Retirement Guys: Firework frenzy on the stock marketWritten by Nolan Baker Mark Clair | | firstname.lastname@example.org
The quick decline in the stock and bond market during the past few weeks has started to get the attention of many investors. Our past columns offer a wealth of advice and guidance for investors on steps to take in today’s market. Two good recent columns we encourage you to read online at www.ToledoFreePress.com are “Buy low, sell why” and “Don’t be an Emotional Investor.”
Today, what we would like to focus on is answering the questions you might have regarding the recent market uncertainty and give you additional advice on what you as an investor should be doing.
Are the recent declines in the stock and bond market normal? The simple answer is yes. For a long time we have been recovering from the 2008 crash. Even recently the market continued to rally. At some point the markets will go down. That decline could be short-term, go all summer long or, if economic conditions change, it could get worse. How the average investor reacts to those changes can have a dramatic impact on his or her individual results. Remember to buy low and sell high. Don’t let short-term results impact your long-term decisions. The sooner investors realize they don’t have control over the market in the short term, the quicker they can focus on what they can control, which is cost, cash flow and risk.
Is your current portfolio on track? All investors want their accounts to go up in value. And yes, we would agree performance is an important part of a successful long-term portfolio, yet we feel this should not be the first or only thing an investor looks at. Comparing individual performance to others can encourage an investor to chase results, which can be a costly mistake. Forget everyone else and just focus on what your individual goals and objectives are. If the objective is to produce a certain amount of income a year and that goal is being met, don’t worry too much about the day-to-day noise of the stock market. Make sure there is a very specific goal and objective for each investment account.
Are you taking too much risk? Often times we hear investors say things like, “I lost 5 percent. If I keep losing that same amount, before long I’ll be out of money!” Instead of trying to figure out this math on how long the money will last, focus on what risk level you are comfortable with when you look at the total plan. We call it giving your plan a stress test. Review the risk by looking at the total plan not just individual holdings. At any given point it is not uncommon for one part of the portfolio to be doing well while another part is underperforming. Emotions would tend to lead you to sell the “loser” and buy the “winners.” Remember this can lead to chasing results and possibly increase the risk. Although it does not guarantee against loss, diversification is a strategy that can help reduce risk.
Why has the stock and bond market been so volatile lately? In our opinion, several factors are making the market unstable lately. Interest rates have dramatically increased in a very short period of time. A few weeks ago 30 year mortgage rates were close to 3.25 percent. Now according to www.bankrate.com they have skyrocketed to 4.51 percent. This shock to the system has had an impact of most investments that were sensitive to interest rates. The stock market needed to take a breather as well. We had gone almost a year and a half since that last one day decline in the stock market like what occurred on June 20. Risk of default is another concern among investors. Right here in our backyard, Detroit is on the verge of bankruptcy. That would make it the largest U.S. city in history to file bankruptcy. Take all of these factors and combine them together and it makes for fireworks in the economy.
What should an investor do now? Those who have recently reviewed their accounts and fouthe objectives are being met, and risk is under control should just go back to enjoying the summer. The water is warm and the parks are beautiful. Turn off the news and get outside. If you haven’t reviewed your investment plan in awhile, aren’t sure if the objectives are still on track, and don’t know how much risk is in your plan, then schedule a review with a licensed investment professional right away. This could be the most important decision you make this week towards gaining financial independence.
For more information about The Retirement Guys, tune in every Saturday at 1 PM on 1370 WSPD or visit www.retirementguysradio.com. Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550