What the Recent Stock Market Craziness Means For You



I wanted to share my thoughts given the craziness in the stock market over the past week and hopefully provide some perspective which the press fails to report. Let's look at the market drop from some other angles:


BONDS

Almost all of your portfolios have bonds in them. When you hear news that stocks are down remember that stocks only represent a piece of your portfolio. Further, if stocks are down, most likely bonds are up. This holds true during the past week -- bonds have been up.


STOCK MARKET PERFORMANCE

The stock market is up 8.59% as measured by the S&P 500 over the past 12-months (as of 8/4/11). So, while it's true that stocks have been beat up over the past week, they are still in positive territory for the past 12-months. Year-to-date the stock market is down 3.50%. Longer term the stock market is up significantly. Since March 9, 2009, just about two and a half years ago, the stock market is up 86.31%. Thus, even though the market is down recently it is up significantly over the past two and a half years.


BALANCED PORTFOLIO COMPARISON

By comparison, our portfolios that are comprised of 50% stocks and 50% bonds are up 8.29% over the past 12-months, and are up 0.53% year-to-date. Longer term our 50/50 mix portfolios are up 54.49% since March 9, 2009.


BUY LOW SELL HIGH

It's funny, if I were to ask you how to make money in stocks you'd likely say, "buy low and sell high." However, while this is easy to say it's very counterintuitive. If you buy low you are buying something that is down in price, that nobody wants, that CNBC is saying is awful. Buying low is buying stocks now. Buying high is buying gold now. The average person buys high once an investment has gone up in value and the investor feels good. They generally sell after an investment drops and the individual feels bad. Of course, this is the opposite of what they should do. This emotional investing is the ticket to poor returns.


REBALANCE - BUYING LOW

A good way to take advantage of the recent stock market drop is to rebalance your portfolio. Since stocks have done poorly recently your stock allocation may be lower and your bond allocation may be higher than the targets we've set. For example, a portfolio that was 50% stocks and 50% bonds in January may be 45% stocks and 55% bonds now. My recommendation is to rebalance. This means, in this example, to sell 5% of the bond portfolio and add the money to the stock portfolio, bringing the portfolio back to the target weighting of 50/50. Please let me know if you would like to rebalance your portfolio.


BUCKET INVESTING

We typically position portfolios using a bucket strategy. "Bucket One" consists of the money you'll spend in the next year or two. This money is in money markets or equivalents. "Bucket Two" consist of money that will be spent in years three to ten years. This is our bond money. "Bucket Three" contains the money that won't be spent for ten years or more. With this methodology the money you have invested in stocks is money that we won't begin spending for ten years. This means that if there is a stock market drop we have ten years to rebound. Time is on our side.


APPLE COMPUTER

Do you think Apple will be profitable over the next 1-3 years? In other words, do you think Apple will sell ipads, ipods, iphones, and computers? If the answer is yes and they are profitable, their stock will likely increase. Stock prices, while swayed by the noise of recent events, eventually reflect their true value based on a company's profitability/earnings. I believe companies will figure out a way to be profitable even given the current craziness. If this is true then stock values will go up.


EXPENSIVE WORDS

The most expensive words on Wall Street are, "This time it's different." When we have stock market drops people - even the pros on Wall Street - tend to let their emotions get the best of them, and begin to believe that this market drop is different from previous market drops. We have always rebounded from stock market losses. Corporations have figured out a way to be profitable even when economic conditions have seemed insurmountable. I believe that this will continue to be the case. I believe that capitalism works and will continue to do so. If this is the case, then stocks will increase over time.


HOLD THE COURSE

As you might expect by now, I am bullish on the long-term, and believe that the best action to take right now it to stay the course.


I hope this was helpful as you battle the negative sentiment created by illogical volatility and sensational news reporting.

About the author

Lon Jefferies, CFP®, MBA
Lon Jefferies, CFP®, MBA

Lon Jefferies is an investment advisor representative with Net Worth Advisory Group, a fee-only financial planning firm in Salt Lake City, Utah. He is a Certified Financial Planner (CFP®) and a member of the National Association of Personal Financial Advisors (NAPFA). He possesses an MBA and bachelor's degrees in Finance and Marketing from the University of Utah. Lon writes articles for local magazines such as Utah CEO, Business Connect and Utah Business Magazine, and he consistently contributes articles to online magazines such as FIGuide.com and FILife.com (by The Wall Street Journal). Additionally, Lon is an expert author at EzineArticles.com. Lon has been quoted nationally in publications such as the NY Times and Investment News.

Lon can be contacted at (801) 566-0740 or lon@networthadvice.com. Learn more about Net Worth Advisory Group at http://networthadvice.com and visit Lon's blog at http://www.utahfinancialadvisor.blogspot.com.

One Comment

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  • This country has come back from everything thrown at it.
    Why dont these big money men realize this and stand up for
    their country and not run scared when something happens. If
    our economy or the worlds goes belly up they wont have any
    money anyhow. Buy stock dont sell it.
    OUR COUNTRY NEEDS YOU NOW

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