Fears of a “double-dip” recession are in the air. Obviously, this isn’t particularly good news; we’d all like to feel that the economy is growing robustly. At the same time, however, you’ll want to avoid making hasty, ill-advised investment decisions based on the mere threat of a slide into another recession. Instead, you’ll want to keep your long-term investment plan intact — in all economic environments.
The possibility of a double-dip recession makes great headlines. But such events have been rare. In fact, we’ve seen only one double-dip recession in the past 77 years. However, this history hasn’t stopped gloomy forecasters from predicting a double-dip in 1991 (it didn’t happen) and in 2003 (when it didn’t happen again).
Will we again avoid the double-dip recession this time? It’s dangerous to make predictions, but it seems more likely that what we’re really experiencing is a “soft patch” in the economic recovery as retail sales remain weak, consumer confidence is low and unemployment remains high. But on the positive side, manufacturing activity has been strong, corporate earnings have rebounded to pre-recession levels and profit margins are near all-time highs.
And yet, many investors are focusing strictly on the negative reports — and they’re acting on their fears by moving money from stocks to fixed-income vehicles, such as bonds. During the period from July 2008 through June 2010, investors pulled more than $200 billion out of stock-based mutual funds and put more than $475 billion into bond funds, according to the Investment Company Institute.
Bonds can provide a source of regular income and will return your principal when they mature, providing the issuers don’t default. They're an important part of most investors' portfolios. But if you're joining the crowd and over-concentrating on bonds, you risk losing the following:
• Growth opportunities —. According to Ibbotson, a leading investment research organization, stocks have done particularly well following 10-year periods in which the stock market hasn’t performed strongly — and the past 10 years were one of the worst periods we’ve ever seen for stocks. And right now, many quality stocks are trading at some of the most attractive values in 15 years, as measured by price-to-earnings ratio, or P/E.
• Portfolio balance — Ideally, you want your portfolio to contain a mix of investments — stocks, bonds, international and cash — designed to reflect your risk tolerance, time horizon and long-term goals. You’ll need to adjust your investment mix over time to reflect changes in your life, and regular portfolio reviews will prompt you to rebalance back to your target mix and determine whether any other changes are needed. But if you’re constantly disrupting your portfolio’s balance by reacting to short-term events, you’ll have a much harder time achieving your objectives. In virtually all areas of life, balance is essential — and that’s certainly true in regard to your investments.
A “double-dip recession” might sound scary, but it may well never come to pass — so don’t let the mere prospect throw you off your investment strategy. Good investment opportunities are out there — so dip into them.
Past performance is no guarantee of future results.
Before investing in stocks, you should understand the risks. Stocks are subject to market risks, including loss of principal invested.
For more information, call Stephen Fambrough at 254-968-6224. You can also visit us at Edward Jones Fambrough, 2215 W. Washington Street or on the web at www.edwardjones.com. Edward Jones is a member of SIPC. (Paid advertorial.)