Get Help Weathering the Current Market

With everything that's been happening lately, including terrorist attacks, last year's corporate scandals, and the gloomy war with Iraq, many physician- investors are asking themselves: What do I do with my money now? The truth is, physician-investors are better off figuring out what not to do in this precarious environment.

Remember when your mother asked you, "If Johnny jumped off the bridge, would you?"The answer to that question applies to our current situation as well. Just because Johnny panics (the first thing people usually do in these situations) and retreats, assuming a "bunker mentality," doesn't mean you should. In fact, you should do the opposite.

If you take a look at history and see how the markets of yesteryear behaved, you'll quickly realize that there's a greater need for contemplation than for panic. Understanding what is happening within your own portfolio and revisiting your objectives will result in smarter moves. So, before you follow Johnny and retreat, consider the following 5 investor rules as you contemplate your next strategic move:

1. Look at previous markets. The fact of the matter is that the stock market has experienced its share of bad times. It's seen it all: wars, recessions, assassinations, and scandals. Yet over the long term, the markets have shown positive returns. Taking a look at previous bear markets (consult the table below) may help provide physician-investors with a better perspective. Although this may be one of the worst bear markets, it isn't the first. Repositioning and rethinking your investment strategy will be more beneficial to your long-term success than running away.

2. Give your stocks a break. There are a number of factors that contribute to the change in a stock's price. Stocks are impacted by supply and demand. When people move away from the market, for whatever reason, demand is affected. This can cause a "downdraft" in the market, which will pull many stocks down, even the good ones.War fears, inflation fears, or psychological factors can cause a downdraft. The profitability of the underlying company and the sector in which it operates can also have an impact, even during good market times.

Remember:

Unfortunately, this is when many investors lose their heads. They see their stock prices drop and are ready to throw the baby out with the bath water before considering the long-term factors. Before cleaning out your portfolio, look at each company's earnings (ie, profits) and market share. Get an idea about the long-term outlook for the company. You may find holdings that are worth hanging onto for the long term. Focus on the company, not the stock.

3. Maximize dividends. With the current market environment, price seems to be everything. And as mentioned in rule #2, the quality of the underlying company may be worth hanging your hat on. There are a number of companies whose stock prices have dropped considerably that are still managing a profit (ie, posting decent earnings) and, in some cases, paying dividends of 3% to 4%.

Remember, the price of the stock does not always reflect what the company is doing. A company could be producing new products, gaining more market shares, or making money even though the price of the stock has dropped. Dividends contribute to the overall return on a stock. For example, a stock with a 15% "paper" loss in price that is paying a 3.5% dividend doesn't really lose 15% if you hang onto it and the dividend continues.

4. Put your cash to work. Many investors with paper losses in their portfolios are keeping their cash in low-yielding money markets and even checking accounts. It's an attempt to "balance" their losses by doing nothing with their cash. Other investors are afraid to do anything, even if it is to their advantage. They figure that if they do nothing, things probably won't get worse. However, this is the wrong way to think.

There are "markets" where you can bring cash into your portfolio. And in these times, bringing as much value and new money into your portfolio is the best way to combat losses. Other alternatives include purchasing CDs (they usually pay a little more), short- and intermediate-term bonds, and even fixed annuities for those nearing retirement. Additionally, now is a good time to embark on an asset allocation (or reallocation) program, especially if the market hit you hard. You'll be in a better position when the market rallies.

5. Focus on the bottom line. Rule 5 is a combination of rules 1 through 4. Markets like the one we're currently experiencing often prompt investors to begin nitpicking their investment holdings. They make changes based on the activity of 1 holding instead of trying to increase the overall value of their portfolio. Putting cash to work, maximizing dividends, sticking with companies that show positive earnings, and diversifying among market sectors and investment classes are moves you can make right now. If you aren't ready to follow Johnny and give up, there's a market out there waiting for you.

Patrick J. Flanagan is a New Jersey–based registered representative affiliated with First Montauk Securities, member NASD/SIPC. He welcomes questions or comments from readers at 800-969-0899. Any opinions expressed are the author's and do not necessarily reflect the opinions of First Montauk Securities or its officers, directors, or affiliated registered representatives.