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Step one: Don’t panic

By Sheyna Steiner ·
Friday, August 12, 2011
Posted: 3 pm ET

The stock market wrapped up yet another week, and this time it was a crazy one. The Dow Jones Industrial Average closed the week at 11,245.71, up 5.3 percent from the low hit last Thursday.

The Standard & Poor's 500 index finished the week up 5.2 percent from last Thursday.

Understandably, investment advisers had their hands full with a few nervous clients.

One adviser, Eric Randolph at Hopwood Financial Services in Great Falls, Va., explained how he was talking clients down from the ledge -- metaphorically.

"One of the reasons we have a job is that the market usually has an overreaction to whatever the news is, and we believe that is the case right now," says Randolph.

"There is, as usual, the tendency to take whatever the most recent news is and extrapolate into the future with it. That happens on the upside which is why you end up with bubbles, and it happens on the downside," he says.

"This time is different," is the refrain often heard in the thick of asset class bubbles, but it's clearly a popular thought when the market gets ugly as well.

"Let's just say that the Dow has many more days where it loses 500 points per day, every day until it hits zero. That will be the end of capitalism as we know it," he says.

Backing up from the abject failure of American society, the market is always going to come back ... at some point, to somewhere.

Recognizing that the market is going to come back up and indeed go back down at some point, is the best place to form your investment plan.

There are good times and bad times to come up with your investing plan. A good time is usually when not much is happening: You're not sweating with anxiety or delusional with soaring profits. An example of a bad time would be, say, Monday of this week. Drastically amending your plan at such times is also a bad idea.

"We've had clients who came to us because they actually sold on March 9, 2009 -- the absolute bottom -- and then recognized they shouldn't have done it. At that point, you're in the mode to stem the tide of damage you've done to your portfolio," Randolph says.

Unlike 2008, credit markets are not frozen, there is no liquidity crisis and the American financial system is not teetering towards collapse.

"Pay attention to the fundamentals, what is really going on in the market," Randolph says.

"Right now we're more than 80 percent of the way through earnings season. Out of all the companies that have presented earnings, better than 85 percent have met or beat analysts' predictions for their earnings. That right there tells you that it doesn't sound worthy of the market dropping by 500 points on one day and 600 the next day. That is clearly an indication that it is emotion driving the market," he says.

Heartening economic reports including a definitive statement from the Fed on interest rates early in the week, coupled with a decrease in jobless claims and slightly perky July retail sales rallied the markets. The European stock markets revived after several countries banned short selling on stocks.

It is hoped that the market unpleasantness is over for now, but clearly the underlying problems in the global economy will not be resolved anytime soon.

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