Smart Investing in a Market Panic

Starting Thursday, funny things began to happen in the stock market. It began to rise even as worries arose about the safety of money market funds and talk surfaced about a government agency to take over bad assets from banks.

On Thursday, the Vanguard 500 share price climbed 4.4 percent. Then on Friday, the stock market rally continued as big investors welcomed Treasury Secretary Henry Paulson's proposed bailout for banks.

By midday Friday, Mr. Panicked was overtaken by irrational exuberance. He decided it was time to jump back in the market by plowing his $95,300 in cash from his sale earlier in the week back into the Vanguard 500 fund.

But again, he had to buy at the day's closing price of $116.14, up 4 percent from the previous day. He could not buy as many fund shares as he first thought and he missed out on that day's gains as well as Thursdays.

Same Old Advice for Investors

For the week, Mr. Panicked started with $100,000 and ended with $95,300. Had he sat tight and listened to the same, boring advice he would have ended the week with $100,300 as the Vanguard 500 Index fund posted a .3 percent gain for the week.

Instead, Mr. Panicked locked in a $4,700 loss and missed out on a $300 gain.

Keep that in mind the next time you get tired of hearing the same old advice.

This work is the opinion of the columnist, and in no way reflects the opinion of ABC News.

David McPherson is founder and principal of Four Ponds Financial Planning (www.fourpondsfinancial.com) in Falmouth, Mass. He previously worked as a financial writer and editor for The Providence Journal in Rhode Island. He is a member of the Garrett Planning Network, whose members provide financial advice to clients on an hourly, as-needed basis. Contact McPherson at david@fourpondsfinancial.com.

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