Cents and Sensibility
Question: Is there any way to protect myself from a market drop?
No way for total
safety against drop
Answer: No one can totally insulate himself from the effects of a stock market drop. However, there are some things you can do to minimize the effects.
First, divide your investment dollars among different types of investments -- stocks, bonds, mutual funds and so forth. If any one of your investments falls in value, you'll have other investments to fall back on.
Next, diversify globally. International markets offer a great deal of opportunity. They've lagged the U.S. market in five of the past seven years. This is unusual because many foreign economies typically outpace the U.S. economy. If you are considering investing globally, consider mutual funds. Many mutual fund managers are seasoned foreign investors with long histories of successful money management.
Buy quality stocks that pay attractive dividends. Do your homework and find out which companies have consistently paid attractive dividends. Regular dividend checks can soften the blow of a downturn in the market.
Most importantly, invest for the long term. History has shown that those who invest for the long term reap the greatest benefits from investing in the stock market.
Q: I have always invested in certificates of deposit. My son tells me I shouldn't limit myself to CDs. Do you agree?
A: That depends on your financial situation. Certificates of deposit are one of the safest investments you can purchase. You know exactly how long your money will be tied up, how much interest you'll earn over the life of the CD and exactly how much principal will be returned at maturity. In addition, CDs are FDIC-insured up to $100,000.
However, CDs, like all other investments, have disadvantages. First, they can leave you vulnerable to changes in interest rates. If interest rates drop before your CD matures, you may be forced to reinvest that money at a lower rate. CDs also offer no growth of principal. Why is this important? Inflation slowly erodes the purchasing power of your money. That is why a loaf of bread that cost 30 cents 30 years ago costs more than $1 today.
Nearly every investor needs to own some type of investment that offers growth of principal. Some attractive investments for first-time growth investors include growth-and-income mutual funds, blue chip stocks, variable annuities and convertible bonds. Which one best suits your needs depends upon your financial situation.
If you have an investment professional, I suggest you meet with him or her to discuss which growth investments might be appropriate for you.
Guy Steele is a financial planner and head
of the Pali Palms office of Edward Jones. Send
planning and investing questions to him at 970
N. Kalaheo Ave., Suite C-210, Kailua, HI, 96734,
or by email at: email@example.com