The stock market is doing much better than it was two years ago. Interest rates are still low but increasing, posing a threat to bonds and other investments that pay interest. We are already feeling the pinch in our wallets at the grocery store, mall, and travel agency. The price of crude oil is flying high, sapping consumer confidence. Kiplinger predicts 2011 economic growth of 3.5 percent and modestly higher interest and inflation rates. Here are several smart moves every investor should make.
Step 1: Everyone knows that this bull market will someday end, so each of us should prepare. We can hedge with an exchange-traded fund (ETF) or mutual fund that moves in the direction opposite of bond or stock prices. We can also invest in ETFs and stocks that permit stop-limit orders and take advantage of these orders. A stop-limit order will protect us from a disastrous situation resulting from our stock being crushed by a surprising earnings report within the industry. As the value of the ETF or stock fluctuates, we should reset the stop point.
Step 2: We should think twice before acting on the next crisis reported on FOX because the market has been known to quickly correct itself. Financial planners recommend waiting three days before reviewing how investments have reacted. To verify whether the direst predictions carry weight, wait at least one to two weeks.
Step 3: Keep a personal investment policy statement that assesses each investment held and why it is held. This is the best method of assessing if the investments as a whole are sensible or need some tweaking. Sample investment policy statements can be found online if you need a reference.
Step 4: Widespread bullishness often signals trouble on the horizon. Take some profits across all holdings. This will ensure that stocks are not overweighted. Keep the stock allocation generous as long as the economy continues to expand.