Business News & TipsALAN MOORE / L’Observateur / August 26, 1998Recently, the stock market has become volatile as it responds to a number of uncertainties, ranging from the global economic implications stemming from problems in Southeast Asia and Russia, to concern that the powerful rise in stock prices is over with a sharp decline ahead. Of course, mostinvestors know that uncertainty is a normal part of investing-the greatest chance for potential rewards is found with the greater risk taken when investing in stocks with above-average returns-but are the present uncertainties so great that we should alter a long-term investment program? We firmly believe the answer is No.
There are basically two types of market declines. The first type is avaluation correction that occurs when stock prices have moved beyond the underlying fundamentals with a downward adjustment bringing the two in line. These valuation corrections are a normal occurrence in a dynamicmarket. A second type of market decline reflects a change in the broaderbusiness cycle and represents a more serious and prolonged period of weak stock prices. With continued economic growth expected for the remainderof this year and through the next, combined with low interest rates and inflation, the odds are high that the recent weakness is simply a valuation correction.
The strong performance of the stock market over the past three years has probably created unrealistic expectations among many investors. Thiscombined with blow-by-blow media reporting and the ebb and flow of markets creates a much greater psychological risk for investors. This is arisk that can be reduced with investors understanding of, and commitment to, a realistic investment strategy. If you are uncomfortable with theuncertainties of your investment portfolio, now is the time to review your strategy.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm that is a member of the New York Stock Exchange, Inc.)
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