These times of economic hardship, although lightening, still seem to be upon us as investors and general consumers. However, history has shown that however stressful and unpredictable investing can be, there is inevitably a turn-around period every time - look at the crashes in the twenties and seventies and you’ll see the cyclical potential of our current situation. The last few months have indicated such a period with a veritable upswing in the market, which means new and exciting opportunities in stocks and bonds despite investor reservations.
Staying in cash investments like money market funds and short-term CDs seemed like the safe route during the last year of economic turmoil, but experts are now indicating that staying in cash investments for a long period of time can be detrimental to your portfolio. This is not to say that these safe investments will become unstable, but rather, that investors may be missing out on key opportunities. According to American Funds’ recent "Time to put your money back to work?" article, the three major asset classes, those being cash, stocks, and bonds, have been the best assets to obtain over the past 83 years!
From a short-term point of view, cash assets are safe, protected, and provide liquidity, but investors should be cautious of staying in cash investments for too long because returns can be lower and can be affected by inflation. In contrast, stock and bond assets tend to have better long-term returns and usually withstand inflationary periods. At this point in time, when investing is the last thing on most consumer’s minds, the market is extremely attractive! Prices are rising, but are still relatively low and now that the market is seeing an increase, many assets will continue to grow. Some stocks may still not be doing well at the moment, but that does not mean that they will continue to plummet - it is important to investigate the causes behind any drops or fluctuations before dismissing opportunities.
The largest damper on any investing this quarter seems to be the job market update, which continues to only show slight improvements. According to MarketWatch, filings for state unemployment benefits fell by 4,000 last week, but are still at levels well above the healthy economy mark. The domino effect of this slow turn-around is evident in the way consumers seem to be strapped for cash and credit - decreasing some consumer sales and making retailers cringe at back-to-school time, which is usually a top selling point in the year. Discount department stores and the teen apparel market have seen significant drops from this impact according to Forbes.
Another aspect of the market that has investors on edge is the depreciating value of the dollar and the federal budget deficit that continues to grow in correlation with China’s stakes in our economy. The government intervention through the stimulus plan is also still a strong issue as well as some experts believe it has hindered the natural forces that mend the economy through free markets. Others say that a slow turn around is actually healthier for our economy in the long-run. According to MSN Money, a short-term recovery with a bounce-back characteristic is not actually as profitable as it may seem. The conditions we are currently in with low interest rates, low inflation, and much government support is conducive to a slow, but sure recovery. Shorter recoveries cause inflation to increase and interest rates to rise - a bear market!
The most logical option is to keep your portfolio diversified and slowly return to investments in the stock and bond markets. As emotional as the past year has been for investors, keeping an eye on the future is the center of any investment plan - remember, investing is about planning and taking risks - they just need to be smart ones and your financial advisor can help you determine the right mix of risk and safety. Remember, it’s never a bad idea to stick with companies that have traditionally been strong - keep in mind that those are the companies that although they may fluctuate have a tendency to come back strong time and time again.
Most importantly, speaking to your investment advisor and assessing your personal situation is key. Investment strategies are about timing and goals, so following trends does not always bode well for every investor. Above all, be hopeful in the new quarter and let your investment strategy become flexible, but goal-oriented.
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