The bull market is getting old. Should you sell? Some of the tech stocks still have good earnings. That implies a good intrinsic stock value. Should you buy when stock prices fall? Interest rates are edging up. Is that bad for stocks? What can you do to avoid confusion about investments? We wrote about the risk of higher interest rates three years ago.
The cost of doing business (borrowing) is about to go up for companies that can least afford it. The expectation that stocks with speculative credit ratings will outperform blue chips seems to be going away as blue chips are being bid up in expectation of higher interest rates. The consensus of investors to flee to quality and dump junk is a measure of the risk of higher interest rates.
Watch the rate of inflation if you want to know how fast and how high interest rates will be raised. The Fed is charged with maintaining price stability and optimal employment. Interest rates that are too high and go up too fast may stifle inflation but will also put people out of work. Not raising rates will allow inflation to creep into the picture, especially as the world economy heals and energy prices go up. Meanwhile the risk of higher interest rates is that weak stocks will suffer, the bonds in your portfolio will devalue as rates go up and mortgage interest rates on your new home will rise as well.
We wrote this article three years ago and interest rates have edges up. Meanwhile blue chip tech stocks have continued to rise based on strong earnings and a flight to quality. And today the market is up one day and down the next. That is the same pattern of volatility we say prior to the 2008 crash. And we looked at volatility as it relates to investments in a recent article.
There were people who were were wiped out in the 2008 market crash. And there were those who made fortunes in the market meltdown by shorting various investments. And there were people who simply kept their investments and are just fine today as we noted in recent article about profitable investments. Obviously, the most profitable approach is to buy when prices are low and sell when they are high but market timing can be chancy. Warren Buffett had something to say about volatility versus risk in a newsletter a couple of years ago. Business Insider quotes Buffett in saying that volatility is not the same thing as risk.
What Can You Do to Avoid Confusion about Investments?
The point is this. Investors who routinely research stocks and other investments before buying do better than those who simply follow market trends and hope for more of the same. Intrinsic value is a good guide to investment success no matter how volatile things are. And if you invest with a sufficient time horizon for truly long term investments you tend to even out the ups and downs of the market and find reasonable profits over the long term.