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| English: President Barack Obama confers with Federal Reserve Chairman Ben Bernanke following their meeting at the White House. (Photo credit: Wikipedia) |
Washington, May.28, trading stocks .- Last The Fed hasn't exactly taken away the punch bowl yet, but they've stopped refilling it and are starting to give the party guests dirty looks.
On Wednesday, Fed Chairman Ben Bernanke was clear that it is too early to stop quantitative easing - the Fed's program of buying bonds to keep interest rates low.
But then he wasn't so clear when he said the Fed could begin to slow down the bond buying in the next few months. Later it was reported that several Fed members wanted to start paring back as early as June.
That sent the market into a 250-point reversal. Bond yields spiked and many investors got nervous.
Not me. I'm not worried about where the market is going due to Fed action, valuation, earnings, technicals or any other factor...
That's because I have no plans to sell my stock holdings for years.
Of course, if the fundamentals change on any individual stock, I may exit the position. But since I don't expect to stop working for another 20 years, I don't need to sell my stocks anytime soon.
If the stock market's trembler has you concerned because the money that you have invested in stocks is needed in the next three years, here's what you should do:
Sell your stocks now!
I don't know if the market is going to fall further or if we're going up another 2,000 points on the Dow. We don't time the market at The Oxford Club - because we've never seen anyone do it consistently well.
But I do know that if you need the money in the next three years, it shouldn't be exposed to the risk of the market. Not because the end of quantitative easing is near, but because your short-term money shouldn't be at risk.
Now some people will say, but I need the higher yields that I can get in the stock market from dividend-paying stocks like a GlaxoSmithKline (NYSE: GSK) or Linn Energy (Nasdaq: LINN).
My answer is to figure out another way to earn more income or cut back your expenses. Be a greeter at Wal-Mart or eat out less. You need to take those steps rather than risk your money in the stock market. What good is a 4% or even an 8% yield if your principal goes down 15%?
So let me be crystal clear: If the money you have invested in the stock market is needed to pay expenses in the next three years, sell now.
But if you don't need that money imminently...
"Remain Calm... All Is Well"
When stocks fall hard, it may feel like a Kevin Bacon moment in Animal House.
It's tough to stand firm while everyone else is rushing for the exits. But if you're a long-term investor, you really shouldn't care where the market is going since you aren't planning on selling anytime soon.
That should be doubly true for investors who own stocks that raise the dividend every year. And if you reinvest those dividends, you should be praying for a sell-off because that will allow you to reinvest those dividends at a lower price, which will get you more shares, which will generate more dividends, which will get you more shares... and so on and so on.
It's very easy to get caught up in the histrionics of Wall Street and particularly the media that covers the markets.
Investing has become our national pastime and the TV networks and websites want to make sure you're too scared to miss a moment of the action so that you're watching their channels and visiting their sites.
If you use trailing stops to get you out of trouble when the market tanks, then your stops will sell your positions. No need to panic. If you don't use stops and you plan on holding your stocks for five, seven, 10 years or longer, whatever happens over the next two to three years is nothing but a blip, even if we were to experience a real bear market.
Keep in mind that over the past 75 years, there have only been seven 10-year spans that have generated negative returns for the market. That's a 91% win rate. And those periods all had to do with the Great Depression and Great Recession.
Also, remember that not every 10-year period that involved the Great Depression or Recession generated a negative return. For example, stocks posted a 41% return between 1933 and 1942.
Even 2001-2010, which incorporated two nasty bear markets, returned 12%. Granted, that's a weak return over 10 years, but had you held on, you didn't lose money.
And if you were invested in stocks that raise the dividend every year, you did even better. Since the S&P Dividend Aristocrat Index was created in 1990, the index has never lost money over a 10-year period.
In fact, its worst performance was in the 10-years ending 2008, when the index returned 40%. The average gain over 10-years was 184%.
So if Ben Bernanke does in fact take away the punch bowl and that causes the market to sink, remain focused on your goal. If you're investing for retirement, a house, tuition or some other long-range plan, you have a much better chance of achieving it if you stay in the market rather than if you worry about where it's headed over the next year or so.
But investors who take the proper precautions, stand to make a killing. The key is preparing. I've discovered a unique income investment that's poised to shoot up over 160% when rates rise. These "spread trusts," as I call them, will also generate double-digit income for years. And it's all thanks to the Fed's market manipulation...
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