By the end of January, it looked as if most of the stock market’s decline might be behind us. Experts –for the most part—seem to share some tentative optimism that the worst of the panicky sell-off throughout the world’s markets is over. Although plenty of pundits are busy analyzing what triggered the worldwide panic and identifying problem areas, the average U.S. investor just wants to know how to weather the turbulence. Here’s a synopsis of some words of wisdom from experienced stock analysts:
- Don’t act hastily out of fear, anxiety or anger. If you’ve lost money, knee- jerk reactions now could cost you even more. Certainly, recent events are very worrisome, but if you are an individual investor saving for the long term, don’t confuse your concerns with those expressed by financial pros or industry analysts whose performances are critiqued quarterly.
- When panic strikes the markets, the sell-off affects all equities across the board—good, bad and mediocre performers. It is the reverse of the Wall Street adage—“a rising tide lifts all boats”. That being said, after a period of declines, not all stocks are good value despite so-called “bargain basement” prices. To determine if a stock is truly undervalued, it is wise to consider a company’s profit potential for 2008. Be warned that, overall, analysts are fallible when predicting earnings, and that many seem to show a degree of optimism that is illogical in the face of recent market turmoil. The more conservative investment pros are recommending that their clients stick with sectors that are recession-proof (consumer staples, healthcare, etc.) or those who generate significant income overseas (blue-chip tech stocks, international oil and gas companies).
- If you feel some action is necessary in response to January’s bad news, ask your professional tax and investment advisors if it is time to sit down to reevaluate your investment portfolio. A sound investment strategy is based on many factors including: your personal financial situation, family and financial obligations, your age bracket, and career and retirement goals. Only a full understanding of all the factors that affect your individual investment planning can yield a strategy that provides the right diversity (mix of stocks, bonds and other financial instruments) and exposure to risk. If there are any major changes afoot— kids going to college, retirement imminent, etc.—it is likely that your investment strategy needs re-calibrating.
- Finally, don’t forget that, historically, the Federal Reserve’s fiscal policies have been shown to cause stock market trends. The Fed’s unscheduled interest rate cut of three-quarters of a percent gave the stock market an immediate (and most welcome) boost, resulting in a modest gain for the week ending January 25th. However, it is likely that the full benefit accruing from the rate cut will take 10 to 12 months to take hold.
There may still be a few bumpy patches ahead. However, the Fed’s commitment to intervention and President Bush’s $150 billion economic stimulus package should give investors some reassurance that steps are being taken to restore economic stability and confidence in the markets.