Don’t blow a big opportunity offered by the bear

Your portfolio has endured one of the worst bear markets of the last 100 years. As bad as things seem, investors may have been handed a once-in-a-lifetime opportunity. They shouldn’t blow it by becoming fixated on what’s happened to them.

Unfortunately, investors frequently focus on what they paid for an investment, and fluctuations up or down from that initial price bully them into inertia. During the great bull market of the 1990s, there were plenty of investors who couldn’t bear to sell winning investments. They had paid so little for their investments, and seen the price go up so far, that they held on in order to avoid paying capital gains taxes. The bear market has erased that problem for many investors.  Now they are sitting on losses that they “can’t take.” Once again, they are focused on something in the past—the price they paid for their investment—not on the future.

Forget what you paid! Look at your portfolio today and ask yourself whether you would buy more of each of the investments in it. If not, sell them. Ask yourself if your portfolio is well balanced and diversified among the major investment asset classes. If not, sell investments and reallocate your money. The important question is this: will my portfolio meet my long-term financial goals? If it isn’t up to the task, fix it. Don’t worry about losses or gains?worry instead about not being in the right place to take advantage of the eventual market recovery.

The U.S. stock market fell 49% from its peak in 2000 to its low in October 2002. The stocks in the NASDAQ index fell by 78%. No one knows whether the market will fall further from here, and it may. But the bigger risk over the next few years may not be having your money in the market if it falls further. Instead, it is having a badly diversified portfolio that won’t take advantage of a strong market recovery that may leave today’s prices behind in the dust.