On both Saturday and Sunday morning, I awoke around 6am and promptly made some tea and started listening to the weekend business talk shows. I have confirmed why this is not my usual routine. It, quite frankly, is not a good thing to do unless you want to make poor decisions in a state of panic.
I offer the following to let you know that I am keenly aware of the magnitude of what is going on. I am certain that following a logical plan, being communicative, and focusing on the numbers will get us all through it just fine (perhaps even on top).
Logical choices to make now
My job as a financial consultant is to educate and guide investors through ever changing economic conditions. Since there is no way to know on 7/24/11 how our government will handle the debt ceiling issue, we can only make decisions based on what we do know. The plan is as follows regardless of what this week brings:
a) I will continue to reduce cash each week as we dollar cost average into the core equity holdings that I believe are appropriate for the individual client. The present earnings data has only supported my belief that we are on the right track. The debt ceiling issue can send temporary shock waves through these sectors but cannot derail it in the long run.
Dollar cost averaging involves continuous investment in securities regardless of price fluctuation. It is appropriate for investors only if they are willing to stick with the plan and keep purchasing. It does not assure a profit nor does it protect against loss.
b) The government backed bond/fixed-income markets are the most likely to be harmed by a poor decision right now. Therefore, I will continue to overweight our high yield bond holdings and may even increase them for income investors. If income is the goal, short-term price fluctuation is unlikely to harm us.
High yield bonds (aka junk bonds) are those rated BB or below and are not investment grade securities. They are subject to risks such as interest rate, credit and liquidity. Investment grade bonds are those rated BBB and higher. Lower rated bonds should generally be part of a diversified portfolio.
c) Every economic cycle, including the ugly ones, offer certain opportunities that are unique to that particular cycle. Japan is this cycle’s. I am initiating exposure to the Japanese equity market for all clients with at least a moderate growth objective.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Experience leads me to believe that there is no real need for the level of pessimism I heard on television this weekend. When Lehman was allowed to fail, I suggested that we simply have a couple of years of income tucked away safely for our income investors and that we return to active management (not passive index) investing for others.
Stock investing will always involve risk including loss of principal and no strategy is a guarantee of success. Losses may occur. Planning helps. Staying calm in times of turbulence may too.
Until next week,
Susan R. Linkous