Interest Rates, Housing Market, Oil Prices - All Effect the Stock Market
Investors Struggle to Keep Focused In Midst of Short-Term Distractions
November 4, 2007
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By: Jerry Cole - Retirement, Investment
The market is full of countervailing forces. That's what makes it a market. And you can sometimes go batty trying to make sense of it all. For example, the Federal Reserve cut interest rates by one quarter point on a day when third quarter gross domestic product was reported to have grown at an annualized 3.9%. Go figure.
The interest rate cut is meant to spur the economy, but the economy seems to be doing o.k. when you look at the big picture. More than likely the Fed's action was in response to the worsening housing market which has put strains on credit just about everywhere.
The stock market first reacted positively to the rate cut, gaining 137.5 points on Wednesday, the day of the cut. But then on Thursday oil prices went over $96 per barrel and gold went over $800 per ounce and the stock market promptly fell 362.14 points -the fourth biggest drop of the year. Then on Friday the market gained 27.23 points on the news that employers boosted payrolls by a surprising 166,000 in October, the most in five months.
The perturbation in the market this week again reminds us of our need to know our tolerance to risk. Suppose you felt positive about the economy on Wednesday when the Fed cut interest rates and you decide to jump into the market. To mediate your risk you decide to invest in only the 30 stocks that make up the Dow Jones Industrial Average (what we refer to when we talk about the "market"). That would have been a hard day for you because 29 of the 30 component stocks closed down.
Since emotions play such a large role in making investment decisions, risk management is essential to a successful investment plan. Your timing would have been bad in the above example, but the concept of investing in the Dow index would be sound if you believe over time the average would give you a satisfactory return.
Fear and greed are basic, but powerful, human emotions. Both divert otherwise rational individuals into making irrational decisions. This is especially true when making investment decisions because those decisions relate to personal wealth and financial stability. It takes a lot of energy to manage your emotions. It is a struggle to keep focused on long-term investment goals amid the distractions of short-term market events such as we witnessed this week.
In managing your risk, it is important to be aware of the moves made by those who influence our economy. Central to this is Fed Chief Ben Bernanke. After Wednesday's interest rate cut, Mr. Bernanke stated "The Committee judges that, after this rate cut, the upside risks to inflation roughly balance the downside risks to growth." Hopefully his is right and we are balanced.
So keep your risk within your tolerance and keep ahead of inflation.
I invite your questions.
Or Contact Jerry Cole at:
509 Center Ave, Suite #102, Bay City, MI
(989) 892-5055
(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)
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