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Action Plan

Timing, of course, is usually a critical component of investing success. In fact, the returns from a solid investment idea can easily turn sour if the entry and exit strategies are poorly handled—which can happen if no allowance is made for conditions at the moment of execution. Though it may seem obvious, one of the best ways to minimize the risk of being blindsided by choppy price action is to regularly stand back and try to assess what is actually going on in the market. If trading has been volatile, what are the possible reasons? Is activity being driven by fundamental developments, or does it seem to reflect the fallout from a widespread mood swing? If unexpected data or surprise geopolitical events are responsible for increased instability, does it make sense to wait for the dust to settle before getting involved? Generally speaking, markets tend to quiet down significantly in the hours and days following event-driven disturbances.

Putting circumstances in context can also provide valuable insights. Some questions to ask when the investing landscape becomes unsettled are: Where were share prices headed beforehand? Has the overall market or the securities you have been monitoring been in clearly defined trends, or just treading water? Is it just one security or sector that is volatile, or have many different markets become destabilized at the same time? Intense price swings in a variety of arenas often indicate that the overall economic environment—or, at the very least, investor expectations about it—is changing. If the instability is confined to asset classes other than equities, could it reflect circumstances that may ultimately affect stock prices? Dramatic selloffs in the bond market, for example, may indicate that investors perceive the economy is poised to recover or inflation is set to rise—or both.


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