Friday, January 23, 2009

Pausing For Perspective

If you have watched CNBC lately, you may have noticed the emerging trend of multiple "mini screens" on the television at once, each screen hosting a financial expert. It seems you can measure the amount of panic in the market by the number of mini screens present. Lately, as many as eight or nine mini screens have been squeezed onto the television at once.

At the same time, headlines in newspapers and magazines have been increasingly dire. Today, the top headline on (a website targeted at financial professionals) reads "Banks: On the Edge of Cataclysmic Failure."

Cataclysmic failure? Let's take a moment to distance ourselves from the fear-fueled media and compare our current position to other periods of financial distress. During the Great Depression, over 9,000 banks failed, with 744 banks failing within the first 10 months of the initial stock market crash in 1929. During the savings and loans crisis of the 1980's, over 3,000 banks went under. How many banks have failed since the current market decline began in October of 2007? In the media's eyes, what exactly constitutes a "cataclysmic failure?" During the last 16 months, 43 banks have failed.

Certainly, our economy is suffering through a serious pullback, and the failure of 43 banks should not be taken lightly. However, the point I'm making is that investors should not rush to action based on negative reporting by the media. Rash decisions based on emotion frequently have a detrimental impact on performance. An investor should have a financial plan that defines how investment decisions should be made and all investment decisions should meet the qualifications laid out in the plan. This will prevent emotions from driving investment decisions and improve long-term portfolio performance.

Of course, if an investor needs additional advice or help developing a financial plan, they should speak to a fee only, independent financial advisor who has no financial motivation to sell products. NAPFA financial planners are a great place to start your search.

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