Lessons from the financial crisis (Part 3)

Five things to try now to help improve your personal economy.

Step 3 - Rethink risk.

Even the most seasoned investors may have felt weak in the knees as they watched the financial crisis evaporate stock and housing wealth. Among those in our survey, 21% shifted to a more conservative investment mix, but more than 50% stuck with their plan. Five years later, those who stayed in the markets may have reason to celebrate. Although they lost more in the early years, they benefited from the 125% rise in the S&P 500® Index since March 2, 2009. Those investors who fled the stocks for the apparent safety of bonds and cash may have missed that recovery. An earlier Fidelity research study showed that 401(k) savers who continued making contributions and stuck with their asset allocation had higher balances than investors who tried to time the markets .

Retirement savers who stayed the course fared better.

So what if you were rattled by the volatility and increased your investment in bonds, beyond your long-term plan, in an effort to reduce risk? You may need to rethink what is risky. In recent years, bonds have been investor favorites, and assets in taxable-bond funds have more than doubled since the end of 2008, climbing from $1.1 trillion to $2.5 trillion, according to Morningstar. But, bonds have been beneficiaries of 30 years of generally falling interest rates, and thanks to investor demand and central bank policy, today rates are historically low. There is no guarantee that rates will go up soon, but if they do, bonds may suffer price losses. Those will be partially offset by climbing income on funds, but interest rate risk may make bond investments more risky than some investors may realize.


Bottom line: Get a plan you can stick with for the long term that has a realistic chance of meeting your needs. Consider making regular monthly investments—no matter what the market is doing. If the market moves strongly, considering rebalancing at least annually or when your portfolio is more than 5% away from your target asset mix. Those practices could help give you the discipline to try to buy low and sell high.

(To be continued...)

Source:  Fidelity Investments

The information contained in this article does not constitute a recommendation, solicitation, or offer by D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.

The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville.  The Firm is also a member of the Financial Planning Association of Northeast Florida.