Ah, the whims of the free market economy. Somewhat like riding the roller coaster at the State Fair every October.
Those of us who lacked the foresight to bail out when the market was at it’s zenith several years ago have been subsidized, if not rewarded, in recent months for our patience and indulgence. We are not whole yet, but we are much better off than we were six months ago.
What’s next? As always, it’s anybody’s guess. The market goes up, the market comes down. Stock market watchers seem to be in agreement that a slow, but steady, rise is likely over the next year. Corporate earnings have been better than expected and are likely to improve even more next year.
At least one noted mutual fund guru, whose name escapes me, has suggested that the traditional buy-and-hold strategy of stock market investing may no longer be the thing to do. The alternative is attempting to time the market to buy low and sell high. Perhaps he’s right, but I don’t think so.
People, being the way they are, usually miss the turn when trying to time the stock market. Thus, they buy high when excitement about the market is contagious and they sell low when hysteria sets in. Those sitting on the investment sidelines over the last couple of months missed a 15% gain in the market. If you missed it, it’s going to be pretty tough to make up the lost opportunity.
What about bonds? Lots of folks have dumped their investment dollars in bond funds. Even though bond yields are low, low, low, at least they represent a measure of safety after the stock market tumble. Personally, I think this is a mistake.
Bond values rise and fall in the opposite direction of interest rates. Interest rates go down bonds go up. And, conversely, when interest rates rise, bond values fall. This can be a little confusing since stock prices work in the opposite direction. Low interest rates usually mean stock prices rising, etc.
We are now enjoying the lowest interest rates in several decades and there is no way for them to go but up. Maybe not next week or next month, but eventually they will go up. When that happens the bond prices will go down, down, down. Traditionally, after investors have lost a bunch in the bond market, they sell out in a frenzy and lock in their loss.
Well, if bonds aren’t the place to be, where to go? As old fashion as it may sound, investing in a mixture of bonds and stocks seems to work best over time. Choose your ratio between stocks and bonds and ride that pony. For the truly adventuresome, a portfolio of 75% stocks and 25% bonds should be a good mix. As one goes down, the other will likely go up. More conservative investors should choose a bigger percentage of bonds and less stock.
If you’re already managing a reasonably balanced portfolio, I suggest you do nothing. If your heavy in bonds, perhaps backing off a bit before interest rates begin to climb will contribute to increasing happiness. If you don’t have bonds but want to buy some, buy them gradually over a really long period of time. This should lower the risk of being swept away should interest rates rise suddenly.
Regardless of the bumps of the last couple of years, the U.S. stock market is still the best deal going over the long haul. Ownership of a broad base of stocks in a mutual fund assures that your investments will perform at least as well as the economy as a whole. Trying to do better than that is tricky and fraught with risk.
Thought for the Moment — Do not let any unwholesome talk come out of your mouths, but only what is helpful for building others up according to their needs, that it may benefit those who listen. — Ephesians 4:29
Joe D. Jones, CPA, is publisher of the Mississippi Business Journal. Contact him at firstname.lastname@example.org.