What to Do with Your Investments in a Roller Coaster Market

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What to Do with Your Investments in a Volatile Market

What to Do with Your Investments in a Volatile Market

What is going on!?

A few weeks ago, Standard & Poor’s (S&P), one of the big three credit rating agencies, placed the United States’ debt on negative credit watch, meaning our nation’s debt was under review for a possible downgrade. Then, last week, Congress and President Obama signed a debt reduction deal and raised the debt ceiling. But, this deal was not good enough for S&P, so it downgraded U.S. debt on August 5 from AAA to AA+ for the first time ever.

In addition to the United States’ economic woes, Europe’s financial crisis is worsening despite their attempts to contain it. Since the U.S. economy is closely tied to international markets given that 50+ percent of S&P 500 companies’ revenues are from international sales, another recession in Europe would negatively impact our own economy.

The recent stock market roller coaster is a reaction to all of this news and fear of what may come – recession, more regulation, international default, and so on. However, this is not 2008! Banks and companies are in much better shape across the world. And even though our economy is sluggish and unemployment is unbearably high, some clarity and support from our politicians could boost consumer confidence and get us back on track.

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What should you do with your portfolios?

Burton Malkiel, an American economist and author of “A Random Walk Down Wall Street,” wrote in The Wall Street Journal:

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My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios. If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did.”

Let’s dissect his advice:

Stay the course and don’t bet against the long term success of the United States. The U.S. is the strongest economy in the world and will continue to thrive despite bumps in the road.

Rebalance your portfolio. What percent of your portfolio is invested in stocks and bonds? Bond prices are very high given the extremely low interest rates. If your bond holdings are higher than necessary, you can sell some bonds and buy some stocks.

But wait! What is your proper asset allocation? Depends on your time horizon and risk tolerance:

Time horizon – When do you need this money? The sooner you need your money, the more conservative your allocation should be. Quick and dirty calculation: subtract your age from 100 to get the percent of stocks you should be invested in.

Risk Tolerance – That quick and dirty calculation could be too conservative or aggressive for you. Rule of thumb: if you can’t sleep, your investments are too risky. It is difficult to properly assess risk tolerance because this week everyone is a lot more risk averse than they were just two weeks ago when the market was rocking.

There are some decent questionnaires online to help you assess your risk. You can also check your 401(k) website for tools and resources. Even better, call your financial advisor for help.

What effect will the downgrade have on your wallet?

The lower United States credit rating should cause interest rates to rise across the board, although rates actually declined this week. Regardless, rates cannot get much lower and will rise eventually, so take advantage. Pay off credit card debt that is ridiculously high right now, lock in a low, fixed rate on your mortgage, home equity, car loans, student loans, etc; and avoid variable rates!

I know market volatility is scary, but please try to remain calm and ride this out. Over the long run the stock market will recover. The United States is still the strongest economy despite this downgrade. Warren Buffet said he would rate United States debt as AAAA. There is truly no other debt safer than the U.S., which is why despite the downgrade, investors are still flocking to Treasuries for protection.

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Steed Investments is an independent, fee-based firm based in Fort Worth, TX, that specializes in holistic financial planning and investment advice. Owner, Gelasia Steed, CFP®, is a personal financial shopper deciphering exactly what clients need to help them achieve their goals and dreams. Contact Gelasia for help with any financial advice need.

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