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Many new investors involved in the stock market have seen tremendous price appreciation, until recently.  Most have not experienced a downturn in the market and may hit the panic button before they take a good look at their portfolio.  The stock market decline over the past year was the worst investors had seen in ten years.  By late March the Dow Jones Industrial Averages was down 7.78% from year-end 2000; the NASDAQ off 20.17%; and the Standard & Poor's 500 down 10.46%.

Volatility has always been, and will always be, an integral part of investing.  Without volatile markets, the opportunity for profit would not exist.  The problem is that everyone loves upside volatility but hates downside volatility.  Unfortunately, one cannot exist without the other.

Most investors want to see stock prices on a continual rise.  What they should want are falling prices when they decide to purchase a stock.  If the stock was a good value at the higher price, it is a better value at the lower price, considering its fundamental value still hold.  The lower price will allow an investor to buy more shares and further benefit from higher potential appreciation should the stock reach its expected intrinsic value.

Although it feels like stocks will never go up again, history suggests otherwise.  A number of reliable stock market indicators suggest that the stock market could be higher twelve months from now.

There have been 13 occasions since 1931 where the Fed has cut interest rates three consecutive times; 12 out of those 13 eases, the market was higher one year out.  This is a good reminder that the Federal Reserve can have a strong influence on the stock markets.  The liquidity that is being injected into the economy will likely have a positive effect on the stock market.

Many investors have become paralyzed by the markets' recent actions.  Investors may need to determine if their investment plan for the next twelve months will in fact weather the short-term fluctuations and through their long term strategy.  The plan should be designed to give your portfolio the best potential for attaining your goal to personal financial wealth.

Take a look at the stocks in your portfolio that are no longer viable companies.  Many dot-com companies that are now selling below your cost basis fit that category.

Keep in mind a diversified portfolio can weather downturns in the market better than a portfolio heavily weighted in one industry.  If that industry is having difficulty meeting profit and/or Wall Street analyst's expectation, your entire portfolio will feel the crunch.  That does not mean that you should buy mainframe computer manufacturers, semiconductor companies, software companies, hardware companies, etc.  Even though each of those may be considered a different industry, they are merely branches of the same tree.  When lightening strikes the tree, all the branches may fall.  Include one or tow stocks from these industries with stocks from financial, energy, health care, retail and other unrelated industries in a portfolio.  Then, when downside volatility strikes one industry, the impact to the entire portfolio may not even be noticeable if the other stocks are rising in price.

Consider upgrading to better companies in the same industry.  Upgrading involves making sure that you own the companies that have the best potential to advance in your time horizon.  If you own the second- or third-tier company in an industry, consider selling it, even at a loss to buy the best company.  The company with superior market share often performs much better going forward.

If you already own a first-tier company within a particular industry, and the fundamentals of the company continue to be strong, consider adding to that position by dollar cost averaging.  Dollar cost averaging involves investing an amount into the same investment at regular intervals rather than in one lump sum.  By investing on a periodic basis in the same security, you may pay a lower cost per share, which increase your potential to earn a profit.  You automatically buy more shares when prices are down and fewer shares when prices are high.  Over time, your average cost per share may be lower than the average share price of your investment.

Decide, before you buy, under what conditions you will sell if the stock price falls.  Generally, a falling price without an underlying change in business fundamentals is not a good reason to sell.  If the price falls as a consequence of a change in the expected growth rate of sales or earnings, this may be a sufficient reason to sell.  Establish some parameters before you buy that can provide the reasons for you to sell the stock.

Volatility is a necessary ingredient of stock market investing.  When stock prices rise, it is an investor's friend.  It hurts tremendously when stock prices fall.  The key to weathering the ups and downs of the stock market is to take your emotions out of the process.  Sit down with your professional planner to make sure that your investment strategy is still on track.  If your strategy and investment profile has not changed, you will weather these turbulent times in the stock market.

This article was published in The Network Journal. Jodye Deal, contributed this article for the New York-based magazine.  If you have questions on investing, please send them to Investing@GazelleAssociates.com.

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