Last Week's Bond Trading Sets Good Example for Stock Investors

When the markets reopen, resist panic and think things through.
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last two columns have focused on giving back. We must never forget the events of last week but, as all financial markets get ready to reopen, we must also give some thought about how we come back from this, for if we do not, then those who set off those attacks will have succeeded.

The Market

History Shows Panic Selling or Buying Is Not a Good Strategy

Gary B. Smith: Looking to the Past for Guidance

The Argument Against Gloom

Cramer: How a Handful of Individual Stocks Could Fare

Cramer: Euro Markets Don't Tell the Whole Story

The Economy

Tony Dwyer: Triumph Over Tragedy Is the American Way

Tragedy -- and Retaliation -- to Strongly Affect Energy Sector

Sector Watch

Investors Will Be Seeking Safety, but Not All Will Desert Biotech

Software Firms Likely Will Forget the Third Quarter, Look to Fourth

Consumer Uncertainty Weighs on Wireless Sector After a Week of Warnings

Defense Stocks Aren't the Sure Bets You Might Expect

It's still too early to say how things will develop. Obviously, the shutting down of major sectors of the economy will have some negative impact, and there are those who think that recession is inevitable. Yet there is also reason for optimism if the response I've gotten from readers in recent days is any indication of the American spirit. We can study how the economy responded in other times of crisis, but if there is anything that investors should have learned from the past year, it is that markets can behave in an unpredictable fashion.

Though nothing can compare to the heroic acts of the past week, I am inspired by the actions of bond investors on Thursday and Friday. Everyone in the bond business has some connection to the World Trade Center, and I know it was emotionally difficult to resume trading in the face of great personal loss. The professionalism exhibited on those days, which allowed the financing of this country to begin to resume, was extraordinary. I hope that it set the tone for other markets to follow. Individual investors can learn a great deal from the way these bond investors acted during a time of great stress, and I want to share a few thoughts from the actions of traders over the past few days that might help you navigate the coming weeks.

First, don't panic. It is difficult to make good decisions, financial or otherwise, in panic mode. Last week, in a calm fashion, traders thought through what they needed to do and then executed. The result was a relatively orderly market. If you are a long-term investor, it's not a good time to turn into a short-term one.

Second, think things through. It's always a good idea to invest or trade with a plan, more so in a volatile environment. The best investors are now trying to think through a range of possibilities without jumping to conclusions, as there will be many crosscurrents in the weeks ahead. As you formulate a plan, go back and think about forces that could act in the opposite way from what you expect. You may still end up coming to the same conclusion that you started with, but you will be better prepared to deal with what lies ahead.

Third, don't overcommit. Many traders took baby steps last week, committing capital a little at a time. This contributed to the calmness of the bond market, and allowed traders to commit more capital should volatility increase. I wrote last week that an emergence of panicky selling could stir my patriotic desire to step up and buy, but planning at what levels and in what amounts that will happen. I've long written about having a mix of stocks, bonds and cash that works for your own financial situation, and now is a good time to take a look at your overall balance of assets and plan on how that might change.

Fourth, work together. The bond market is still largely a person-to-person market. A number of institutions now have a need to rearrange their asset structure, and I was impressed by how market participants and the public sector collaborated to begin affecting those shifts last week. I sensed an increased commitment last week among traders to treat each other fairly, above even normal market etiquette. I have heard stories of how traders left some potentially profitable opportunities on the table so as not to stress the market. There is a sense among institutional investors that we are all in this together. For individuals, this means that there is no need to feel as if you are on an island. If you feel that you have been hamstrung by last week's events or are unsure that your assets are not allocated in an ideal fashion, you should seek out a competent broker, planner or investment counselor to help guide you.

Brian Reynolds is a Chartered Financial Analyst who spent more than 16 years as a fixed-income portfolio manager and economist at David L. Babson & Co. in Cambridge, Mass. He currently writes and lectures about investment issues and trades for his own account. At the time of publication, he had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell. He welcomes feedback at

Brian Reynolds.