Wall Street Steward Blog

Your Fears are Priced In

I have spoken to several clients recently that have said something to the effect of “I am scared of losing money in stocks…I want to move into bonds because they are safer.”

I think the reason people believe this is because interest rates have been falling, with a few small blips, since 1980. When rates fall, bond holders collect the coupon income, and typically also see their bonds appreciate in price.

However, when interest rates eventually move higher, those same bonds will drop in price. Which, by most people’s definition, makes them not “safe.”

When people make this argument, they are sometimes missing the forest for the tree. Instead of worrying about timing the stock and bond markets perfectly, ask yourself these questions:

  1. What is my overall goal for my investment portfolio?
  2. Has my goal changed substantially due to recent volatility?
  3. If I make portfolio changes, am I prepared to lose purchasing power, due to inflation?
  4. Do I fully understand that the risk free rate of return is currently less than the inflation rate?
  5. What is my time frame, and when will I need income from my portfolio?
  6. Do I have an adequately funded emergency fund, and what dollar amount constitutes “adequate?”

Let the answers to these questions frame your investment decisions. Rash moves made based on “gut feels” is not a prudent investment philosophy.