It is a well-worn adage that Wall Street doesn’t welcome change. And, change is what we have had lately –lots of it unwelcome— like the banking crisis/credit crunch, rising food costs and oil at $100 a barrel. Add the impending presidential elections into the mix and you have a situation with more uncertainty than investors have experienced for a long time. If experts are floundering, what’s the individual investor to do? Few market pros—if any—offer simple solutions but they do agree on some major points.
The vast majority of market experts urge investors to stay the course and resist the urge to sell stock whilst the market flounders. History has shown us time and time again that investors who buckle down and stay in the market come out ahead in the future. Of course it is difficult to keep emotions out of investment decisions, but market experts agree that staying invested is smart—with the proviso that investors consider a few important points:
- Diversify …With Care
When the stock market falls, individual investors feel the urge to revise the allocation of their stocks, bonds, and other assets. Planners agree that it is important to hedge your bets, but recommend that investors stick with strategic ratio allocations that should be determined by financial/retirement goals, age group, risk aversion and other important factors. Most agree that this is no time for wholesale selling, and that investors should hold a long-term diversified position and resist the urge to “tweak” it in response to news reports. As for cash holdings, most experts recommend holding sufficient cash to cover 3-6 months of expenses.
- Hedge Against A Weak Dollar
Trading currencies is a high risk activity and inadvisable for most individual investors, but participation in a mutual fund that invests overseas may be a viable solution for many. Investment experts note that most U.S. investors don’t take sufficient advantage of this option. How much of your investment should be in overseas funds? This depends on your specific situation and the strategy your investment advisor proposes, but as a rule of thumb, experts suggest putting about 20 percent of your stock holdings in a foreign equity mutual fund.
- Recession-Proof Equities
Of course, there is no such thing as a sure bet in any kind of economic environment, but regardless of whether the economy is growing or declining, there are certain products or service sectors where demand is likely to remain fairly constant. It doesn’t take a genius to figure out some of these sectors—health care, oil and natural resources, consumer staples, etc.— but bear in mind that not all companies in a given sector are going to be stellar performers, and that in some instances you may have missed the start of the party.
- Watch Brokerage Fees
Watch out for higher commission “new” investment vehicles like EFTs. Look for funds sold directly by fund companies, and bear in mind that expenses have been increasing among lower-cost products.
One area where there appears to be almost total consensus is when it comes to taking action. Experts, who have survived similar economic times, and prospered after similar crises, urge investors to avoid knee-jerk responses to bad news, and to be patient. At times like this, nothing is often the best thing to do.