Why were
investors turning to stocks? Was it the generally strong performance of stock
market indices during 2012 or something else? Theories were abundant. Some
speculated that the surge signaled:
- Renewed confidence
in the American economy
- Relief that
capital gains and dividend taxes remained constant for middle income
Americans
- Faith in the
ability of the American government to get things done
- Lack of
attractive investment alternatives as the average yield on high-yield
bonds fell below 6% for the first time ever
Interest rates
are just one tool the Fed has been using to encourage economic growth. It also
has been engaging in quantitative easing (QE) which is purchasing Treasuries on
the open market to inject capital into the economy and encourage growth. Last
week’s Federal Open Market Committee meeting notes indicated there was
discussion among Fed members about ending quantitative easing earlier than
expected, possibly before 2014.
So, which is it?
Will policy remain accommodative or will it start to tighten? We may not know
for sure for some time. The good news, according to Barron’s, is that
tightening monetary policy would not be all bad news. “The end of quantitative easing would mean that the Fed sees sustainable
economic growth in the U.S. – and globally.”
Sage investment advice… Almost
two decades ago, the CFA Institute published an article that included a letter
from a father who was a financial professional to his daughter. His missive
included some timeless and practical advice about investing. Among the thoughts
he shared with his daughter were the following principles for investing:
·
A fool
and his money are soon parted. Pay close attention to financial matters because investment
capital is a perishable commodity when not managed properly.
·
There is no free lunch. Risk and return are interrelated.
Generally, the greater the risk, the greater the potential return and vice
versa.
·
Know thyself. Be honest in assessing your risk tolerance because it’s easy to underestimate
the stress of a high-risk portfolio when markets move south.
·
Don’t put all your
eggs in one basket. Diversification helps determine potential rates of return and
manage exposure to risk. Make sure you have a well-diversified and
well-allocated portfolio.
·
Take the long view. Make a plan and stay
with it. Don’t let short-term market fluctuation or media-fueled frenzies cause
you to panic. Investment decisions should result from a rational trade-off of
risk and return. Unfortunately, those decisions often reflect fear and anxiety
about current events.
·
Remember the value of
common sense. Investing is not a competitive sport.
It should be an effort to achieve a pre-determined financial goal within a
specific risk-tolerance framework. No system works all of the time and you should not expect it to.
Sound financial advice may prove particularly important
during 2013. During the fourth quarter of 2012, markets were volatile as
Congress argued fiscal cliff issues. The solution – The American Taxpayer
Relief Act of 2012 – resolved matters related to taxation, but left spending
issues to be hammered out in the future. As a result, we may see additional
volatility during the first few months of this year. If you begin to experience
fear and anxiety when listening to news reports or checking market performance,
just review the principles above!
Weekly Focus – Think About It
If you want to be successful, it's just this simple.
Know what you are doing. Love what you are doing. And believe in what you are
doing.
--Will Rogers, humorist and social commentator
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