By Chris L. Meacham, CPA
Due in part to a shifting economy coupled with investor uncertainty, it’s no secret that we face a rather volatile stock market. Since June, the Dow Jones Industrial Average has had more than 12 moves of more than 100 points in either direction, thus leaning the market toward a more volatile state. Given the inherent uneasiness of a highly fluctuating market, investors have shown reasonable caution as they approach their investment strategies – a concept that makes sense considering the uncertainty wafting about the U.S. economy.
Earlier this year, we felt the sting of a changing market. But due in part to a press conference held by Ben Bernanke last month, the Fed had nonetheless expressed optimism about the U.S. economy although official policy language did not change. Two main points, stimulus removal and potential rising rates, left many investors scratching their heads on which financial moves could prove best in the face of these potential changes.
These are important concepts to understand.
First, there is a difference between tapering stimulus and when the Fed begins to raise interest rates. The tapering that Bernanke speaks of just means less stimulus money, not ending stimulus. The government’s balance sheet continues to grow at historic rates. Ben used the analogy of letting up of the gas pedal versus actually applying the brakes. Even in his rosy scenario, rates do not begin to rise until 2015. Second, although he painted a hopeful scenario of an economic recovery over the next 12 months, he fully maintains the ability and desire to “reapply the gas pedal” if needed and will increase the stimulus to keep interest rates low.
The truth is that thanks to the market’s indiscretion, investments of all types could easily be affected. But that doesn’t mean investors must fall by the wayside while stocks dominate unfavorably. In fact, investors are encouraged to take a proactive approach in partnership with Cornerstone Wealth Management when it comes to the management of any given financial portfolio.
WHAT CAN INVESTORS DO TO STAY PROACTIVE?
In wake of the recent volatility of the market, investors have rotated out of bonds and bond-like investments, opting instead for cash versus equities. This resulted in dramatic changes across the market. But now that the pain from the initial reaction is gone, the question is what to do next?
Don’t sell into the fear.
Investors should understand that much of the market volatility was due in part to an overreaction. A potential rate decrease would probably be only a short-term trade. Interest rates are likely going to increase over time and investors need to prepare for it. However, we believe it is a fool’s game to try to predict the exact path and timing of the moves. It will most certainly be choppy at best.
Understand the principles of inflation.
Increasing interest rates is not the same thing as increasing inflation. Most would have thought that money coming out of bonds would have moved into stocks. But that did not occur because stocks felt the same pain of negative performance as bonds. Inflation is not a problem for the economy, nor is it expected to be for a while.
Avoid short-term trading.
We believe that, due in part to the market’s unpredictability, short-term trading should be avoided this summer, rather focusing efforts on longer-term investment strategies. Ask us about some increasingly stable options for a more predictable financial portfolio in the coming months.
Diversify your portfolio.
Opportunities in private investments such as real estate and private lending can offer opportunities that are not directly affected by the stock market’s daily fluctuations, lending potentially greater stability to any given financial portfolio.
Talk to a professional.
Making the right moves throughout the life of your portfolio is essential when it comes to properly managing your money. The partners at Cornerstone Wealth Management are trusted advisors to the Rancho Santa Fe community, with a solid reputation based on expertise and objective management of our clients’ portfolios. Feel free to give us a call at (858) 676-1000 or visit us online at
The information contained in this article is believed to be accurate. However, Cornerstone makes no claim regarding its accuracy, completeness, or reliability, and the information is not intended to be used as the sole basis in making any investment decisions and is no substitution to consulting with a licensed professional about your specific situation. This information does not constitute tax or legal advice, and should not be relied upon for such purposes.