Stocks, Bonds, Cash… Oh My

There is impending fear and panic by the talking heads in the business media. We are days away from the debt ceiling deadline with dire predictions for the economy if a solution doesn't arise. Fears of a falling stock market permeate the media. Bond and cash yields are rock bottom. What's an investor to do? Here are your options for dealing with the current investment climate:

Panic-Sell all of your stocks and bonds. Take your cash out of the bank and stuff it under your mattress.

Advantages –You know where your cash is and won't get stung by a decline in stock prices.

Disadvantages – You have no protection against inflation and no opportunity to benefit from a potential upward movement in stocks. Furthermore, how will you know when to get back in the market?

React to market moves - Assume that everything you hear on the markets is true and trade accordingly. Choose the hot stocks of the day. Follow the advice of one or more commentators and do exactly what they say. After all, they're on television, so they must know what they're talking about. Barbara Friedberg, MBA, MS is editor-in-chief of Barbara Friedberg Personal Finance.com where she writes to educate, inspire, and motivate for wealth in money and life. Learn about personal finance from a real life Portfolio Manager & MBA professor! Stop by the website and download a valuable free eBook, 20 Minute Guide to Investing. MMM DONUTS

Advantages – You have direct advice from a professional and someone to blame if the trading decisions don't go your way.

Disadvantages – How do you know who to follow and what advice to take? If you choose the wrong pundit, you may be worse off than before.

Stay the course – If you are a sensible investor, you have already decided on an appropriate asset allocation for your age and risk tolerance. You know enough to understand that stocks and bonds are volatile. Although long term stock price trends are positive, the road in between is rocky.

As a serious investor, you realize that the chance to beat the market regularly is slim and that every investment decision will yield either a gain or loss. Stick with the plan you devised, including well researched stocks, bonds, and funds in the allocations appropriate for you. Be careful who you advises you. Accept that portfolio volatility is avoidable. Make sure to keep money you need during the next 3-5 years out of the stock market!

Advantages – You won't be swayed by the stock of the day, which has likely already had its run up. You won't rack up huge trading costs or miss the market's upward movements because you were jumping in and out. You will be acting on a well reasoned investment plan and not a whim.

Disadvantages – You might miss a high flying winner. Your portfolio will experience volatility. Wait… no matter what, an investment portfolio will experience some volatility.

Keep your sanity and think before you act. There have been countless crises and they never last forever.

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