Expect Wall Street to be just as volatile. And this seesaw activity will continue as markets react to every financial event, political upheaval, policy decision and economic report. But even in this environment, you can still make basic moves to fortify your portfolio and protect assets. Studies have shown that African American investors have a greater tendency to avoid risk and volatility than their White counterparts. As a result, large numbers have pulled dollars out of the market, converting paper losses into wealth-depleting capital losses.
In most cases, it’s costly to get off the ride before it’s over. In fact, turbulent markets and economic downturns can present wealth-building opportunities for strategic investors. The following tips may help you find a smoother, more profitable course:
- DON’T PANIC: Our rule-of-thumb: engage in disciplined, long-term investing. It’s true the past can never fully predict future outcomes but it serves as a valuable reference. Note that the stock market crash of 2008 extended to two months of 2009 before equities began to rebound. Between the Great Recession market low of 6,547 on March 9, 2009 to the post-crisis market high of 12,810 0n April 21, 2011, the Dow posted a spectacular 95% gain in a two-year period.
- LOOK FOR DIVIDEND STOCKS: With increasingly unpredictable environment, consider purchasing shares of companies that make cash distributions to shareholders on a quarterly basis. These stocks tend to be high-quality blue chips that can provide you with additional cash flow from a yield of 2% to 3% . Also, the capital gains taxes on qualified dividends are no higher than 15%.
- TAKE ADVANTAGE OF 401(k) PLANS: In our recent August issue, BLACK ENTERPRISE CEO Earl G. “Butch” Graves, Jr. stresses the value of contributing to employer-sponsored 401(k) and 401(b) plans in his Executive Memo column. For good reason, it’s a systematic way to build your retirement nest egg. As many of you know, funds are deducted from your paycheck and you get to invest in an array of investment offerings with tax-free dollars. An added bonus is that in many cases your employer will match a portion of your contribution—the maximum is currently $18,500 per year. By doing so, you benefit from dollar cost averaging—the process of investing equal dollar amounts at regular intervals—which enables you to purchase more shares of quality companies when the stock price drops, a likely event in today’s capricious market. Since these tax-deferred vehicles are designed for retirement, you’ll face stiff penalties and tax liabilities if you withdraw funds before age 59 1/2.
- GO INTERNATIONAL BUT BE PICKY: In diversifying your portfolio, you should still get some foreign exposure. Among our recommended financial power moves is making investments in emerging markets like China and India through mutual funds. Experts suggest such vehicles represent no more than 10% of your holdings, however.
- GET DEFENSIVE. Identify recession-resistant stocks. Companies in sectors such as pharmaceuticals, personal care, household products, food and consumer staples—products consumers purchase in economies weak or strong—will offer some portfolio stability.
U.S. Treasuries are still safe bets. As the debt ceiling battle in Washington came to a close, I asked Jason Tyler, senior vice president of Investment Research for Ariel Investments, L.L.C. (No. 6 on the BE ASSET MANAGERS list with $5.5 billion assets under management) whether investors should still flock to government bonds as safe havens. He unequivocally asserted that these securities represent the world’s most solid investment—even with the downgrade. “People hold U.S. Treasuries because there’s extraordinary financial stability underneath it and that’s still the case,” he says, adding that the European debt crisis has made that continent’s securities less attractive. “U.S. Treasuries should continue to be seen as the safest place to park money. At the end of the day, nobody holding U.S. Treasuries is going to lose principal.”
Even though you employ these strategies, the market may still take you for a loop or two. Some days you’ll have to hold on tight. If you stay focused, however, when you return to terra firma, you’ll be richer for it.