If you're an investor, you probably haven't enjoyed the past few months.
In January alone, the Dow Jones Industrial Average fell 4.6 percent. And since the Dow hit its all-time high of more than 14,000 in early October 2007, the index has dropped about 10 percent. So at this point, you probably have at least two big questions: What's causing this market instability? And how should you respond?
Let's start with the first question. What forces have caused the market drop? Here are the chief culprits:
. Looming recession. Leading economic indicators suggest a significant slowdown in growth. For example, the unemployment rate has risen to 4.9 percent, up from 4.4 percent last March. Since 1949, we haven't seen such a big rise in unemployment without a recession.
. Sub-prime loan crisis. As you know, the sub-prime loan crisis has been in the news for months. First, problems with sub-prime loans hit the real estate industry and the financial services industry. But now, the sub-prime crisis may have spread to the extent that consumers are being forced to pull back from spending.
. Decline in international stocks. As a huge part of the global economy, the United States is far from immune to what's happening in foreign stock markets and many of these markets are down between 20 and 30 percent over the past several months.
So, in a nutshell, these factors have helped lead to the stock market decline. Yet in recent days, the picture has brightened a bit. From Jan. 22 through Jan. 31, the Dow rallied 6.5 percent. Part of the reason for this "bullish" momentum can likely be attributed to actions by the Federal Reserve, which cut the federal funds rate, a key short-term interest rate, by 1.25 percentage points over an eight-day span in late January.
Furthermore, the president and Congress passed an economic stimulus package.
These measures may help the economy in the near future, but as an investor, you may have opportunities right now, because many stocks have already fallen 25 or 30 percent, which means they may now be good values.
Consider this quote from Warren Buffet, perhaps the world's most famous investor: "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well. The dumbest reason in the world to buy a stock is because it's going up."
So, if you have room in your portfolio to add appropriate investments, look for those opportunities now, but don't buy investments today that you would not want to own in a recession tomorrow. If you are already fully invested, with a diversified mix of quality investments, have the courage to be patient and do nothing. (Keep in mind, though, that diversification does not guarantee a profit or protect against a loss.)
If you've created a long-term strategy, one that is suitable for your needs, goals, risk tolerance and time horizon stick with it.
Michael Lader is a financial advisor with Edward Jones. His office is located at 4590 PGA Blvd., Suite 200 in Palm Beach Gardens. Contact him at (561) 776-8988 or visit the Web site: www.edwardjones.com.