Five Items To Review NOW

It is hard to believe that the summer of 2013 is drawing to a close.  Our kids have already been back at school for over a week.  My son told me that so far this school year looks like it is going to be hard (fifth grade – school gets pretty serious in fifth grade).  Well, successful investing is hard too.  There are times when protecting what you have is much more important than trying to make your money grow.  Now is one of those times to protect what you have.  I understand that you don’t need any more stress now.  I also understand that you don’t need anything else on your ‘To Do List’. Below is a short list of investment related questions that you give some consideration – right now:

1.    How exposed are you to the bond market now?     The U.S. ten year Treasury bill rate was around 1.6% on May 1st, 2013.  Today it is around 2.8%.  That is a rise of over 75%.  If the stock market was down over 75%, would you hear about it on the 10 PM news?  Bonds go down in value when interest rates rise.  A wise mentor of mine told me early in my career “You can lose just as much in bonds as you can in stocks”.  Don’t continue to take the risks associated with bond mutual funds unless you understand that risk.

2.    How are your stock mutual funds doing?     All stock mutual funds rise when the stock markets are doing well.  But every stock market investor owns a couple of mutual funds that lag the market averages.  It seems like the stock market has paused.  Now may be a good time to sell the mutual funds that you own that have lagged the rest.

3.    Do you own any ‘target term’, ’20xx’ type funds in your 401(k)?     Many of those target date funds use exposure to bond mutual funds as a way to lower risk as the target date gets closer.  See point number one above.  Any exposure to bonds now means that you will continue to lose principal if interest rates keep going up.  Find the stock and bond mixture of any target funds that you own.  Make sure you understand what you own now so you are not surprised later on.

4.    Do you have a plan if the stock market drops dramatically?     The bond market is already a disaster.  If the stock market follows, make sure that you have a game plan in place to preserve your stock market principal.  Remember how you felt during the July 2008 to March 2009 stock market decline? Avoid that feeling again with a stock and bond market risk management game plan this time.

5.   Can you manage your emotions better this time?     Your August statements are due in your mailbox in a couple of weeks.  I can warn you right now that the news will not be good.  Now is not the time to react emotionally and to run out and sell everything that you own.  The number one investment management priority right now is to keep what you have.  Make some logical decisions about how much risk you want to take with your stock and bond market investments going forward.

Cheers,

Ed Downey