Several readers sent emails after WTC9-11. On reader, in particular, was thankful for the words of caution and professional responsibility in Moneywise and on the David Lopes radio show, regarding making investment decisions in the face of extreme emotional stress.

There were other investment advisors, also doing the right thing by urging their clients to stay the course by waiting. The reader further said that if she had not heard (and read) these advisory cautions to just remain calm, remember your long-term goals, wait until the volatility in capital markets settled down, she would have succumbed to intense broker pressure and sold everything. There were brokers out there urging investors to sell out of equity positions immediately before the market dropped even further. The shortest time frame recorded so far was two hours after the World Trade Towers collapsed. It is debatable as to what kind of a message that sends, particularly if it is coming from an investment professional and as thousands were in terrible anguish seeing their friends, their co-workers, their jobs, and their city vanish into smoke.

And of course as we know, the markets did recover, rather quickly when viewed against the last 14 global crises since 1946. Last week the NASDAQ was up 35 percent and the Dow by 11 percent since WTC9-11.

Moneywise printed a chart showing recovery times for the S&P 500 when these crises occurred. The market bounced back in less than three months eight out of the 14 times. Even the worst crash (at that time), 1987, took less than a year to return to equalisation. Sceptics will always point out that you can't rely on history, and that is true to some extent. But in many instances, the patterns of investor behaviour and markets repeat themselves, enough to provide reliable guidance for future strategies.

Remember that those who fared the worst in the Stock Market Crash of 1929 were investors who had margined 90 percent of their equity positions, had no other savings for fallback and who then panicked and sold out to ruination.

Whenever there is increased volatility in capital markets and you become concerned about your investments, ask the following questions:

1. Have my needs and time horizon for this portfolio changed since this latest market incident?

2. Do I need the cash right now?

3. Has anything else changed in my life that would cause the need to liquidate right now?

4. Have I shopped around and spent some time researching my investment purchases before buying?

5. Have I (and my advisor) picked good mutual funds, or stocks or bonds with a good long history of returning steady returns?

If the answers to questions 1, 2 and 3 are no and the answers 4 and 5 are yes, why would you feel the need to change anything? The only change necessary short-term is a change in mind set. Have confidence in your decisions and those of your advisor.

If you did sell in a panic, or an emotional depression, you may have incurred losses. In the case of mutual funds with deferred sales charges, you may have also been assessed redemption charges. Less than three months later, the market is back on track. Can you rationally assess whether you should have sold? Can you track those sold investments now to see whether you did missed gains? If they recovered in line with the NASDAQ, the gain on an annualised basis may be in the neighbourhood of 150 percent. Still think you should have sold? On the downside, some sector funds may never come back, but they were solidly in the trenches before September 11, anyway, destined to remain there.

Once the emotion is removed from your decisions, logical sense prevails; three months later is a good time to review the rest of your portfolio with a jaundiced eye. If you felt you had purchased decent investments, where are they now compared to their peers and the benchmark? Holding their own? Still in the dumpster? Consider making changes to the non-performers, but make notes on the steadfast names, the investments that bounced back. Place the notes in your investment file for future reference the next time a crisis occurs. You will find it most reassuring.

Having a more stable market allows time to research that mutual fund, stock or bond again. Does it have a good consistent track record, not too volatile, with steady returns (and steady money managers) at the helm? They may not boast exciting take your breath away (80 percent) returns. But we all know what happened to those, but good steady year after year return on equity. If these investments are the kind I favour they have track records going back ten years or more. If the funds fared reasonably well in the last bear market then ask yourself why would this bear market or this terrible tragedy be much different?

If you are not satisfied with your answers, you do need to start the investment product and advisor research again. It is paramount that you have confidence and trust in the professional you work with.

New Portfolio

Next week we are starting a new investment portfolio tracking sequence. We are going to create a portfolio that will meet ten to 15 common investor criteria, including risk level, total return, reputation of fund company, investment goals, fees, relative performance against peer groups, investment style, time horizon, liquidity, and management of risk. The portfolio will be composed of various kinds of investment vehicles, mutual funds, some bonds, some individual stocks, and exchange traded shares. While we will use known name mutual fund data for tracking, the brand names will be kept anonymous. It is important for everyone to receive objective information with the perception of promotion of a particular product or firm.

Finally, a Reader Question

A reader is afraid to buy bonds yielding 5.5 percent in this market because he will have to pay a premium of 105 (cost above the par value of the bond of $1000). His broker told him that he can never get back that $50 above par, so for example if he purchased $50,000 worth of bonds, his premium above par will be $2,500.

In a way, this is true. If you hold the bond to maturity, say November of 2006, you will receive only $50,000 back. No premium will be paid back to you, but, suppose you sell the bonds two years from now for $1,030? Or, suppose even with the cost of the premium, you are happy with a 5.5 percent yield. It is better than you may be able to achieve elsewhere. If that is the case, then receiving back only the face amount (par) is part of the game, because the premium paid is part of the equation. You are not "out" anything. The bond cost you more because it pays a better coupon rate, probably somewhere around 6.65 percent.

The broker then told him that you deduct the total premium paid from the coupon interest amount paid, and that is all you get the first year. Well, this is not exactly true either. Your premium cost of $50 actually gets amortised over the five year period, so in the first year you will receive, interest of $66.50, from that you subtract your one year of amortised premium, somewhere around $10, to equal a real yield of $55.50. Check my math. $55.50/1000 = 5.55 percent interest rate.

Martha Harris Myron CPA CFP is a Certified Financial Planner (TM) (US) practitioner. She holds a NASD Series 7 license, was a US tax practitioner for 12 years, and is the winner of the 2001The Bermudian Best of Bermuda Gold Award for investment advice. Confidential e-mail can be directed to marthamyronnorthrock.bm

The article expresses the opinion of the author alone. Under no circumstances is this advice to be taken as recommendations to buy or sell investment products or financial plans. The Editor of the Royal Gazette has final right of approval over headlines, content, and length/brevity of article.