By Sheryl Rowling
SAN DIEGO — Dear Money Maven:
Q: I’m very concerned about the stock market. It’s been at an all-time high, but is showing signs of volatility. Should I cash out of stocks now?
Q: Bonds are paying almost nothing and interest rates can only go higher. I don’t want to lose money on my bonds. Should I cash out of bonds now?
A: Believe it or not, I’m hearing each of these questions with similar frequency. The simple answer is that nobody can predict the market. We know it will have ups and downs, we just don’t know when! What we do know is that:
1) Over the long-term, the market will give positive returns.
2) Diversification can help cushion the downturns.
To reinforce these concepts, let’s delve a little deeper.
In times like these, the media likes to sensationalize – no wonder we worry when we are constantly bombarded with predictions of impending doom! It is possible that stocks will decline in value in the near-term, just as it is possible they will continue to increase.
Bonds are paying very low interest returns currently and any inflation or rise in interest rates will cause bonds to decline in value.
So, is the answer to put money under the mattress? The bottom line is that no one can predict the market. What happened in 2008 was extremely rare – all sectors declined in tandem. In the vast majority of years (statistically over 95%), diversification reduces the downside exposure. And, in the long run, market values increase over time. Though they are less visible, there are risks of not investing as well. Holdings large sums in cash guarantees that you will not keep up with inflation.
By investing in a broad and diverse set of investments, such as real estate and commodities, as well as international and emerging markets equities, your portfolio’s performance will always vary from indices such as the S&P 500 or Dow Jones Industrial Average. While any individual investment carries with it a degree of price fluctuation, these investments typically provide improved returns for your overall portfolio over time.
As for bonds, they tend to be far less risky than stocks over the long run. Additionally, bonds often increase in value when the stock market declines (and vice versa). Lastly, even if the value of the bond declines, it continues to pay interest income that cushions the loss. For these reasons, bonds play a very important role in reducing overall risk within your portfolio.
It can be concerning to see a decline in value from week to week or month to month. However, I encourage you to look at the big picture as much as possible. While I expect there to be ups and downs over the coming months and years, as will always be the case with investing, staying the course and focusing on long-term objectives is a key to a successful portfolio.
I have some clients who have said, “I might not be around long enough to recover from a downturn.” To them I say, “then it doesn’t matter if you eat into principal!” Whether you will be utilizing your portfolio or leaving some to your heirs or charity, investing for the long-term is always the way to go.
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Rowling is a certified public accountant, personal finance specialist, and principal of Rowling & Associates. She may be contacted via sheryl.rowling@sdjewishworld.com
Dr. Louis Lurie wrote: Hi Sheryl: I was reading Investing Shpilkes in the San Diego Jewish World this morningand I thought it was a piece I read by you 20 years ago,and that I forgot to delete . I probably did read such a piece by you 20 years ago and it’s a good thing I didn’t delete it then and I won’t delete it now.
As Donald Rumsfeld, former Secretary of Defense, famously said In February 2002 in a Defense Department briefing…….
“As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
Thats is to say
We know there are some things
We do not know.
But there are also unknown
Unknowns,
The ones we don’t know
We don’t know.
I thought Rumsfeld was Sec. Of Defense, who knew he was also an
Economist.
Dr.L
Thanks for reading Dr. L!