The stock market goes up, then it goes down, then it goes up, and then it goes down. The main concept that needs to be remembered in this environment is the difference between being a trader and an investor. Although many of my friends are employed as traders, when it comes to their personal financial situation, they are investors, either voluntarily or by corporate mandate (you know who you are). While this is a great time to be a trader (if you know what you are doing, of course) as traders love volatility (the way to make money as a trader is to buy at one price and sell at a higher price in a relatively short period of time), it is an unsettling time to be an investor. With the amount of financial information and commentary available to people, a filter needs to be put in place to regulate what is really important. Here a just a few things to keep in mind, regardless of your situation. First, what is your time horizon for any given investment? If you are 43 and the money is in an IRA, you really shouldn't be concerned about day-to-day, week-to-week, or month-to-month moves, as long as you are comfortable with your investment plan. If it is money being used to buy a house in three months, that is a different story. Second, what is your risk tolerance? Some people are very comfortable to be invested 100% in equities and real estate. Others don't want to put there money in an FDIC-insured CD. Only you know your risk tolerance. A good financial advisor should be able to define and quantify that for you. Finally, what percentage is in what? Even you are the most conservative investor, you might 5% of your money in a hedge fund with massive sub-prime exposure. At the margin, this is your most risky asset. Are you prepared to lose it? Are you prepared for that investment to take ten years to rebound? Again, only you can answer that question.
While you are watching CNBC and the market is moving up and down, keep in mind who you are, what you are invested in, and what your time horizon is. These periods of volatility are good times to review strategies with your advisor to determine if you investments are properly positioned for your needs.
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You know, I try to explain this to knucklehead brokers in my daily commentary. Some get it, others don't.
What is disturbing, the brokers and clients who act as traders, are, sometimes, the most clueless how a market or instrument works. I see this with characters who buy deeply-discounted callable securities in the hopes they get called at par in the not-too-distant future. Often they can't imagine why an instrument will not be called
Others look at the yield curve and will invest (speculate really) on the "cheapest part of the curve. If the treasury curve is flat 2s to 10s, they will buy 2s. Now this may be ok if rates are beginning to rise as it may permit investors to invest at higher rates down the road. However, when rates are falling, one may want to invest on the 10-year area of the curve.
Some investors take things to the extreme and, when rates are low, they buy only 3-month or 6-month T-bills. Here is a little project. go back to 2004. Calculate what your average yield was if you purchased 6-month bills following the Fed's decision to begin tigtening (assuming you kept rolling the proceeds every 6-momths. Compare that to the yield of the then 3-year T-note. You may be surprised. Try it with 3-mos as well.
I'll fire up my Bloomberg right now...although I don't think I really need to.
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