Sometimes the noise of the markets can be a distraction from basic fundamentals. The best strategy to cushion both stocks and bonds (including mutual funds) is to focus on quality. For fixed income (and we do a fair amount of tax-free municipal bonds, especially within South Carolina), the highest rated bonds will be less volatile when interest rates rise. When the economy slows, corporations with consistent earnings and little debt tend to be less volatile. Look for consistency and quality, and avoid swinging for the fences with low-quality momentum stocks and poorly rated bonds, because you will likely get burned. Having a plan can help you stay on track, especially when news and political events start to cause anxiety in an otherwise healthy market. Random, unplanned changes rarely pay off. Remove low quality investments and trim over-weighted areas in your portfolio. Many investors lost 50, 60, even 70% during 2008 because they forgot to rebalance and held lower quality investments. A well balanced, 50/50 portfolio of high quality investments would have dropped approximately 15% that year. Adding structure sounds like an obvious guideline, but because most investments are sold on a commission-basis, many people end up with a random collection of investments that don’t necessarily fit together. Like any sports team, a solid portfolio is constructed of individual parts that work well together as a whole. Lastly, news sources can generate lots of hype and create worry…but investing should be fun. Having our local schools and parks operate effectively would not be possible without the debt issued by municipalities, which enables investors to enjoy a stream of tax-free income. The creation of capital through the equity markets is what allows innovative companies to grow and expand, while investors reap the benefit of growing capital and even dividend income along the way. Enjoy the process and have fun!
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