After Monday’s 777 point drop in the Dow Jones Industrial Average, the term ‘roller coaster’ is not quite descriptive enough to describe the stock market’s recent behavior. There seems to be two camps on what investors should do in reaction to the ups and downs of Wall Street. One group is telling you to sell everything and prepare for the worst. The other is advising to just stay put and ride out the storm, so who is right?
I was a money manager for nearly twenty years and found myself in the middle of these controversies quite often. I always found it odd that there was no middle ground answer to reacting to these kinds of situations. I have never been one to employ a ‘buy and hold’ mentality, and I was never a ‘sell everything and run for the hills’ extremist. My view has always been that a portfolio of investments should not be static, as the economy changes a portfolio should be adjusted accordingly. This type of active account management is what I specialized in. I retired from money management and financial planning about six years ago. Later this week, I may be making a big announcement on that issue, so stay tuned.
As an active money manager, I would go through my client positions each day and decide whether to make any changes. Common sense would dictate that you want to decrease exposure to investments that are not doing well and increase your portfolio allocation to in areas that are currently profitable. Consider the fact that a government bond fund (American Century Target Mat. 2025) is up 13% in the past one year. Would you be surprised to know that there are stock funds that actually go up in value when the market goes down? There are a number of these mutual funds (known as bear market funds) that are up more than 50% in the past year. I share these two examples simply to point out that you do have options and not everything is going down. For now, I think it would be prudent to lower your exposure to areas that are especially vulnerable. I would put financial services funds at the top of that list. For those of you that are just buying index funds, don’t be fooled. A typical S&P 500 Index Fund will have more than 20% of its money in financial companies. This is simply because the S&P 500 Index is comprised about 22% of financial stocks.
Three Things To Do Now:
1. Take A Look At Your Retirement Accounts And Rebalance Your Investment Holdings.
2. If You Are Getting Close To Retirement, Consider Increasing Your Cash Position.
3. Take A Serious Look At Defensive Investments Such As Oil, Gold, Pharmaceuticals, And Government Bonds.
At this point, I think there will be some form of financial bailout legislation passed soon. I would not expect this to solve all of the nation’s financial problems. In fact, some analysts think it may really cause the value of the dollar to drop which will in turn wreak havoc on the economy causing higher interest rates, higher oil prices, and continue to drive the stock market lower. This is a time for ‘active management’ of your investments.
Helping you make the most of God’s money!