For Long-Term Investing, Ignore Short-Term Volatility

The financial news over the last several weeks has been anything but upbeat. Many of our largest financial institutions are under tremendous pressure. Bear Stearns has collapsed, Fannie Mae and Freddie Mac are in trouble, mortgage lenders and banks are fighting for their corporate survival and, to top all of that, the energy crisis is forcing the world into a global slowdown. One of the few upbeat pieces of news we have seen is that Congress just passed a homeowner protection bill to enable homeowners to recast debt and stave off foreclosure. Against this background, there is little wonder that investors worry about the correct response to these situations.

Most of the people I have spoken to have had one of two opposite reactions to the turmoil in the financial system. The first reaction is usually that they want to reduce their equity exposure. Maybe it is time to either get out of the stock market and sit on the sidelines or cut back on the amount of equities they hold while waiting for the environment to improve. The second reaction, and this is slightly less frequent, is to think that since the markets have fallen almost 20 percent in nine months, this might be a good time to put more money into the market. While it might seem reasonable to assume that one of these would be the correct choice, the best choice is to do neither and maintain your investment allocation.