We have enjoyed minimal volatility in the market over the past 2 years, but it looks like those days are over. “Why?” you ask. Well, the federal government has been buying $85 billion a month in U.S. bonds and mortgage-backed securities to help stimulate the economy by forcing interest rates lower. This is known as quantitative easing. As the economy improves, which it is, the Federal Reserve will reduce and eventually eliminate this stimulus. At which point, hopefully the private sector is able to take over – thus explaining the volatility in the stock market.
How does this effect investors?
High demands for bonds have kept interest rates low – great for borrowers, but bad for investors. When the demand for bonds decreases, rates will rise. The 10-year U.S. Treasury was at 1.6 percent on May 1, 2013 and is now at 2.4 percent, a 44 percent increase. When interest rates rise, bond values fall. The good news is that The Trust Company’s bond managers returned 10 percent in 2012 – four years’ return in one year. We are constantly monitoring investment options, and many times decide to take no action because all investment alternatives have risk. If you hold a diversified portfolio of investments, history has rewarded your patience during turbulent times. Had you remained invested from the stock market low in March of 2009, your portfolio would now have recovered 130 percent.
What should you do?
Relax and take a deep breath. Long-term money for retirement should be invested in stocks to stay ahead of inflation. Funds needed for the short-term should not be invested in stocks. Never react emotionally. Most importantly, contact your relationship manager to ensure you have the right strategy for your circumstances.