Are you ready to ride out this market?
Vail, CO, Colorado
If you’re an investor, you’ve probably had happier times. Although the stock market has slumped recently, the drop on Tuesday, Jan. 22, still shook up a lot of people. At this point, you probably have at least two big questions: What’s causing this market decline? And how should you respond?
Let’s start with the first question. What forces have led to this market skid? Here are the chief culprits:
– Looming recession: Leading economic indicators suggest a significant slowdown in growth. For example, the unemployment rate has risen to 5 percent, up from 4.4 percent last March. Since 1949, we haven’t seen such a big rise in unemployment without a recession.
– The subprime loan crisis: As you know, the subprime loan crisis has been in the news for months. First, the problems with subprime loans hit the real estate industry and the financial services industry. But now, the subprime crisis may have spread to the extent that consumers are being forced to pull back from spending.
– Decline in international stocks: Because the United States is a huge part of the global economy, international markets are affected by what happens here. Many of these markets are down between 20 and 30 percent over the past several months.
All these factors have helped lead to the stock market decline. Are we officially in a “bear” market? Not quite.
Before the drop on Jan. 22, the U.S. markets had fallen 15 percent; a 20 percent drop is the standard definition of a bear market.
In any case, though, help may be on the way. The Federal Reserve cut short-term interest rates by three-fourths of a point, the Fed’s biggest rate cut since October 1984. By making it cheaper for businesses and consumers to borrow, the Fed hopes to jump-start the economy.
Furthermore, the President and Congress are working to pass a stimulus package. And, in the broader picture, inflation and interest rates are still relatively low, which is typically positive news for the financial markets.
Perhaps most important, many stocks have already fallen 25 or 30 percent, which means they may now be good values. In fact, recessions and their accompanying market declines can be great opportunities for you, as a long-term investor, because you now have an opportunity to buy good investments at a lower price.
Consider this quote from Warren Buffet, perhaps the world’s most famous investor: “Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well. The dumbest reason in the world to buy a stock is because it’s going up.”
So, if you have room in your portfolio to add appropriate investments, look for those opportunities now. If you are already fully invested, with a diversified mix of quality investments, have the courage to be patient and stay the course. Keep in mind, though, that diversification does not guarantee a profit or protect against a loss.
If you’ve created a long-term strategy ” one that is suitable for your needs, goals, risk tolerance and time horizon ” stick with it.
Bad times don’t last. Smart investors do.
Charlie Wick, Tina DeWitt, and Todd DeJong are financial advisers with Edward Jones Investments. They can be reached in Eagle at 328-4959, in Edwards at 926-1728, and in Avon at 845-1025.