Certified financial planner Wes Moss provides personal finance advice and accessible investment strategies. His guest post appears here Monday mornings.
The stock market is a giant roller coaster, and we are currently white-knuckling through a series of crazy twists, turns, plunges and loops. As I write this, the Dow Jones industrial average has been down for seven of the last eight weeks, and that one “up” week was just a hair above break-even. That’s why your 401k and IRA are feeling a bit queasy.
This wild ride is powered by what I call the Dirty Dozen of economic factors. They’ve been driving the market since the beginning of May and have been especially vengeful in June. The worst offenders:
Rough stuff — and there is no sign things will improve anytime soon. But here are three investment keys that just might keep you sane in this period of market insanity:
Balance your buckets: During any market correction, balance is your best friend. Your investment assets should be divided between the cash, income, and growth buckets. The cash bucket contains CDs or money-markets, the income bucket contains various types of bonds, and the growth bucket a diversified mix of dividend paying stocks. So far in May/June your growth bucket is probably down close to 7 percent, but the bonds in your income bucket are up. Vanguard’s total bond market index (BND) is up 1.4 percent since the end of April, compared to a minus-7 percent return for the S&P 500.
Focus on income: Each one of your buckets will produce some level of steady income regardless of the stock or bond market’s direction. Cash and CDs will pay you interest (at very low rates today), bonds can pay interest anywhere from 1 percent up to 7.5 percent depending the type, and stocks can pay dividends anywhere from nothing to over 5 percent. So in combination, your portfolio should have an “overall yield,” or a steady, predictable amount that it should produce each year in income — regardless of the stock market’s direction.
Be Patient: If you own a stock, stock mutual fund or stock ETF you must give it time to grow. We would all like to get a steady 7 or 8 percent annual return on our investments, but the market just doesn’t work that way. However, from a very long-term perspective there is no doubt the stock market has trended from the lower left of the page to the upper right. That trend will continue here in the U.S. during the next 5 to 10 years, despite all of the problems that we face.
– By Wes Moss, for Atlanta Bargain Hunter