The Ups and Downs of the Market

August 30, 2008

Its up and then its down -- what do you do? The stock market isnt static. It is up and down constantly. It changes every single second of the day. Market turmoil isnt unusual. It happens every once in a while. The changing of financial seasons is what the market is built upon.

So before the evening news report on the stock market makes you want to get out quickly, you need to consider the natural cycles of stocks. Sometimes people dont survive the turmoil. Sometimes they do. How do ensure that you get through the waves ahead?

First, you must know the differences between turmoil and the normal cycling of the market. Turmoil occurs when an event temporarily affects part of the stock market, or even the entire stock market. Turmoil comes from many sources, often political, economic or other large scale actions and events. For example, situations in the Middle East have affected the US price of oil. This affects the economy and the stock market in many ways. It causes turmoil.

The natural cycle of the stock market is the ups and downs that are simply economic cycling. The cycling is seen in the long term trends that show a up and down to the market.

Turmoil can affect the cycling of the market. It can cause a change in the season before it was expected. But things level back out given time.

You prepare yourself for the natural ups and downs of the market by investing for the long run. How do you prepare for market turmoil?

First, you must be diversified. Look at your current needs. If you are young and plan to invest for 30 years, you can be a bit more aggressive in your investment choices. If you only have five years until retirement, you should be more conservative in where your money is allocated. Invest in cash, bonds, real estate, stock and other types of investments. How much you attribute to each category depends on your current needs and your future goals.

Now look at how each category is divided between classes. For example, if you are a conservative investor, you probably dont want to be investing all of your stock allotment into speculative stock. That just isnt the proper fit for your needs.

Once you have diversified your investments by class, you can move onto individual investments. Look specifically at the individual company that you are investing in.

Now, sit down and look at your investments in another way. You need to know what you would do in a turmoil situation. Know what your short-term trading strategies would be if you had to shift your investments into cash. Know exactly what parts of your portfolio you would change if you had to quickly.

A key to this is really identifying your long-term investments. These are the ones that you wont touch unless the turmoil that occurs is so drastic that you must move them to cash as well.

Of course, it can be more complicated than it seems. We all have different comfort levels. Most people get uncomfortable when they see trouble in the stock market. But you have to have a plan and stick with it. Turmoil will happen. Ups and downs are guaranteed. You simply have to diversify and be prepared for the worst.

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