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Football season is coming!
Those teams hoping to make it to the top can’t just rely on
a good offense. They know they’ll need a great defense as
well. It is the same way when it comes to managing your
money. With several major issues affecting the markets, it
may be time to add some defensive plays to your portfolio
playbook.
Oil
The price of oil affects more than how much you pay for gas.
It impacts the price of just about everything you buy.
Whether something is shipped by freighter, rail, air or
truck, it is affected by the price of oil. Thus, rising oil
prices become a brake on the economic engine.
That means oil prices can impact your investments—in fact
some of the recent market turmoil can be attributed to the
price of oil. Professional investors recognize that rising
costs will cut businesses’ profitability. So traders aren’t
willing to pay as much for stocks in general.
This doesn’t mean you should go buy energy-related stocks.
With a $10-$15 a barrel terrorism premium in the price of
oil, prices could quickly decline as more supplies come
on-line and as world uncertainty levels off. If you own
these stocks, hold them but take profits if prices begin to
decline.
Interest rates:
The Federal Reserve recently raised its target Federal Funds
rate from 1.25% to 1.5%. We should be in a rising interest
rate environment for the next several years. Currently,
short-term rates are increasing faster than long-term rates.
This is another area where it makes sense to play a little
defense. Instead of buying a 10-year bond that might pay 5%,
put that money into a Certificate of Deposit that matures in
6 or 9 months. Currently, short-term Certificates of Deposit
yield as much as 2% and are directly guaranteed by the U. S.
Government. By the time they come due, interest rates could
be 1% higher. At that point you can switch to offense,
lengthen your maturities and have a dependable income
stream.
The Election
The stock market hates uncertainty. Pension and mutual fund
managers, who literally control trillions of dollars of
investments, invest based on expectations of how the economy
and particular companies will grow over the next several
years. The faster the growth, the more these managers are
willing to pay for a share of stock today.
The difficulty comes when current events cause them to
question those growth assumptions. The close presidential
race has created uncertainty in the market. If these
managers had a better indication of who the winner would be,
they could better determine the impact and invest
accordingly. They don’t, so investment decisions are made
more cautiously. In other words, they are playing defense
instead of offense.
Recently, the daily number of shares being traded in the
stock market has been below normal. Buyers are content to
sit on the sidelines and watch. If the market drops low
enough, they will step in and pick through the bargains.
There is so much money on the sidelines that when they
decide to put it to work the markets could recover quickly.
Terrorism
Many investors are concerned about the effects of terrorism,
and rightly so. The Republican convention makes an
attractive target. The threat level has been raised in the
New York financial district. Terrorists were able to
influence Spain’s elections through the Madrid bombing.
For those who are retired or near retirement, your ability
to sleep at night is a good indicator of your comfort level
with your current investments. If preserving what you have
is a higher priority than growing it and you aren’t able to
sleep at night, then you may want to reduce your risk.
For my clients who are concerned about terrorism, we have
been playing defense for the last several months. I have
reduced the percentage that they have exposed to the stock
market and have used Exchange-Traded Funds for the money
that remains. They still have some exposure to the market,
but we can move money to safety in a matter of minutes.
The markets will always move up and down. And long-term, the
prospects of the economy are still quite positive. Playing
both offense and defense will help ensure you aren’t on the
losing end of the financial game.
Mr. Voudrie is a Certified Financial Planner and the
President of Legacy Planning Group, Inc., a Private Wealth
Management firm in Johnson City, TN. For more information
call 1-877-827-1463 or email jeff@guardingyourwealth.com.
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