The stock market, after dropping over 800 points today, closed down 370 points, reacting largely to the growing credit problems in Europe and weakening economies in Asia. I want to share my thoughts with you in regards to the current situation.
1. Despite the activities of today, I am confident that the recently passed legislation will begin moving the sludge of non-performing mortgage loans out of the credit system. This will restore confidence in the credit markets which is essential to the continued growth of global economies.
2. In my own account I am betting that confidence will ultimately be restored and that global economies will continue to grow; if only because billions of people around the world get up every day and go to work, intent on improving the quality of life for themselves and others. That is a powerful force that will ultimately win out over the credit crisis we are experiencing today.
3. It is extremely important to keep the current events in perspective in regards to your portfolio, your asset allocation, and ultimately your financial well-being.
4. Whether you are 22 or 72 years old, any money you need to access in the next two to three years should always be kept in investments that are secure and away from the volatility of the stock market. A good place to park these funds are in CDs or high-grade, short-term bond funds.
5. If you are a younger investor, it is essential that you look at the current decline in the stock market as a positive event. Investing future dollars at these lower levels will greatly enhance your long-term returns. If you have an automatic investment plan through your workplace retirement account, keep socking away those dollars.
6. If you are an investor who is getting ready to retire, or is retired, your asset allocation is critical. You should always have a healthy dose (at least 3 to 4 years worth) of high grade bonds/CDs in your account to draw on for living purposes, especially during periods of financial upheaval like we are experiencing today.
7. It is quite possible that the stock market will drop below today’s valuations. Remember, when investing in common stocks, the goal isn’t to predict the market’s bottom, it is to capture the market’s performance over the next five to ten years and beyond, which I am fairly convinced will be on the upside.
I have been involved in the financial services industry for over twenty five years and have seen many crises unfold, including the crash of 1987, the savings and loan debacle a few years later, and the dot.com bust. Sometimes it is hard to remain optimistic and committed to one’s asset allocation amid these events. If you have created an intelligent asset allocation based on your need and ability to take risk, you are almost certain to reach your financial goals no matter what happens to global economies and stock markets of the moment.
Stay tuned to The Coffeehouse Investor, I will be posting regular blogs to share my thoughts on the current situation. Feel free to send me an email with your questions and concerns.