Don't panic in down market

February 21, 1993|By Knight-Ridder News Service

Every year or so, investors are reminded of a basic truth: Not only do stock prices rise, but they also can plummet.

The latest reminder came last Tuesday, the day after President Clinton announced plans for tax increases. Blue-chip stocks lost 2.4 percent of their value, as measured by the Dow Jones industrial average. Small-company stocks fared even worse, down 3.6 percent.

Despite an occasional bump in the road, investors should avoid the temptation to panic. Investment decisions should be based on long-term financial goals, not short-term emotions.

Most of the selling on Tuesday was done by institutions, not individuals. Because of their size, those firms can afford to trade on the slightest price changes.

Individuals would be clobbered if they used that strategy, says John Markese, president of the American Association of Individual Investors, in Chicago.

Unlike most individual investors, the big institutions can buy and sell large blocks of stock cheaply. Also, individuals would have to pay a capital-gains tax if they sold securities that had increased in value. Institutions pass those costs to their clients.

And by the time stock market news reaches the public, most Wall Street firms have already reacted.

Rather than jumping in and out each time the financial markets flinch, individuals should take a long-term approach. That means building a diversified portfolio designed for your specific needs and objectives.

"If you can do that, you are well on your way to having a sound financial plan, and short-term fluctuations won't bother you so much," Mr. Markese said.

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