As an investor, you often may have to digest a great deal of information, some positive and some negative. And right now, you can find both the good and the bad – but most importantly, you can find investment opportunities.
Unfortunately, many people are focusing on the gloomy headlines: the possibility of a double-dip recession, European debt concerns, slowing growth in China and other factors. And when investors get jittery, they tend to flee the stock market, which leads to the declines we’ve seen in recent days.
That’s the bad news. The good news is that there really is some good news out there. Consider the following:
• Sustainable economic recovery – The economic recovery is already a year old. In fact, the economy grew by about 3 percent in the first half of this year – one of the largest turnarounds in 50 years. We’re now entering a more sustainable recovery pace. And although there may be some bumps in the road, there’s probably little chance of a double-dip recession, an event that, historically, is quite rare.
• Low inflation, interest rates – Inflation is currently running at a manageable 2 percent per year, while interest rates remain at near all-time lows. The ability to borrow inexpensively during periods of low inflation historically leads to stronger economic demand.
• Strong corporate earnings – Following the end of the recession, corporate profits have improved dramatically – and companies are using their strong profits and growing cash balances to boost their dividends. This is also good news, because companies typically don’t raise dividends unless they’re somewhat confident about the future.
• Stocks priced favorably – Many quality stocks are attractively valued today, based on their price-to-earnings ratio, or P/E. Typically, the lower the P/E, the better the value. Currently, the P/E of the stocks in the Standard & Poor’s 500 is about 12; over the past 22 years, the average P/E was 18.5.
• Historical precedent – The past decade has not been a good one for stocks. But during the past 80 years, whenever stocks have done poorly over a decade (average annualized 10-year returns of less than 4 percent), the returns over the next 10 years have been strong (annualized average returns of 12.5 percent per year). While past performance can’t guarantee future results, history is still on the side of the optimistic investor.
Given these factors, what should you do now? For starters, don’t panic. Don’t rush into ultra-conservative investments because you’re worried about stock market declines; with today’s low interest rates, these vehicles may not help you much in achieving your long-term financial goals.
Instead, balance your portfolio with an appropriate mix of short-term investments, such as cash and certificates of deposit (CDs), and long-term investments, such as stocks and bonds. Your ideal balance should be based on your individual risk tolerance, time horizon and specific objectives.
This article was submitted by Richmond Hill financial advisor Laura Evans on behalf of Edward Jones.