Ouch!

Today was a painful one for investors as well as those in the financial industry.

Lehman Brothers filed for bankruptcy.

Merrill Lynch was bought by Bank of America for a bargain basement price.

The downfall of these supposed financial industry stalwarts sent the markets worldwide plummeting.

There are plenty of lessons to be learned from days like this. The one we'd like to share it this:

Just because a company has been around 100 years, doesn't mean it's going to be around tomorrow.

As an investor, the best thing you can do to protect yourself is diversify.

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Emotions Harming 401(k) Returns?

401(k) investors are running for the hills. As they see the values of their 401(k) plans plummet, they are pulling their money out of equities (ie. stocks) and putting it into fixed income investments (ie. bonds/stable value). This according the the Hewitt 401(k) Index.

In most cases, this probably isn't the wisest decision. It's not easy watching your retirement funds, and the hopes and dreams they represent, as they seem to melt away. But the stock market is a roller coaster. It has it's ups and downs. Fortunately for investors, historically the ups have far outweighed the downs.

Unfortunately for investors, emotions take over when it comes to investing and their money. This usually makes investors buy when things are soaring and sell when things are tanking - the exact opposite of what they probably should be doing.

As Warren Buffett once pointed out, if you were going to buy a hamburger or a car, would you hope the prices of hamburgers or cars go up or down? Obviously, you'd want them to go down.

Same for stocks. The only people who should be hoping for higher stock prices are those want to sell them. Everyone else should enjoy the bargain the market is now giving them. When stocks go on sale, those who cast their emotions aside and buy can really pad their long term returns. These are the times savvy investors make their fortunes in the stock market.

As is often the case, no one has said it better than Buffet himself . . .

"Be fearful when others are greedy and greedy when others are fearful."

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How To Weather the Recent Stock Market Turmoil: Think Climate Change

Since we posted about investing in down markets last October, things have gotten much uglier in the financial markets.

Listening to the Chicken Little financial pundits scream “The sky is falling, the sky is falling,” it’s tempting to take your money out of the markets and stuff it in your mattress.

It’s not easy to watch the value of your investments sink like lead. However, the advice we gave in October still holds true. Investors who keep investing during a falling market can really pad their long term returns.

Try to remember that what happens from day to day, or even month to month, in the stock market is weather. As a long-term investor you should not be interested in weather, you should be interested in climate change.

And over the long term, investors who don't panic during the inevitable market downturns and stick to their target allocations will be duly rewarded.

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The Upside of a Down Market

The recent market fluctuations have many investors running for the exits. Those who are selling in a panic, however, are missing out on a golden opportunity. How so? One only needs to turn to another dose of wisdom from Warren Buffett to find the answer.

"If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."

Investing in a falling market is when savvy investors can really pad their long term returns. Trying to time the market, however, is a losing game.

So how can you stay sane in a tough market and take advantage of it when investments are on sale? Simply stick with these sound investing principles:

1. Take advantage of dollar cost averaging by investing a set amount on a regular basis. You'll automatically buy more shares when prices are low and fewer shares when prices are high.
2. Diversify through asset allocation. Assets classes act differently. While large cap stocks are going up, small caps may lag behind. By using asset allocation to diversify across a number of different asset classes you will minimize the negative impact a drop in any one asset class has on your savings.
3. Regularly rebalance your portfolio. Besides keeping your portfolio in line with your investing goals, rebalancing will also automatically ensure that you buy low and sell high.
   

Following the above tried and true principles, as we do here at Blue Ocean Portfolios using low cost ETFs and index funds, will help you take advantage of the opportunity market volatility creates.

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