The recent volatility in the stock market has no doubt caused investors a great deal of anxiety. The mood of the markets had been panicked – with steep declines one day, followed by market rallies the next – as investors try to make sense of the broader economy and what lies ahead. What we have witnessed in the markets has been nothing short of extraordinary in nature.

• The bankruptcy of Lehman Brothers
• Merrill Lynch reached a deal to be purchased by Bank of America
• American International Group (AIG), the large international insurance and financial services conglomerate, announced plans for a major reorganization, the sale of assets and 80% governmental ownership

There is no question that the financial sector is experiencing extreme stress unlike any seen in decades. In addition to the events of last weekend, the placing of Fannie Mae and Freddie Mac in conservatorship (effectively under the control of the Federal Government) is indicative of the nature and magnitude of the challenges that the markets face. The degree of intervention that the Federal Reserve has undertaken is also indicative of their commitment to take even unconventional steps that they deem necessary to avoid a broader crisis from developing.
As the markets digest this round of market events, we believe it is critical that investors focus on key considerations to guide their actions. Despite this recent spate of activity and the fear that is plainly evident in the market, investors with a disciplined, long-term view should view this as an opportunity to do the following:

1. Re-visit one’s range of goals – both short-term and long-term – and current situation within a broad, objective context may help to calm any concerns.
2. Re-affirm one’s strategic asset allocation. As always, this remains the fundamental decision within which all other portfolio decisions should be made.
3. Evaluate the adequacy of one’s liquidity.

Each time the markets come under extreme pressure, the specifics differ to an indeterminate degree from the prior correction. The epicenter of the current financial dislocation is different from those in the bear market of 2000-2002, just as the causes behind that event were different than those behind the correction in 1998 or the crash of 1987. Market corrections are painful, but remain a natural part of the business and economic cycle as excesses are removed from the market and speculators head for the exit.
There are some similarities that are worth noting, however:

• Nobody has demonstrated the ability to consistently call the bottom of such markets.
• At the bottom, investor fear reaches an apex and wields its greatest cyclical influence as speculators liquidate their positions.
• Once a bottom is reached, risky assets are typically best-positioned to outperform over the next leg of the market cycle.
• While the timing always remains in question, markets tend to rebound sharply after the point of capitulation has been reached.
• Patient investors who remain committed to their long-term asset allocation strategy position themselves well to participate in the subsequent rally.
• While such markets can create great fear, they also create substantial opportunity.

If you are looking for a long term strategy that you can depend on, contact Odyssey Advisors. Leave your investment strategy to us.

Mark Collard authored the above article.

Mark Collard is a Partner in the investment management firm, Odyssey Advisors, LLC. Collard received a BS in Business Finance and Accounting, Cum Laude from Saint Vincent College and an Executive MBA from the State University of New York at Buffalo.