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August 5, 2011

Are these the times to be fearful and sell or be greedy and buy?

There are many ways to describe Thursday’s drop.  Some terms being used to describe the drop were: dramatic, scary, painful, troubling.  You have to ask yourself if there is a reason to do anything?  There are many factors to consider.  Nothing you do today will change the past.  There is no way to know the future. 
One question to ask yourself is whether you are an investor or a trader?  That is, are you looking at the short-term as opposed to the long-term.  This will help you evaluate the alternatives that apply to your situation.  Look at your financial goals, determine the timing for those goals and prioritize your goals.  Reflect on whether the likelihood of meeting them has changed.  Are your cash reserves adequate for the next 3 months, 9 months, 24 months?  The higher your cash reserves and/or your short-term certificates of deposit and short term bonds the less need you have to do anything today.  This is also a good time to reflect on how you react to the changes in the financial markets.  Note the difference in your feelings when the markets go up compared to when they go down. 
Now look at the make up of your portfolio.  Are there any reasons to change it?  It is important that you balance your financial needs with your tolerance for market volatility and your tolerance for losses.  Generally the alternatives with higher returns have higher risks.
These are not the time to just react.  These are the times to monitor, measure, evaluate and analyze before doing anything.  Be careful not to become paralyzed.  More importantly do not overreact.   
The last paragraph of Dave Kansas’ column in the wall street Journal reads: “so, as the markets crater around you, keep a cool head and look for opportunities that make sense.  As Warren Buffett says: ‘Be fearful when others are greedy, and be greedy  when others are fearful.’  No shortage of fear out there Thursday.”
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