In Europe, the financial crisis drags on. China’s economic growth has slowed from “wow” to “ho-hum.” Here at home, we’ve seen heated political debates over taxes, spending and deficit reduction.
Taken together, these factors have created a “fog of uncertainty” that has left many investors in the dark about their next moves. But is this “fog” really impenetrable — or can you, as an individual investor, see through it to a place of clarity?
To do so, you first need to realize that while the events mentioned above are certainly not insignificant, they also aren’t the key determinants of investors’ success.
While these types of stories dominate the headlines, they also tend to obscure some of the factors that frequently do play a bigger role in the investment world. And right now, these factors are actually somewhat encouraging.
Consider the following:
• The economy continues to grow. The economy isn’t going “gangbusters,” but it is growing. And thanks to historically low interest rates, consumer debt payments have dropped significantly, leaving people with more money to spend elsewhere. Typically, this higher spending tends to contribute to future economic growth.
• Corporate earnings remain solid. Many companies have shown strong earnings over the past couple of years — and earnings tend to be a key driver of stock prices. When their earnings are strong, companies may use some of the profits to repurchase shares of their own stock, thereby reducing the number of shares held by the public — which means that even if profits remain the same, the earnings per share should increase.
• Stocks are still attractively priced. As measured by the price-to-earnings ratio (P/E), stocks are still priced relatively well. While no one can predict stock market performance, this may be a good buying opportunity.
Of course, all these indicators of today’s investment environment can change over time; at some point, they may well be not so positive. But if you truly want to see through the fog of uncertainty that always develops with unsettling political or economic news, you’ll want to follow these basic, “all-weather” guidelines:
• Stay diversified. A diversified portfolio can help protect you from the harshest effects of market volatility. (Keep in mind, though, that diversification, can’t guarantee profits or protect against loss.)
• Rebalance your portfolio. Over time, your investment mix can shift, even without your intent. For example, some of your holdings can appreciate so much in value that they take on a greater percentage of your portfolio than you had intended. That’s why it’s important to periodically rebalance your portfolio so that it fits your investment objectives and risk tolerance.
• Stay focused on the long term. When confronted with short-term market fluctuations or scary headlines, many people overreact and make ill-advised investment decisions. You can avoid these behaviors by staying focused on the long term.
• Invest in companies that are charting their own course. When investing for the equity portion of your portfolio, look for companies with the ability to prosper in all economic environments.
With patience and perseverance, and by focusing on the key factors outlined above, you can navigate the fog of uncertainty and concentrate on your long-term investment goals. So don’t be afraid to “set sail.”
This article was written by Edward Jones for use by Evans, Edward Jones financial adviser in Richmond Hill.