dedicated to providing quality products and services to the pharmacy community.

DON'T FOLLOW THE HERD

There’s a theory on Wall Street that goes something like this: If you follow the crowd and buy the hot investment of the day, chances are you’ll be scooping up shares when most others are about to sell. This natural tendency to buy when everyone is euphoric can have you buying at the wrong time -- and not buying when you should.

              Investors often jump into an investment at the wrong time because they are worried about what others are doing instead of focusing on good old-fashioned fundamentals, such as the company’s earning potential and its management.

              History has continually shown us that when individuals make investments without a prudent basis for doing so, they often wind up losing money that can take many years to recover. We saw this in 1999, when investors drove the Nasdaq composite over 5,000 -- only to see it fall to less than 2,000 over the following year.

              History has also shown that when individuals avoid investments because the popular thinking is to steer clear of them, opportunities are often overlooked. We saw this in early 1982, when interest rates were high and companies had a difficult time impressing analysts with their earning potential. That period proved to be the beginning of a bull market that lasted more than fifteen years.

Good Advice

In response to market downturns, some investors shift a greater percentage of their assets to money-market accounts. Time and again, this strategy has proven to be a mistake.

          Keep in mind that the stock market has experienced nearly twice as many bullish periods as bearish periods over time. And while past performance is no guarantee of future investment results, the stock market has bounced back from every major market downturn to date.

          When times get tough for stocks, we generally recommend that you maintain your confidence in their long-term growth potential and use these simple strategies:

• Reduce your cost by averaging down. If one of your stocks declines in value, but the underlying business is still sound, consider buying more shares. You will reduce your overall cost basis.
• Stay diversified. Keep your assets spread among investments likely to perform differently under the same market conditions. Profits from appreciated investments can help offset losses from any losing investments.
• Stay focused on your long-term goal. Don’t try to avoid the downturn by jumping out of the market. No one can accurately predict when it will rebound. Remembering why you invested in the first place will help you stay calm during times of market uncertainty.

Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences.