The average investor can handle a few bumps in the road. Today's combination of recession, inflation and a credit crisis, however, may make the urge to
do something-anything!-ever more compelling. The following are a few of the most common questions I hear from clients, along with my answers.
Q: Should I stop contributing to my 401(k) until the market rebounds?
A: If you have a good investment plan, it's usually best to stick to it. This bear market is a short-term situation. Your investments-your 401(k) in particular-should be for the long term. Stocks are cheap now. Additional investment should allow you to capture their growth once the market turns upward.
Q: I'd like to move money into something safer until the market stabilizes. What are my options?
A: CDs and money market investments feel safe, but over the long term, their yields aren't even close to the gains of the stock market. Another option is cash. It is always a good idea to keep a buffer of cash equal to six months or more of living expenses so that in an emergency you wouldn't be forced to sell investments at a loss, but holding onto cash with the thought of reinvesting at just the right time can be difficult. Even the pros can't usually do that. Typically, you stand to lose more by not being in the market when it makes its upswing than you'd lose by taking some hits on the downside.
Q: Do you recommend moving more money into commodities such as gold and oil?
A: No. While they are strong now and could go even higher, many analysts agree that they are probably near their peak. Consider the dot-com boom. Investors who poured money into technology stocks in early 2000, when the market was at its peak, soon discovered that was the worst time to invest! They bought stocks at the highest possible prices and then watched their value plummet, with the tech-heavy NASDAQ dropping more than 77% between March 2000 and October 2002*.
Q: My bonds are down in value. Should I sell?
A: What would you move your money into? I feel bonds are still a good investment vehicle for a diversified portfolio.
Q: Some intelligent and financially-savvy people I know have been making changes to their portfolios to address changing market conditions. Am I foolish for not doing so?
A: Two things to keep in mind here:
1. You should review your portfolio to determine if any changes are needed; however, in many cases, deciding to do nothing may be a wise decision.
2. In my opinion, I see no safety in the herd. However, according to the annual Dalbar study of investor behavior, the record of cash flows in and out of the market shows that crowd behavior is often a reliable indicator of what
not to do.
Pam Dumonceau, Owner, Consistent Values, Inc., a Registered Investment Advisor in Aurora, Colorado, may be reached at 303-804-0101 or www.ConsistentValues.com.
Pam Dumonceau is a Registered Representative/Investment Advisor Representative. Securities offered through AIG Financial Advisors, Inc., a registered broker-dealer and member FINRA/SIPC. Advisory services offered through Asset One, LLC, a registered investment advisor.
The views expressed are not necessarily the opinion of AIG Financial Advisors, Inc., and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested. No strategy can assure a profit nor protect against loss.
Investors should be aware that there are risks inherent in all investments, such as fluctuations in investment principal. With any investment vehicle, past performance is not a guarantee of future results.
*Journal of Indexes (July/August 2008)