Who said it was a bad thing to take advantage of upward movement in the market? However, despite how your investments are doing – always keep your eye on the prize and the downside in your peripherals! The Chicago stock market, much like any other, is a indescribable roller coaster of emotions during an extended rally. Flashing lights are everywhere on Main Street and investors welcome everyone into their party of accomplishments.
Last week alone, the S&P 500 (INDEXSP:.INX) achieved a 5yr peak. The gain for the index last year totaled 13% - stimulating a fever pitch. Statistics show that over $55 billion in new printed currency washed through the stock market and exchanges during the month of January – the largest in history. The TrimTabs Investment Research firm has calculated and followed the market trends strictly, noting that this year stomped out the record set in 2,000.
So, what does this all mean and what do we do next? Investors are experiencing first-hand, the aftermath and affects of the fiscal cliff that came and left without damaging the market, as many anticipated. Of course, the real estate market took a hit on pending home sales for December, the year-to-date stats were up almost 7% for the year already! We’ve also witnessed an alteration of corporate earnings in a positive direction. According to FactSet Research Systems Inc. (NYSE:FDS), the average earnings growth ratio increased by 2.5% for the fourth quarter of last year. However, not many are hopeful that it will last.
Many individuals and investors believe Main Street professionals are not properly processing the message that the U.S. economy and federal budget can derail the stock market into another Depression. Sure – the U.S. economy is slowly, but surely, rebounding, but is it stable enough to maintain the December events? Government spending continues to decrease, according to the Federal Reserve, it is expected to recede further with the planned sequester budget.
For these reasons, amongst others, many encourage investing in the stock market, an approach more of a dimmer than an on/off switch approach. A gradual approach that enables you to ease in and cultivate your investments is more feasible, according to the experts on Main Street.
Effective Risk Management
Just as any project, the stock market is based on knowledge and timing – both aspects require constant upkeep and nourishment. How do you think, temper risk management and play a role? First and foremost, stop looking at the past and look towards the future. Old returns can linger bad karma – focus on the volatility instead. Wherever possible, spread out the risk, consider where each risk lies of course, but don’t concentrate on them. Growth-oriented investors focus on long-term investments – maintaining a decade outlook until retirement.
On the contrary, income-oriented investors tend to focus on inflation policies that mainly affect bond prices. Considering the bigger picture of stocks, what will this do to overall portfolio quality?
Get the Facts First
Take a look at this sample portfolio of five funds to hold. This template as originally suggested by David Swensen, (Yale University) and later updated for records, poses a clear insight to ow to control temper risk when trading.
- Vanguard Total Stock Market ETF, 19.74 (standard deviation)
- Vanguard FTSE Emerging Markets ETF, 29.41
- Vanguard REIT Index ETF, 32.71
- iShares Core Total US Bond Market ETF, 3.62
- iShares Barclays TIPs, 7.32
The point is that this showcase of a lower volatility for the bond funds' five-year measures consistently increase. It’s the ideal fail-safe in creating an effective portfolio presentation.
If you are more of a moderate-risk investor, you are probably focused on flipping allocation, right? Putting 20% minimum in each of your stock funds with the remainder being invested back into the bonds. Sharp, but the more aggressive investors are likely to put 70 to 80% in – who’s winning?
Still, there really is not anything wrong with taking advantage of the market’s upward spiral – if you work smarter! Do not ever take your eye off the downside and possibilities of disasters unfolding because at the end of the day – when the market closes – it’s just you and your account – as many figures as that may hold.