A year after market low, how should you invest?
Published 2:40 pm Friday, February 26, 2010
It’s been about a year since stock prices hit their low point during the long bear market.
Since then, of course, we’ve seen a big rally, but some of the decisions you made when the market was at its lowest point may still be affecting your portfolio’s performance and prospects.
So now that we’ve reached the one-year anniversary of the market bottom, it’s a good time to see where you are today and how you can prepare for tomorrow.
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In looking back at the market depths of a year ago, it’s important to note that we didn’t get there overnight.
In fact, stock indexes had fallen about 50 percent since hitting their all-time high in October 2007, which means investors went through a 16-month downturn.
Consequently, it’s not surprising that many people, tired of seeing gloomy investment statements month after month, decided to “play it safe” for a while by putting large sums into fixed-rate vehicles such as certificates of deposit (CDs). And a lot of those CDs had one-year maturities, which means they’re coming up for renewal.
If you bought CDs a year ago, you probably did so for their ability to preserve your principal, but in the process you made some trade-offs.
First, you accepted a relatively meager income stream, because short-term interest rates, like those paid on your CDs, were low. And second, you relinquished the growth potential you might have gotten from other investments, such as stocks.
So now that we’re a year removed from the bottom of a bear market, can you use the money from any maturing CDs to help you make progress toward your financial goals?
Actually, if you hold maturing CDs, it’s a good time to review your overall investment strategy, possibly with the help of a professional financial adviser.
Take a close look at your portfolio. Is it well-suited for your individual risk tolerance, time horizon and long-term objectives, or should you make some changes?
Is it too aggressive for your needs, or too conservative?
Is it properly diversified among investments suitable for your situation?
While diversification, by itself, cannot guarantee a profit or protect against loss, it can help reduce the effects of volatility and give you more chances for success. Keep in mind that while CDs are FDIC-insured, other investments carry certain risks that you should understand before investing.
Of course, if you hold investments in a brokerage account, it’s likely not your only portfolio—you may well be investing through your 401(k) or other employer-sponsored retirement plan. If so, keep in mind that you probably don’t want your investments to duplicate those inside your 401(k) account. Instead, look at your investment picture “holistically” and seek to diversify your accounts.
Once you’ve reviewed your portfolio and identified any possible gaps, you can then consider where the money from any maturing CDs can be used most effectively. You probably won’t see any festivities marking the one-year anniversary of the market low. But you can celebrate in your own way—by considering available investment opportunities.