Market volatility feeds fear and greed

Domestic and international financial markets are are in uproar, causing selloffs and deep concern among investors. The US lost its top-level credit rating, equating its creditworthiness with Belgium and New Zealand, but below 13 other countries: the Netherlands, Switzerland, Finland, Norway, Sweden, Hong Kong, Germany, France, Canada, Britain, Denmark, Austria, and Australia.

Many Americans are wondering, “What should I do?”

Two reactions are common:

  • Fear
  • Greed

These two reactions can be powerfully motivating and are prompting some very irrational behavior. First, let’s look at an extreme example of fear: In 2008 when the market dropped significantly after the real estate crisis, many fearful Americans called their broker, liquidated everything, then went to the bank and withdrew all their money. Those strongly held beliefs about the end of America & fear of losing everything caused many others to stop investing and simply hang on to cash. It seems silly now, in retrospect, given the continuity of our American way of life that anyone would have acted so irrationally. Still, from a behavioral perspective, people are terrified of losing their security. One this is clear: when facing economic uncertainty, acting from a basis of fear is risky.

Greed is the other common reaction to the fiscal calamity. Some investors are using the volatility to profit from the downturn. Short-sell strategies and derivitives can enrich a portfolio as the market goes down. Without insider information, betting on the downturn is risky.

A conservative approach

Speaking with local financial advisor, Greg Melia, I learned about the “rule of 100.” The rule of 100 is simple:

100 – Your Age = Maximum % of Your Portfolio in Stocks

The basic idea behind the rule of 100 is that the closer you are to retirement, the less risk your portfolio assumes. What are other investment alternatives to stocks? Consider more conservative alternatives like bonds, annuities, CDs, even Gold.

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