If everybody is saying the same thing, can they all be wrong?

Readers will notice that in these times of major declines in equity values, pundits almost universally advise to stay the course, do not panic, keep to your plan and so on. Perhaps reassuring but how sensible is this advice?

For example, if the investments are considered to be speculative, then the answer is likely to be to cut your losses. Often these types of equities are specific to certain fads which when they lose their attraction will never regain their earlier momentum. Witness the end of the tech boom when many of the companies disappeared never to be seen again. We are now facing a similar situation with the proliferation of social media startups trying to emulate Facebook.

If the equities represent real value then one can take some comfort that this value will again be recognized. Several outcomes are possible including the acquisition of the company or simply that the stock market again looks at it favorably. In any event, value will out.

Sometimes sector recognition takes over, causing distortion. This was evident during the period when private equity investors were very active. Value based companies were being acquired at a great rate at premiums to market around 35%. The end came not because of the disappearance of opportunities but because acquisition capital was in short supply. In this case retaining these value based companies remains a good idea in spite of a changed environment.

Now consider the investor. We see way too many examples of random investing exemplified by poor representation in equities, bonds, and cash and by inadequate geographical and sector diversification. As well, the assets are often of questionable value. The investor clings to the faint hope that everything will be rosy again. At this juncture it is time to take remedial action which includes eliminating the junk, and establishing a plan incorporating quality and diversification. The plan has to capture distribution among equities, bonds and cash. It also has to include sector diversification and quality assets which will survive the bad times and prosper in the good times.

So staying the course qualifies if your assets are substantive and well diversified. If not the value of a market downturn is a very strong reminder to get your house in order.