A year after market low, how should you invest?

Business

Discussion

March 16, 2010

Brian D. Humphrey The Rushville Republican Tue Mar 16, 2010, 09:42 AM EDT

It’s been about a year since stock prices hit their low point during the long bear market. Since then, of course, we’ve seen a big rally, but some of the decisions you made when the market was at its lowest point may still be affecting your portfolio’s performance and prospects. So now that we’ve reached the one-year anniversary of the market bottom, it’s a good time to see where you are today and how you can prepare for tomorrow.

In looking back at the market depths of a year ago, it’s important to note that we didn’t get there overnight. In fact, stock indices had fallen about 50 percent since hitting their all-time high in October 2007, which means that investors had gone through a 16-month downturn. Consequently, it’s not surprising that many people, tired of seeing gloomy investment statements month after month, decided to “play it safe” for a while by putting large sums into fixed-rate vehicles such as Certificates of Deposit (CDs). And a lot of those CDs had one-year maturities, which means they’re now coming up for renewal.

When you bought your CDs a year ago, you probably did so for their ability to preserve your principal, but in the process, you made some trade-offs. First, you accepted a relatively meager income stream, because short-term interest rates, like those paid on your CDs, were low. And second, you relinquished the growth potential you might have gotten from other investments, such as stocks. So now that we’re a year removed from the bottom of a bear market, can you use the money from your maturing CDs to help you make progress toward your financial goals?

Actually, now that you may have these maturing CDs coming due, it’s a very good time to review your overall investment strategy, possibly with the help of a professional financial advisor. Take a close look at your portfolio. Is it well suited for your individual risk tolerance, time horizon and long-term objectives, or do you need to make some changes? Is it too aggressive for your needs, or too conservative? Is it properly diversified among investments suitable for your particular situation? While diversification, by itself, cannot guarantee profits or protect against loss, it can help reduce the effects of volatility and give you more chances for success. Keep in mind that while CDs are FDIC insured, other investments carry certain risks that you should understand before investing.

Of course, if you have investments held in a brokerage account, it’s likely not your only portfolio – you may well be investing through your 401(k) or other employer-sponsored retirement plan. If so, keep in mind that you probably don’t want your investments to duplicate those inside your 401(k) account. Instead, look at your entire investment picture “holistically” and seek to diversify through all your accounts.

Once you’ve reviewed your portfolio and identified any possible gaps, you can then consider where the money from your maturing CDs can be used most effectively.

You probably won’t see any festivities marking the one-year anniversary of the market low. But you can celebrate in your own way – by embracing available investment opportunities.

Brian D. Humphrey is an investment broker and financial management consultant.

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