Monday, October 15, 2007

Black Monday

Ever heard of Black Monday? If you have lately visited any financial website, read a newspaper or listened to CNBC/Bloomberg - you know what the hullabaloo is all about. The unprecedented and unexpected drop of 22.6% in the Dow on Oct 19th 1987 still haunts Wall Street. Can it happen again, are we prepared, has gloablization reduced the risk or increased the risk of such a drop, are you ready ... ?

My take on this situation boils down to

  • We are not very good at predicting the future (think about weather forecasting). There are too many variables and moving parts to conclusively predict markets. My approach - go for the average by going long term and investing regularly in the market.

  • In the short term there is risk of loss, in the long term it's about average return. Greed and panic lead you to buy high and sell low. Again - I track the market but stay away from trying to time the market. My approach - reduce emotional trading by dollar cost averaging on a regular basis.

  • Follow your plan and not the herd. If you have a rationally defined and objective financial plan - stick with it. Know your entry points, diversification approach and exit points. My approach - plan your financial objectives and strategies. Revise as necessary but stick with your plan.

  • What goes up comes down but over the long term it tends to go higher. The US stock market has traditionally returned about 8-10% annually. Mix in some global markets, REITS, bonds/cash and you have a reasonably diversified portfolio. My approach - define a portfolio allocation that suits your risk profile and time horizon.

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