What a Difference a Year Makes
March 31, 2010
As March draws to a close, the U.S. stock market is looking at a year-over-year gain of close to 50%. That's an amazing turnaround -- it was during March of last year that the stock market hit bottom, and at the time, the hope of such a recovery would have seemed like a pipe dream.
It's at times like these that investors start getting a little bolder, and investment industry professionals start making more aggressive recommendations. Of course, the really shrewd investors and savvy professionals were aggressive last year when prices were much lower, but they are the minority. The important thing to remember is this: don't chase returns.
That's not to say you shouldn't own stocks, but if you are going to own stocks, don't try to jump in when the market's been hot, or jump out when you've had some setbacks.
The reminder not to chase returns is important now not only because the stock market is hot, but because bank rates are so low. Anyone mired in minuscule savings account rates, money market rates, or CD rates couldn't be blamed for looking for alternatives. In fact, that feeling is no coincidence -- besides stimulating the economy, one purpose of a low-interest rate monetary policy is to stimulate investment by making sitting in cash unattractive.
The point is, you have to be disciplined, or else you will be whipsawed by market fluctuations. Stocks have their role, as do deposit accounts. Just make sure those roles are determined by your long-term needs and risk tolerance, and not by trying to chase returns you've already missed.