This is something of a tense time if you’re a stock market investor. After hitting record levels this past spring, the market is now languishing just below peak, and has been for months. Meanwhile, the prospect of the Federal Reserve tapering it’s purchases of mortgage securities and federal government debt has caused interest rates to rise. For the first time in about four years, the stock market is looking… vulnerable.
If this is making you nervous about stocks, here’s what you can do about it.
Stop buying new stocks
When ever the stock market starts looking wobbly, there’s always a tension as to whether you should keep your stock holdings intact or begin selling them off. In truth, you don’t have to do either.
You can keep your present stock positions, but stop adding to them. If you are dollar cost averaging into the market through your 401(k) plan or other payroll deduction, you can simply redirect the money into cash assets, or other investment vehicles that you think are safer than stocks.
This will keep you in the market so that you can participate in future increases, but it will also keep your exposure from increasing at an uncertain time.
Move into income stocks
If you’re still concerned that you’re too heavily exposed in stocks, you can simply change the kinds of stocks that you are invested in. Start moving from growth stocks to income stocks. During times of uncertainty, income stocks are a safer bet than growth stocks. You will have an income stream if the market falls, but you’ll still participate in market advances.
Income stocks tend to weather down markets better than growth stocks because the dividends they pay act as at least something of a “floor” on the price. For example, if five-year Treasury notes are paying 2% interest, a stock paying a 4% dividend will only fall so far. As the stock price falls, it’s dividend yield rises – and that makes it more attractive to other investors who will buy the stock, supporting its price.
Increase non-stock holdings
Earlier we mentioned redirecting fresh contributions into cash and other investments, rather than stocks. There are many kinds of options in which to invest if you go in this direction.
You can increase holdings of fixed income investments, such as certificates of deposit, Treasury securities, and bonds. Though none of these vehicles are likely to provide you with much in the way of price growth, they tend to have a stabilizing impact on your portfolio and will offer a consistent income stream in an unstable market.
You can also consider investing in rental real estate or real estate investment trusts (REITs). Falling stock markets sometimes create capital outflows that move into real estate, creating a bull market in that sector.
Study the alternatives to stocks, and consider moving money into any that you believe will be profitable – or at least stable. Sometimes the best strategy in a declining stock market is simply to maintain the value of your portfolio so that you will be able to buy up stocks at a discount when the market bottoms. Think of it as a strategy of making money by not losing any.
Pay Off debt
One of the best alternative investments is paying off debt. If you have credit card debt subject to a 10% annual interest charge, paying it off is the equivalent of earning 10% on your money each year. You probably won’t be able to get that kind of return in any other investment during a stock market downturn. If you don’t have any consumer debt, you can use this opportunity to make additional payments toward your mortgage. The returns may not be as high as the 10% or more you may see on a consumer loan, but you will be reducing your debt, increasing your equity, and avoiding buying stocks as they are decreasing in price.
Paying off debt also frees up future income. This will be especially important once the stock market begins to recover and you’re out looking for bargains. The cash flow that you used to direct into debt payments will now be available to invest in stocks.
Prepare to be better on the job
When all is said and done, none of us have any control over the financial markets. But we do have greater control over what it is we do for a living. If investments are not performing as expected, it’s time to redouble our efforts at making money in the more traditional sense.
Concentrate your focus on finding ways to make yourself more valuable as an employee or in your business. Ultimately, that may lead to higher income, and that will provide greater diversification when it comes to your investment portfolio as well.
Your income is actually an integral part of your overall investment plan. The more that you earn, the more money that you have to invest. If you don’t expect your investments to perform particularly well in the near future, you can simply redirect your financial attention toward earning more money.
When the stock market begins a new upturn, you will be in a better position – with a reconfigured investment portfolio, more cash, and a higher income.
Moral of the story: more action, less worry. That should quell the nervousness over stocks.