1. Money
You can opt-out at any time. Please refer to our privacy policy for contact information.

Stock Market Looks to Future, But It's Uncertain

Sluggish Economy Means Growth in Stocks May Be Slow


For investors in the stock market, a sluggish economy can be a damper on their long-term goals.

The stock market is always looking to the future even while it reacts to day-to-day events. Some bad (or good) news can send the market up or down, at least momentarily.

Over the long-term, the stock market will generally reflect what investors believe is important for the economy and important for stocks. After all, investors want to buy at today's price the stocks (and other investments) what will be worth more in the future.

Since the future in uncertain and unknowable, there is always an element of risk involved in investing. Investors for the long term choose companies with great potential and selling at discounted prices. At least that's the strategy of value investors.

When the future seems bleak or at least blah, it puts investors in a tough position.

Buy and hold stock investors face difficult and challenging times. The U.S. economy is stuck in a rut and will need several years of hard work and good luck to begin moving again.

The stock market, while volatile in the short term, is still recovering from the financial disaster in 2007-08. The odds are not good for a long-term stock market advance without some major bumps in the road ahead.

Which raises the question as to whether the buy and hold stock strategy is dead (I know, some believe it died years ago). However, thanks to retirement plans such as 401(k)s, IRAs and so on, most Americans who own stock are by definition buy and hold stock investors.

These programs reward a consistent investment plan that puts fixed amounts into the accounts on a regular basis (monthly, for example). History is clear that this approach has worked in the past, but will it still work today?

Of course, we can't look our 10 plus years into the future for results. Many stock investors are willing to accept the historical effectiveness of a buy and hold strategy (assuming a broadly diversified portfolio and the other usual qualifications).

Where the buy and hold strategy has failed usually involves investors not understanding the short-term volatility of the stock market. This means they hold on to stocks too long when the time approaches that the investor will need to pull money out of the market (during retirement, for example).

Despite what you may read elsewhere, the majority of individual investors do not make good stock traders - meaning they lack the time, resources or emotional commitment to learning how to buy and sell stocks to take advantage of small price changes.

What most stock investors can and should do is understand that as they need a strategy for exiting most of their stock positions years before they need the cash, For example, if you want to retire at age 65, you should consider moving out of stocks and into more stable assets, such as bonds, at least by age 55.

This doesn't mean blindly selling everything at once, but a planned exit that takes into account the nature of the stock (high tech, utility and so on) and its future prospects along with whether you have a gain or not.

The goal is to shift your assets out of the volatile stock market (in the short term) and into more stable investments. At this point, you should be more concerned about preserving capital and less about future growth.

You'll want to leave a small percentage of your assets in the stock market during retirement, but most of your portfolio should be in fixed income. This will help you avoid what happened in 2007-08, when the market lost 50% of its value right before you retire.

©2014 About.com. All rights reserved.