| As
financial professionals, we are often asked
what we think will happen to the stock market
- will it go up or will it go down? The answer
is yes. Our crystal ball tells us the stock
market will go both up and down, just as it
has for the past 70 years. Unfortunately, it
cannot tell us when or in which order. This
probably is not the answer you were looking
for. Below are some articles written by Glen
Ladau that can help:
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Can
You Weather The Market?
What
should you believe? Many pundits on television
and radio and in magazines claim they can predict
exactly what will happen to the stock market. These
"experts" remind me of a South Florida television
weatherman who every night announces, "Tomorrow will
be hot and sunny." If he keeps saying this, eventually
he will have to be right. One of his counterparts
might announce, "There is a fifty percent chance of
rain." Eventually, she will be right, too.
So
what about the experts who claim the stock market
will go up? They are probably correct. What about
those who claim the stock market will go down? They
are probably correct as well. Although historical
performance is not a guarantee of future results,
history tells us both predictions can be correct.
What
should you, the individual investor, do? The answer
is very simple: Do not worry about whether the stock
market goes up or down because it will. Concern yourself
with things you can control. Work with a Certified
Financial Planner to develop a sound, well-balanced
strategy designed to allow you to meet your objectives.
Your advisor will help allocate your assets based
on your goals, needs, liquidity, time horizon and
risk profile. If you have developed a proper portfolio,
you need not worry about the daily happenings of the
stock market.
Do
You Need Greater Risk In Your Portfolio?
Successful
investing is based on managing risk - understanding
what risk means and using it to your advantage. According
to investment experts, the greater the risk involved
in an investment, the greater the potential long-term
reward. Conversely, if the risk is low, then the payoff
is likely to be lower.
What
is risk? In finance, risk refers to the chance
that an investment's value or return will be lower
than expected. Investments with the potential for
greater loss are viewed as riskier than those with
lesser chances of loss.
However,
the risks associated with investments differ in the
long term compared to the short term. In the long
term, so-called "risky" investments may offer a greater
chance that you may meet your financial objectives.
For
example, a government bond that guarantees a return
of principal and $100 interest after 30 years is risk-free
in the short term, since the return will always be
$100 regardless of events in the financial markets,
if held to maturity. In contrast, common stocks have
the potential of earning as much as $200 and as little
as $0 and offer no protection of principal.
In
the long term the picture changes. Based on historical
stock performance, we know the risk faced by stocks
declines over the long term. The risk faced by government
bonds increases, however, as the long term returns
they offer are frequently outperformed by other types
of investments and often cannot keep up with inflation
and taxes.
Single
asset risk versus portfolio risk - The risk and
return of any one investment should not be viewed
in isolation but in relation to your total portfolio
- the combination of investments you've selected.
The goal is to create a portfolio that maximizes the
level of return for the overall level of risk in your
portfolio and minimizes the level of risk for the
overall level of return.
If
you hold just one or two investments, you are more
exposed to risk than if your money is more widely
diversified. You diversify by investing in a variety
of investments, which behave differently during a
given economic situation or time period.
While
one type of investment is thriving, others might be
faltering or resting. Two years later the situation
might be reversed. To reduce overall risk, it is best
to combine or add to your portfolio well-chosen investments
that have a negative or low positive correlation to
other assets you hold.
The
overall impact of risk - As an investor, one of
the biggest risks you face is that you'll fail to
achieve your financial goals by avoiding risk. Government
issues - the least risky investments in the short
term - have historically returned an average of close
to three percentage points less than common stocks
over the long term (7.9 percent compared to 10.7 percent).
This means that over a 20 year time frame, a hypothetical
$10,000 investment would have grown to approximately
$46,000, rather than to $76,000. While past performance
is not indicative of future results, can you afford
NOT to take greater risks? Only you know your own
comfort level with varying levels of risk. You should
take the time to meet with a CERTIFIED FINANCIAL PLANNER™ to discuss your needs and goals to help you determine
how that comfort level matches up with your future
objectives. Your advisor can then help you decide
if you need greater risk in your own portfolio and
whether your current investments are appropriate for
helping you to achieve these objectives.
Is
It Time To Get Out Of The Market?
Recent
event showed us just how volatile the stock market
can be. Does this volatility mean it's time to get
out of the market? Experts disagree about whether
the market will continue to head upward or if we are
heading for a Bear Market. No one can know for sure.
So what should you do?
Remember
why you invested in stocks in the first place.
Although the everyday ups and downs of the market
show us the risks of investing, we must not forget
about the risks of not investing. Throughout
history, stocks have been the best investment to outdistance
rising costs. Those choosing not to invest subject
themselves to the risk of not keeping pace with rising
prices for everyday goods and services. U.S. Government
Bonds and U.S. Treasury Bills offer investors a government
guarantee for timely payment of interest and guaranteed
return of principal if held to maturity. But, unlike
stocks, guaranteed investments do not offer any opportunities
for growth of capital, and perhaps more importantly,
growth of income.
Of
course, past performance is no guarantee of future
results. Yet, historically, stock investing has been
the best choice for those investors recognizing the
importance of balancing the risk of investing with
the risk of not meeting one's financial goals.
Remember
the time horizon for which you have invested.
Although in the short term volatility poses significant
risk, over the long term this risk declines. This
is why it is important to match the appropriate investment
for the appropriate needs.
So,
do retirees need investment assets that are appropriate
for the long-term? Absolutely! Although some retirees
might argue they do not have a long-term to plan for,
everyone has a longer term, which is something
longer than the short term. In order to keep
pace with rising costs, it is important to invest
in assets that will allow for potential growth over
the longer term.
Remember
the risk and return of any one investment should not
be viewed in isolation. The risk and return should
be viewed in relation to your total portfolio, not
on one investment at a time. The goal is to create
a portfolio that maximizes the level of return for
the overall level of risk and minimizes the level
of risk for the overall level of return.
Although
the volatility of the stock market in recent weeks
has certainly reminded us of the "risky" nature of
the stock market, we cannot forget the risk we face
of not achieving our financial goals because of inappropriate
investments.
Remember,
what is important is allocating your financial
resources in a manner that is proper for you. You
should work with a CERTIFIED FINANCIAL PLANNER™ who
will take the time to learn your needs and goals.
Your advisor will then help you develop a strategy
to help you meet your objectives.
Short
Term or Long Term Strategy?
To meet your financial goals one of the most important steps maybe developing an overall strategy. his strategy
should be based upon a number of factors unique to
each individual. Time horizon is one of the important
factors to consider.
Age
is obviously a consideration in determining time horizon.
Investments which are suitable for a 30 year old may
not be suitable for an 80 year old. While most retirees
might argue they do not have a long time to plan for,
everyone has a longer term than their short
term to plan for.
Short
term investments should provide liquidity to fund
necessary cash flow for one to three years. The funds
set aside for the short term should be invested in
investments suitable for this purpose. These investments
generally will not provide much, if any, growth.
However,
by categorizing a portion of your assets for the longer
term, you can take advantage of investments providing
the opportunity for growth. Although these investments
may be volatile in the short term, this short term volatility may not be a concern, as they are not
intended for use in the short term.
There
is a common misconception that when one retires their
money should also retire. Retirees tend to position
all of their assets in income generating investments,
that, by definition, do not provide growth. Although,
growth of principal may not be important, some growth
of cash flow is necessary to protect against inflation.
A bag of groceries costing $100 today can cost up
to $120 just five years from now. Growth of principal
is the way to achieve the necessary growth of cash
flow.
Of
course, whether it is your short term money or longer
term money, you should work with a Certified Financial
Planner who can help you make appropriate investment
decisions. Your advisor will help you incorporate
your investments into an overall financial strategy
based upon your objectives, risk tolerance and time
horizon. If you plan for ten years and you live for
five, you will probably have more money to leave to
your beneficiaries.
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