by Archie M. Richards, Jr.
June 12, 2006

On the morning of Thursday, June 8, 2006, the stock market suffered a mild panic selloff on huge volume. Many investors said, "I give up," and they sold.

Did you give up? If so, you made a mistake. Get back in. Here's why:

The Economy: The American economy continues to draw strength from the reduction of income tax rates three years ago. Low tax rates never fail to stimulate the economy. The favorable effect will continue for some time. A recession is out of the question.

A recession did occur in 2001. The Federal Reserve, which controls most of the nation's money supply, created a ton of new money to limit the damaging effects.

But with the economy now strong, the Fed is restraining money growth to prevent inflation damage. One result: A key short-term interest rate (the fed funds rate) has risen from 1 percent to 5 percent.

Investors seem concerned that any additional rise (which seems likely) will choke off economic growth. It won't. A rise of fed funds to 5½ percent would be neutral and normal. That was the average during the late-1990s, when the economy grew like gangbusters. Fed funds would have to climb to 7 percent before economic growth would be cut off. No way will it reach that level any time soon.

The Market: On days of panic selloffs, keep reminding yourself that pessimistic sentiment about stock prices (bearishness) does not cause prices to fall further. People do not turn bearish and then sell. Some do, but for the market as a whole, they don't.

Pessimism does not lead to falling prices; it accompanies falling prices. Sentiment does not condition prices. It is conditioned by them.

When prices are on the bottom, pessimism is greatest. The prices can always fall further, making people even more bearish. But a panic selloff, while not infallible, is as good a signal as any that pessimism has reached an extreme and that prices are near their lows.

Never say to yourself, "I'm bearish, and so is everyone else. Therefore, prices will fall more." You'll lose opportunities for profit. Prices often rise fastest after bouncing off panic bottoms.

The stock market is counter-intuitive; it doesn't operate like other aspects of our lives. For example, if we don't like a TV show, we don't watch it, and TV producers cancel the show. If we don't buy a certain line of clothes, producers stop making it. Users and producers are opposite to one another. Unfavorable sentiment by users causes producers to cancel.

But the stock market doesn't divide into users and producers. Instead, we're all on the same side. We're all in it together as investors. Bearishness does not cause selling. It parallels selling.

When you sense intense pessimism, you're probably close to a bottom. Be inclined to buy, not sell.

Investment Strategy: It's essential to allocate your money to various investment categories. For example, from the market peak on May 10, 2006, to the bottom prices at about noon on June 8, here were the worst declines among the investments I recommend (see www.archierichards.com > Suggested Portfolios):

Emerging Markets:	down 25 percent
Pacific:	down 17 percent
Small-Cap Growth:	down 14 percent
Europe:	down 12 percent

Those four sectors represent 37 percent of my suggested portfolio. But during the same period, real estate investment trusts fell only 2.9 percent and long-term bonds rose by 4 percent. Those two sectors, representing 40 percent of my suggested portfolio, partly offset the four unfavorable sectors above. Overall, the portfolio declined less than 10 percent during the period.

From the start of the year to the June 8 panic bottom, the portfolio was down less than 1 percent. What's so bad about that? The year is young. My guess is, we're going to see fireworks on the upside.

If you sold, buy in again now, well diversified. Oh yes, and during the next panic selloff, stay in.