Know what to expect when you invest
If your investment portfolio is even moderately diversified, you probably own both stocks and bonds. And that's a good idea, because diversification is essential to your success as an investor. But you also should know what to expect from different types of investments - because the more you know, the more likely you are to make the right moves.
Unfortunately, some people's expectations get distorted, due to what may be happening with their investments. For example, a couple of years back, many investors saw the value of their bonds rise sharply, causing some to look at these investments as 'growth' vehicles. But is that an accurate assessment?
Probably not, although some recent statistics are quite interesting.
From December 1999 through February 2003, long-term government bonds rose about 13 percent, while the S and P 500, one of the most well-known stock market indices, fell by about the same amount. This was the second greatest period ever of superior bond returns relative to stocks - and one of the few in the past 80 years, a time in which stocks have consistently outperformed all other investments.
And so, while you can't base all your investment decisions on what has gone before, it's generally a good idea not to plan on selling your bonds before they mature and make a profit. Instead, plan for what bonds do provide: current income in the form of monthly or quarterly interest checks. As long as you own your bond, you will always receive the same amount in interest (assuming the issuer doesn't default), no matter how much the bond's current value fluctuates.
Many stocks also provide current income, in the form of dividends. But if you're like a lot of people, you buy stocks for their growth potential. In other words, when you buy stocks, you anticipate the price going up, so that when it's time to sell, you can make a profit.
And, although past performance is not an indication of future results, over the long term, stock prices historically have risen. In fact, from 1926 through 2005, large-company stocks provided an average annual return of more than 10 percent, while small-company stocks returned, on average, more than 12 percent, according to Ibbotson Associates, an investment research firm. Small company stocks fluctuate more than those of larger companies.
Of course, you can't assume that, for a given year, your stocks will return 10 percent, 12 percent - or anything at all. In the short term, stocks go down as well as up, so you shouldn't be shocked at losing principal over a single year, or perhaps a couple of years in a row.
But if you buy an array of high-quality stocks and you hold them for the long term - at least five to 10 years - you increase your chances to achieve some growth.
Ultimately, by knowing what to expect from your stocks, bonds and any other securities you may own, you can draw up a long-term investment strategy appropriate for your individual needs, goals, risk tolerance and time horizon. You may want to work with a financial professional to determine why you own what you do, what you might anticipate from your holdings and what changes you may need to make.
Nobody can predict the future. But you can plan for it - by having a clear set of expectations, based on a thorough knowledge of your investments.
- Belinda Petshow is an investment representative of Edward D. Jones in Forest Grove.