At the end of 2012, our country was facing the fiscal cliff and a looming debt ceiling crisis. How did the equity markets react to these issues in the first quarter? They experienced positive returns, so positive that the Dow Jones Industrial Average closed April 2 at a record 14,662.
Are investors right to get excited? Unfortunately, my crystal ball is always cloudy. As advisors, when news is bad and markets are tanking, we talk about why you should stay the course and adhere to your investment plan. When the markets are doing well, our job is to make sure you don’t disregard your investment plan and pile “all in” to the equity markets. With that in mind, let’s take a look at a couple of the key issues facing investors.
First, let’s focus on the fiscal cliff. The good news is we averted universal tax increases. The bad news is we still haven’t dealt with our debt in a meaningful way. Our debt is currently 73 percent of our gross domestic product; in 2007, this ratio was 36 percent. We’ve seen how this plays out (in Europe). We could see investors start to demand a higher interest rate on U.S. debt, leading to higher interest costs. Currently, our debt service is about six percent of our federal budget. As this percentage grows, there will be less money for the government to spend on other programs.
Next, we’ll examine the fixed income markets. Bond rates are at historic lows, which has led some investors to search for yield wherever they can find it. This could be in the form of dividend-paying stocks, bonds with lower credit quality or longer-term bonds. If you take any of these steps, however, you will be increasing the risk level of your portfolio. The key principle of investing is that if you want more return, you will have to take more risk.
The bottom line is this: If you have done a good job developing your plan, you should ignore the noise of the markets. This means you should avoid getting caught up in either the hype or the fear that bull and bear markets can cause. Just stick to your plan.
Jeff Griswold, CPWA, President & Wealth Advisor, Merit Wealth Management, LLC. 404 SW Columbia St., Bend, OR 97702, 888-516-3748.
