Yesterday (November 30, 2011) is a good example of the rampant volatility in the stock market this year. The Dow Jones Industrial Average was up 490 points! This is good news. But, it is evidence of the fickleness of investors. Or another way to look at it—how twichy their trigger fingers are.
One day we get some bad news out of Europe about one country’s debt woes and the market is off 200 points. A day or two later, Europe says they are going to do something to solve the problem, and the market is up 200 points. A week later, the cycle starts all over again.
This type of activity in the market doesn’t say anything about our economy or the US companies that make up our stock market. Generally speaking, our economy and our companies are doing all right. Not great, but we aren’t in a recession right now.
The market is driven by fear and comfort. Fear of what a Eurozone country default would do to Europe and how that would affect the US. Comfort when somebody says “hey, we think we have a plan.”
Yesterday, there was comfort because central banks around the world agreed to help. Does this mean that all the problems have been solved? No. Does this mean that the market will continue to go up from here? No—as of mid-morning December 1, the market is down about 40-50 points.
So, what should you be doing with your portfolio? Nothing. Nobody foresaw the sudden actions by the central banks and the reaction by the markets. Predicting what is going to happen next is a next to impossible. We know it is painful for you to watch the market move up and down—it is for us too.
But, since we can’t predict what is next, your best bet is to stick to your asset allocation. Your asset allocation should be a fair representation of your ability to tolerate risk (also known as volatility) coupled with your time horizon. As long as those two factors haven’t changed, then stick with it. If, however, your tolerance or time horizon has changed meaningfully, then please contact us and we can evaluate where you are and help you figure out where you should be.
If you have questions, please feel free to give us a call at 1-866-848-0258.