Brace yourself for stock market activity with all the twists, turns and plunges of the Intimidator 305 roller coaster ride. The roller coaster ride is evident with the impact of the Standard & Poor’s downgrade, which gave the markets the worse day since the financial meltdown of 2008: The Dow Jones industrial average dropped more than 5.5 percent, or about 630 points, while the S&P 500, a broader measure of stocks, plunged about 6.6 percent. Investors fled to the new safe haven of the day: gold, which soared to a record high price of over $1,700 per ounce.
From predictions of a double-dip recession to the unprecedented decision of Standard & Poor’s to downgrade the nation’s AAA credit rating, last week’s market performance left investors queasy. Each major index took a steep vertical drop: the S&P 500 plummeted 7.2%, the Dow Jones Industrial Average tumbled 5.8% and the Nasdaq fell 8.1%.
President Barack Obama was finally able to sign legislation to raise the debt ceiling and avert default by the Aug. 2 deadline. Putting an end to the ugly month-long battle between Democrats and the GOP over deficit reduction, the act did little to move the market.
Nervous investors sold shares responding to reports that American consumers had cut spending for the first time in 20 months and manufacturing barely grew in July. The news came a week after investors became jittery over the Commerce Department
‘s announcement that the U.S. economy grew less than 1% for the first half of 2011. To make matters worse, a downbeat economic review from Federal Reserve Chairman Ben Bernanke and fears over a widening European debt crisis contributed to the Dow’s 513-point nosedive last Thursday, the largest point decline since Oct. 22, 2008. Then Friday the Dow had another wild ride, a 416-point swing as investors in response to the better-than-expected jobs report, progress on the European financial front and news of the debt downgrade, which S&P announced after financial markets closed.Informing the agency of $2 trillion error in its deficit projections, U.S. Treasury officials stated the miscalculation raised “fundamental questions about the credibility and integrity of S&P’s ratings action.†In a conference call with reporters on Saturday, the agency defended its move, asserting the debt ceiling stalemate demonstrated “a degree of uncertainty around the political policy-making process which we all think is incompatible with a AAA rating.”
The downgrade from AAA to AA+ could lead to higher interest rates and borrowing costs on everything from credit cards to mortgages. And local governments may find access to funds much more expensive.
It also brings another element of uncertainty to the markets. Policy makers and investors are preparing for even more turbulence. Global exchanges had a negative reaction to the downgrade when markets opened Monday: Major Asian indexes in Tokyo and Shanghai were all down more than 2% after the opening bell. Treasury yields fell as gold hit a record.
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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.