I don’t like to fly.
Each time I’m in an airplane, I find myself wondering how the contraption works. How can we be suspended in mid-air? Why don’t we fall crashing to earth? It seems unnatural. But, alas, I love to travel, so I steel my nerves, take my Valium and climb aboard.
Usually, I survive the trip with little damage to my sanity. That is, as long as the ride is smooth. On a recent trip, we hit what the pilot called “a little unexpected air pocket.” I thought we were going to die! My heart raced. My stomach churned. I wanted off that plane. But we were thousands of miles up in the air, and I didn’t have a parachute handy. All I could do was stay put, say a prayer, and trust the pilot to get us on the ground.
When people tell me they want to invest in the stock market, I always ask questions that give me a feel for their risk tolerance. Can they stand the ups and downs of the stock market? In the last few years, with the market growing at unnatural rates, investors forgot about the risks they were taking. The attitude has been to buy stocks, any stocks, and simply sit back and watch them increase in value. It was easy. And, as long as the market was giving us a smooth and upward ride, we were fine.
But, in the last year, NASDAQ has lost more than 60% of its value. The bursting of the tech bubble has expanded to the blue chip stocks as the Dow has bumped and dived below the 10,000- mark. Suddenly, all those so-called risk tolerant investors are screaming that they want off this ride.
If you’re investing in stocks, right now, your heart is racing. Your stomach is churning. You’re certain the world is coming to an end. Then you don’t need to be in the stock market. The time to measure your risk tolerance is not when the market is in boom times but when it hits rough spots. And it will hit rough spots. That’s just the nature of stocks.
But what if you’re in the middle of the ride with no parachute? Carefully study your portfolio of stocks. Will these companies be around 10 years from now, or are they in danger of a crash landing? If the companies you own are sound, you may want to stick it out, say your prayers, and trust Mr. Greenspan and President Bush to get things back on track. If your holdings are questionable, get out. Unstable companies don’t weather stock market storms very well.
Finally, check your pulse. If the events of the last few months are too much for you, consider making changes now to alleviate your stress. Tone down your exposure to stocks. Those stocks could be flying high again next year, but can you stand the bumps in the meantime? In the long haul, you may be sacrificing return, but in the short run, you’re sparing your sanity.
I love to travel, and I’ll get on an airplane again. And, in the middle of the flight, when we hit another air pocket, I’ll wonder why I didn’t just stay on the ground.
Will we never learn?
Nancy Lottridge Anderson, CFA, is president of New Perspectives Inc. in Clinton, (601) 924-9828. Her e-mail address is firstname.lastname@example.org, and she’s online at www.newper.com. Her column appears frequently in the Mississippi Business Journal.