Don’t let market jitters upset your investment strategy
Vail, CO, Colorado
Some investors were rattled by the recent volatility in the stock market. And it’s hard to blame them. After all, one day, we’re seeing record highs, and then, a few days later, we’re on a losing streak ” followed by a rebound. What will happen this week, next week or next month? No one really knows, but one thing is certain: Stock prices often fall (or rise) for reasons that have little to do with why you invest.
To illustrate, let’s consider two of the factors that investment professionals cite as responsible for the market’s series of losses in early June:
n Falling hopes for a rate cut: Federal Reserve Chairman Ben Bernanke hinted that the Fed might not be cutting interest rates before the year ended. Because interest rate cuts often spur the economy and can boost stock prices (at least in the short term), Bernanke’s statements took away some enthusiasm from investors.
Rising bond yields: Bond yields rose significantly; at one point during the stock market’s losing streak, the yield on the 10-year Treasury note hit 5.24 percent, its highest level in five years. When yields go over the 5 percent level, some stock investors believe they can cut back on risk and still earn a reasonable return by investing in bonds. If many of these investors then pull back from the stock market, stock prices may fall.
As an individual investor, what should you take away from these apparent “mood swings” of Wall Street?
Here’s Lesson Number One: Don’t overreact to the swings. You’ll waste time, money and effort by constantly trying to adjust your investment strategies in response to events such as comments by the Federal Reserve chairman or a rise in bond yields above an arbitrary figure.
When the market is volatile (and even when it isn’t), focus on the things you can control. Here are a few suggestions:
Invest broadly. If you spread your dollars among a range of stocks, bonds, government securities and other vehicles, your portfolio may withstand market downturns better than if you only owned one or two types of investments.
Buy quality. Look for quality investments, including stocks of well-run companies with histories of paying dividends. These investments tend to hold their value better during market declines, and they usually bounce back faster when those declines run their course. Keep in mind, though, that companies can increase, decrease or totally eliminate dividends at any time without notice.
Follow an “all-weather” fixed-income strategy. If you are investing part of your portfolio in bonds, don’t try to outguess the direction of interest rates. Instead, take an all-weather approach by building a “ladder” consisting of bonds of varying maturities. Once you’ve created your ladder, you are prepared for both rising and falling interest rates.
When rates are rising, the proceeds from your maturing bonds can be used to invest in new bonds at the higher levels.
When market rates are falling, you’ll continue to benefit from the higher rates offered by your longer-term bonds even if the maturing bonds will be locking into the lower rates.
Above all, keep your eyes on your goals. Your monthly investment statements may occasionally make you frown ” but if you’ve done a good job of building a solid investment portfolio and you follow long-term strategies, you may eventually have a lot to smile about.
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.
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