As an investor, you might wonder what the new year has in store for you. While economic and market forces are, as always, somewhat unpredictable, the overall outlook is generally favorable and by making the right moves, you can further improve your chances of making 2010 a good year for your portfolio.
And one of the best moves you can make is to stay invested. If you had jumped out of the market during the long downturn from late 2007 through March 2009, you would have missed quite a rally. In fact, the Dow Jones Industrial Average staged a considerable comeback from its March lows, climbing 61.1 percent in 2009. The S&P 500 rose 55.7 percent off of its low.
Still, it is unlikely that we will experience returns in this neighborhood for 2010. Although we may see reasonable strong growth in corporate earnings — a key driver of stock prices — stocks are no longer as undervalued as they were when the rally began.
However, although we still face some significant issues, such as high unemployment and tight credit, most experts predict that the economic recovery will continue in 2010, though not at a sizzling pace. And a growing economy is usually good news for investors.
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Of course, despite the potentially favorable investment environment, there is always the possibility of bumps in the road. To protect yourself, consider taking these steps:
1. Stick with “buy and hold.” Despite some claims that “buy-and-hold” is no longer a viable investment strategy given today’s volatile markets, it worked pretty well for those investors who were patient enough to ride out the bear market. Continue looking for and holding quality investments until they no longer meet your needs or until the fundamentals of the investments themselves change.
2. Own some short-term investments. During the long bear market, short-term investments, particularly cash, held up better than most other assets. Yet many investors had too little cash in their portfolios. Don’t make that mistake. Keep an appropriate amount of cash for your age, income level, risk tolerance and long-term goals.
3. Consider adding fixed-income investments. By owning some fixed-income vehicles, such as bonds, you can help reduce the effects of volatility on your portfolio. And if you hold your bonds until maturity, which is often a wise move, you can rely on them for a source of steady income. As always, make sure you understand the risks before investing.
3. Watch for changes in investment taxes. In the coming year, the tax rate may increase for long-term capital gains and stock dividends. If that happens, you may need to review your investment mix. However, even if the long-term capital gains rate rises, you’ll still likely be better off holding quality investments for many years, thereby giving them the time to potentially overcome short-term price volatility. And even if taxes rise on dividends, dividend-paying stocks, with their ability to provide both income and growth potential, can be a valuable part of your portfolio.
No one can say for sure what 2010 will bring to the investment world. But by preparing your investment strategy for a range of possibilities and by making changes as needed, you can make this a year of progress toward your important financial goals.
Diane Tucker, a financial adviser with EdwardJONES in Bradenton, can be reached at (941) 727-0900.