Sunday, August 14, 2011

Lessons from a wild week in the markets

Illustrating the past week’s global market gyrations are the following moves in the S&P500: Monday down 6.6%, Tuesday up 4.7%, Wednesday down 4.4%, Thursday up 4.6%, Friday up 0.5% and down 1.7% for the week. News driving the ups and downs included 1) the Standard & Poors downgrade of the U.S. long-term federal debt to AA+, from the top grade of AAA, 2) continued concerns about the Eurozone’s financial system, 3) slightly better than expected U.S. retail sales during July, 3) a decrease in U.S. consumer confidence, 4) the U.S Federal Reserve announcing that it plans to keep interest rates low until the middle of 2013, 5) a slight improvement in U.S. unemployment claim trends and 6) increased trading by high-frequency systems.

MY TAKE: Investing is a dynamic process requiring continual adaptation. As global markets showed increased stress in recent weeks, adhering to risk management strategies helped navigate the turbulence as “storm clouds” appeared. However, last week’s gyrations likely exposed flaws within some investment strategies. Learn from the markets – avoid taking reactive actions while in the middle of a storm. While we may have passed through its center, we are still in the storm.

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