Is there a solution to stock market turbulence?
This fall, the U.S. stock market seems to change direction every week in response to the latest news — good or bad. When Europe was struggling to find a solution to the Greek debt crisis, stocks took a dive.
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This fall, the U.S. stock market seems to change direction every week in response to the latest news — good or bad.
When Europe was struggling to find a solution to the Greek debt crisis, stocks took a dive. Then, once the European Union (EU) announced a solution, stocks rose again.
Of course, other European nations also have debt problems, and the United States is still wrestling with a solution to our budget deficit that will satisfy both Democrats and Republicans. When you add continuing political turmoil in North Africa and the Middle East to the debt and deficit issues, it’s almost certain that more turbulence lies ahead this winter. Don’t expect the stock market to move up or down in a straight line — there will be plenty of bumps on the road in either direction.
That’s why many investors are looking for ways to reduce their risk. One strategy advocated by market analysts is to invest in dividend-paying stocks. Usually, these are the large, blue-chip companies in sectors like consumer products or utilities. Under most circumstances, the prices of their shares are relatively stable, compared with smaller companies.
However, it’s important to remember that a dividend-paying stock is still a stock. If the stock market goes down, the price of those shares will still go down. If profits decline, the company might even have to cut its dividends.
This so-called “play it safe” strategy failed dramatically in 2008 when the market collapsed and dividend payments fell further than they had in 50 years. After all, the market is a complex place and moving into dividend-paying stocks during times like these is most likely not a panacea.
Add other assets
One of the most important things for investors to understand is that they don’t have to live and die by the gyrations of the stock market. If market turbulence is keeping you awake at night, you might even talk with your financial advisor about shifting your funds into less volatile assets.
In the past few years, many investors have increased their portfolio allocations to bonds, real estate and tangible assets like gold and silver. Others have kept more funds in cash, but with rates on savings accounts, certificates of deposit and money market funds close to zero, those investments are gradually losing their purchasing power because of inflation — another type of investment risk.
But the biggest fear for most investors is losing money in the stock market. Every day, there are headlines about the Dow Jones, NASDAQ or S&P 500 averages going up or down. That constant flow of information on television and the business news has an impact on people’s emotions. In times of market stress, family members and friends may also urge you to “sell, sell, sell.”
In August, the Federal Reserve pledged to keep interest rates low for at least two more years. The Fed’s goal was to encourage individuals and businesses to start investing their excess cash and stimulate the economy. For investors, it means finding assets that can generate more than a minimal return without taking on a worrisome amount of risk. Investors should always be tactical by looking for opportunities.
Great opportunities typically follow a major correction or crisis. The world’s most successful investors look at the future, not the past.
Category: Stock Market
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