Unless you make your living buying and selling investments, the best thing to do when markets drop is absolutely nothing! While it is natural to question the safety of your investments with fluctuations in the stock market, it certainly isn’t the time to sell in fear or worry. However it is a good time to get honest with yourself about what you really feel about risk and to remind yourself what you want your investments to do for you.

What Caused the Recent Stock Market Drop?
I asked Kamal Basra, investment advisor at TD Waterhouse to give me her thoughts on the recent market dip: “A policy change in China to tighten security laws to clean up the stock exchange caused a 10% drop in their stock market which triggered a chain reaction in other countries including Canada and the US. The stock market is cyclical and we've just had four strong years of earnings and growth so the markets were actually overdue for a pullback - in some ways China was just the excuse."

Should investors do anything when the stock market starts dropping?
Kamal says this is a great time to review the mix of investments in your portfolio, to take some profits and to re-align your portfolio with your risk tolerance. But it isn't the time to make drastic changes. Marcela McBurney, portfolio manager at Leith Wheeler Investment Counsel agrees: "Changing your focus when the stock market starts to drop is not something we recommend to clients. This is called market timing and can often prove costly. Remember, the stock market can drop dramatically and quickly, but it can also turn around just as quickly. Some of the best market gains can happen in just a few days."

What do you expect will happen in the markets?
Kamal feels the markets are showing caution and there may be more dips on the horizon, but over the long run stocks are still expected to outperform bonds and cash. Marcela expects that, over time stocks will return in the 8-10% range and bonds in the 4-5% range.

So according to the experts, as long as time is on your side and you can handle the bumps along the way, it still makes sense to include stocks or stock mutual funds in your portfolio.

Here are some ways you can protect yourself during market downturns:

1. Stay Alert
It isn’t necessary for you to become a stock market expert, but having some basic knowledge of the markets puts what’s happening in your individual investments into perspective. This will help you feel more confident and secure that you are making good decisions with your money.

2. Match your investments to your goals
One of the reasons people panic when the markets drop is that they are relying on the money for a short term goal. As a rule of thumb, if your goals are to save for a house downpayment or an emergency fund and you need the money in less than 2 years, you’re best to invest in cash type investments like Guaranteed Investments Certificates (GICs), savings accounts or money market mutual funds. Bonds can be added to the mix if you have 3 to 7 years before you need the money. Only add stocks or stock mutual funds to your investment plan if your goal is retirement or some other goal that’s at least 7 to 10 years away.

3. Take the emotion out of investing
While investing isn’t an exact science, building a simple investment program called “Ideal Asset Allocation” will help you make money when markets are up and as importantly, will help protect your savings when markets fall. Asset allocation simply means allocating a percentage of your investments into cash, bonds or stock investments. Remember your asset allocation must reflect when you will need money for your goals and your risk tolerance, not what's happening in the markets. For instance, your asset allocation might be 100% cash investments for goals like a house down payment or emergency fund. Or, if your goal is retirement and you are comfortable with taking some risk, your asset allocation might look something like 40% bonds and 60% stocks.

4. Dollar Cost Averaging
While the ups and downs in the market might be uncomfortable, volatility can actually be a good thing. Let’s say you invest $200 in a stock mutual fund in your RSP every month. If the market dips on the day you invest, you will be able to buy more shares/units with your $200 that day. If the market goes up the next month, your $200 buys fewer shares/units at the higher price. Over time, this strategy can help lower the overall cost of investing in stocks or mutual funds.

5. Rebalance Your Portfolio
You will need to revisit your ideal portfolio at least once a year and rebalance your investments to your original Ideal Asset Allocation. Remember, your Ideal Asset Allocation should only change because your goals, time frame or risk tolerance changes – not because the market changes. Changes in the market can cause your investments in stocks or bonds to become too large a percentage of your holdings which increases your risk. So if your Ideal Asset Allocation is 40% bonds, 60% stocks and your holdings are now 30% bonds and 70% stocks, sell 10% of your stocks and buy bonds to bring you back into balance. You’ll be selling high and buying low, something that may feel hard to do, but it’s a winning investment strategy.

6. Are you really a Do-it-Yourselfer?
Do you really have the time, interest or energy to manage your portfolio on your own? Yes, you will pay fees or commissions when you invest with a broker, investment adviser or financial planner, but if they can help you achieve your goals, isn’t this money well spent?

7. Educate yourself
Even if you work with an investment advisor that you trust, it’s important that you "delegate not abdicate responsibility" for your money. By learning the language of investing and some of the basics, you will feel more secure and in control of your money and you’ll be in a much better position to achieve your goals.

Register now for "Financial Markets - What's Really Going on?" to hear more about Marcela and Kamal’s views on the markets and how they manage money for their clients.

One of the best ways to start taking control of your finances is by educating and empowering yourself about money. The Women’s Financial Learning Centre offers a variety of financial planning and money related courses for women who want to learn more about money management, investing and financial planning.

Upcoming events in Vancouver:

Financial Markets - What's Really Going On?
Learn how investment professionals manage money - without the sales pitch!
May 24th, 2007
6:30 - 8:30 pm

Sheila's Debt-Free Challenge
Why spend one more day wondering when you will ever get out of debt? Sign up for Sheila's Debt-Free Challenge and learn to get out and stay out of debt.
Starting May 2007

Build Your Own Financial Plan
6 week financial coaching program
Sept 26 - Dec 5th, 2007 (Every 2nd Wednesday from 6:30 - 8:30 pm)

Are you looking for unbiased financial advice? One of the reasons that people shy away from using a financial planner is they are afraid that the advice may be biased toward a particular product or service. LifeDesign Financial is a "fee-only" financial planning and education company and we don’t receive fees or commissions for financial products or services. Contact us today for a complimentary ½ hour phone consultation to find out how we can help you take charge of your money.

Joy Thompson, BA, is a Natural Vision Educator who helps people understand and use simple techniques and practices to improve and maintain the health of their eyes. Joy has been teaching these techniques for over eleven years now, and she has assisted many people in lessening or eliminating their need for lenses or contacts and has helped to improve many other conditions caused by chronic visual stress.

The concept of Natural Vision Improvement was developed by Dr. William Bates, author of “Better Eyesight without Glasses”. Since “The Bates Method” of Natural Vision Improvement was designed, many other vision educators have been trained and have further developed this concept. The fact that our eyes can indeed heal and return to healthy functioning and acuity appears to be a well-kept secret, though, especially in Canada, where there are only a handful of vision educators at present.

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Contact Joy at 778-998-0409 or see_ joy@hotmail.com to book a private consultation or to register for her introductory course on Sunday April 22nd from 2-4pm.