The Dow is up, the Dow is down - but why should you care?
On a day to day basis, the stock and bond markets pretty much follow the sentiment of the day. And, at times, it actually gets to be pretty ridiculous. For instance, the stock exchanges were extremely weak the other day based upon the idea that the Chinese economy was beginning to show weakness. So, it's not enough for us to concern ourselves with our own economy, now we have to worry about what's happening in China? Investors seem to worry about just about everything. Some things are actually happening (the war in Iraq, poor earnings reports, weak economic numbers) and some things are yet to occur (the election, possible terror attacks, a future increase in interest rates or what Mr. Greenspan "might" say to some congressional committee next week).
Look, we all have enough to keep our minds busy on a daily basis. Our day to day routines with our families and our jobs normally guarantees a steady stream of decisions to make and problems to solve. So, why worry about the financial markets. Most situations that cause the direction of the markets are completely out of our hands anyway. What we should be concentrating on is how we can create a portfolio that is relatively immune to these outside events; a portfolio that can weather the storm of global uncertainty.
You've heard it all before. Diversification and proper money management are the best methods of insuring that your investments will be protected from the highs and lows in the markets. In a diversified portfolio, should one investment react poorly to negative national or international events, you can normally count on another investment to make up the difference.
Examine your personal investment structure on a semi-annual basis, or at the very least, annually. Really investigate what you are invested in. Do your holdings include stocks, what about interest rate instruments, mutual funds, real estate, commodities, the foreign exchange markets? Choose the opportunities that give you the most comfort. Learn as much as you can about the investments you don't understand. For instance, if you don't understand REIT's (Real Estate Investment Trusts), read about them, ask questions, study the topic before you make any monetary move.
Once you are involved in a particular investment, make sure you follow its progress. If you are trading stocks, always set your stops and limits to guard against losses. If you are investing in a 401(k) at work, study your investment options often and rebalance, when necessary. The key to a positive investment life is education.
You can count on the world situation being volatile today, tomorrow, next week and probably for the rest of your life. The stock markets will continue to show weakness on some days and strength on others. If you meet the challenge of creating a balanced portfolio through diversification you most likely will worry less and definitely have more time to enjoy the most important things your life has to offer, family and friends. It really is that simple.
Originally published in the Outspoken e-newsletter.