Financial Abundance Guide

On October 19, 1987, the Dow fell 508 points. On October 19, 2007, the Dow fell 367 points. The big difference between the two declines is that the 508 point decline in 1987 represented a 23% decline in the Dow. However, the 367 point decline on Friday represented only a 2.64% decline in the value of the Dow.

The question for investors is whether last week, when the Dow declined by 4.1% and the S&P 500 declined by 3.9%, was a mere blip on a continuing bull market or the presager of a coming bear market. While virtually every analyst has an opinion on this, no one knows for sure.

As an investor, the one thing that you can do is to decide whether you believe that the stock market has more upside or more downside risk in the next 12 months. With economic expansion beginning its sixth straight year, oil and other commodity prices at near record levels, the dollar approaching historic lows and gold near historic highs, it may be time to be cautious about your equity (stock market) exposure.

From January 2001 through December 2002, the S&P 500 fell by over 30%. As demonstrated in the story of Mary, Nancy and Joan on page 122 of the Financial Abundance Guide, portfolio allocations can make a large difference in returns, especially in down markets. Mary, with her 80% equity and 20% fixed income portfolio lost almost 23% during this period, while Joan, with a 50% equity and 50% fixed income portfolio lost only 10%.

It is never wise to try to time the stock market or to sell all of your equity investments. However, it is wise to weigh the risk/reward of your asset allocation between stocks, fixed income and cash. If you have become overly weighted in equities during the bull market of the past five years, it may be time to reallocate your assets so that your equity exposure is consistent with your risk tolerance levels.