If The Stock Market Makes You Nervous, There Are Attractive Alternatives For You
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In recent years, the stock market has rewarded the optimists and penalized the pessimists.
But the pessimists may be rewarded yet. There will always be a major market correction. What should you do with your money now if you feel strongly that the bull market may be cooling? Here are our strategies for stock investors who are uneasy:
- Don't change your strategy. If you're a long-term investor with a time horizon of 10 years or more--and you're happy with the stocks and mutual funds you own--leave them alone. Presumably you have an investment strategy that is designed to work for you over the long haul, so stick with it.
Responding to every anticipated move in the stock market makes you a market timer. Even the great professionals have trouble timing the market consistently.
Better: A long-term strategy that ignores temporary ups and downs in the stock market should give you a higher return over time.
Exception: If you own stocks that have large profits and you're not comfortable with the market's future, sell some of your stocks. Remember the Wall Street adage that no one ever lost money taking profits.
Important: If you're five years away from retirement--or will need the money soon to buy a home or pay tuition--you shouldn't be too heavily invested in the stock market. You're better off in more conservative investments.
- Put the money you were going to invest in stocks into safer places instead. If the stock market frightens you, shift cash to money market accounts where it will be safe and readily available when the market quiets down.
Another alternative: Treasury bills. They pay higher returns than bank accounts or money markets, and they have the absolute backing of the government, making them completely safe.
- Rethink your asset allocation. The key to successful investing is having the right mix of stocks, bonds and cash. The right mix depends on your own personal financial situation and current economic condition.
Strategy: Depending on your goals, you might want to examine your allocation annually--or at least every time there is a shift in the investment markets--to see if the mix still makes sense for you.
If the market makes you nervous, change the allocation by adding new money to bonds and cash.
Pay particular attention to your allocation after a long rally in the stock market. Maybe you started with 50% of your assets in stocks. Now, after a long market run-up, rising prices have pushed that stock allocation to 65% of assets. Take profits to restore your allocation the way you want it to be.
- Invest in foreign markets now. Economies around the world move at different paces, and so do international stock markets.
Example: The Japanese economy and the Japanese stock market stayed weak when the US economy and the US stock market were booming.
Strategy: If you believe the local stock market is turning sluggish, shift money to foreign stock markets that are doing better. Most investors will be better off buying shares in a foreign stock mutual fund.
- Use investment money to pay off debts. This offers a better return on your money than investing in a stagnant stock market. If is also better than putting the money in a low-return bank account. The higher the interest rate on the debt, the better the payoff to you.
- Invest the money in your home. Studies show that money spent on a new kitchen, master bathroom or extra room can add to the value of your house.
- Invest in yourself. Use money that might have gone into stocks to take courses that will improve your skills and learning potential. Adding to your education could help you find a new, better job. You could also use the money to launch a part-time or sideline business, which could grow into a full-time venture someday.
Excerpt from: Bottom Line Year Book 1997, based on Laurence L. Foster and Thomas J. Hakala, partners in the personal financial planning practice of KPMG Peat Marwick LLP.« Read Previous Article Read Next Article »