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Stock Market Plummets
STOCK MARKET PLUMMETS--GRIM FORECAST FROM FED--QUESTION: ARE YOU PROTECTED IN THIS DOWN MARKET?
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(November 8, 2007 - Thursday) - by Lawrence C. Melton, Esq. lmelton@dhayeslaw.com
THE HAYES LAW FIRM, www.dhayeslaw.com
STOCK MARKET PLUMMETS--GRIM FORECAST FROM FED--QUESTION: ARE YOU PROTECTED IN THIS DOWN MARKET?
Losses sustained from a market downturn are not wholly the result of the ebbs and flows of the market.
On some level, losses are the result of your broker's failure to implement RISK MANAGEMENT--the tools and techniques necessary to protect your investments from the ebbs and flows of the market.
The Chairman of the Federal Reserve, Ben S. Bernanke, gave testimony to the Joint Economic Committee in Washington today. His forecast was not optimistic. He said the economy is likely to slow down considerably in the fourth quarter. The circumstances precipitating the grim forecast include: (1) the housing recession, (2) surge in oil prices, (3) lack of confidence in the credit market, and (4) a weakening U.S. dollar. Bernanke indicated that the Fed would not be cutting interest rates again in 2007.
The Fed's gloomy pronouncement was illustrated by yesterday's 360 point free fall in the market. Today, shares stayed in the red. The Dow dipped 200 points, or 1.5 percent. The S&P fell 1.5 percent. As the market takes a nosedive, investors worry about their exposure.
It is important for investors to remember that the losses they sustain from a market downturn are not wholly the result of the ebbs and flows of the stock market. On some level, your losses are the result of your broker's failure to implement tools and techniques necessary to protect your investments from the ebbs and flows of the market.
Why did you hire your broker or financial adviser? Most likely you hired your broker to protect your investments against the inherent risks of the market place. You hired your broker to protect you from being pulverized should the market crash. You certainly did not hire your broker to lose massive quantities of money and then offer up excuses. You do not want to hear the stale refrain: "too bad, the market went down." While it is true that all investments entail some degree of risk, that fact alone does not grant the broker the right to abdicate his or her responsibilities.
Irrespective of the type and designation of the account, all brokers and advisers have a duty to employ appropriate methods and techniques to measure and manage the risk associated with their customer's investments. The two most common techniques of risk management are asset allocation and diversification:
ASSET ALLOCATION is the selection of a portfolio of investments where each component is an asset class (usually stocks, bonds, cash) rather than an individual security. It is widely known that 90% of any portfolio's performance depends solely upon the allocation between classes of investments (fixed v. equities), and that most of the rest depends upon proper diversification within each asset class (e.g., US stocks; foreign stocks; different industry sectors: consumer, financial, industrial, technological; and among equities and U.S. treasuries, corporate bonds, foreign bonds, etc.).
DIVERSIFICATION is the spreading of investments among different industries and market sectors in order to reduce risks. It is important to have in one's portfolio stocks that do not all depend on the same economic variables, such as consumer spending, business investments, housing construction and so forth. Studies show that diversification is not possible with less than 25-30 positions.
More than likely, your broker did not adequately explain to you the information contained in this article. It is probable that your broker did not implement such measures as discussed above. If your broker had implemented such measures, you may have avoided incurring heavy losses from the market crash.
The Hayes Law Firm is a securities arbitration law firm dedicated to the zealous representation of victims of securities fraud. Visit our web page at www.dhayeslaw.com or call us toll free at 1-866-332-3567.
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