The market is down: How should you manage your investments?

Salt Lake Tribune

With this week’s sell-off in the stock markets wiping out gains for the year and sending indexes down 10 percent from their highs this spring, many investors are wondering, "What should I do?"

Coupled with Fridays’ volatile swings, there are no easy answers, given that so much depends on personal circumstances, but here are some things to consider if you’ve made moves or are considering them:

I’m scared and am putting all my money into cash.

PROS: Cash is king, sort of. You won’t lose any more money if the stock market continues to unravel. Assuming you don’t immediately regret your decision to pull out of stocks, you’ll sleep better at night knowing the worst is behind you.

CONS: The return on cash is zero. Over time, if cash isn’t reinvested, its buying power will be eroded by inflation. What’s more — and you won’t know until later — you may have locked in a big loss by moving to cash if the stock market recovers.

I’m a believer in stock markets and want to stay put

PROS: Over the long term, people who stay put tend to do better than those who react emotionally. It is very hard to play short-term swings in the market, so those who are committed to investing long term won’t be second-guessing themselves or reacting emotionally.

CONS: You have to be able to sleep at night and sometimes that can be hard to do when the stock market is fluctuating wildly. If you are overly worried, then it might be time to reconsider your portfolio. And if the stock market is in a long-term downward trend, better returns often can be found elsewhere.

In bonds I trust

PROS: Bonds are typically a more conservative investment play than stocks. They can provide a relatively safe return during periods of market volatility, which can be appealing to risk-averse investors.

CONS: In exchange for safety, you are giving up the potential for bigger returns in the stock market. Also, bonds can lose value if interest rates go up. And unlike stocks, bonds never go up in value when the company that issued them does well.

Treasurys seem the safest bet, so that’s where I’m headed

PROS: Although interest rates paid on Treasury bills, notes and bonds (they differ by time to maturity) are low right now, they are safe havens for cash. You will get your money back, plus a modest amount of interest, when they reach maturity (which can range from 30 days to 30 years).

CONS: Treasurys that mature in six months or less pay almost no interest. What’s more, Treasurys purchased today will lose value if interest rates rise in the future. Here’s an example. Suppose you buy a bond with a yield of 2.5 percent and in a few months interest rates rise to 3.5 percent. You will have to price the bond at a discount if you decide to sell it.

In some cases, Treasurys can be a negative investment. For example, a 10-year bond pays 2.5 percent right now. Inflation is running at about 2.5 percent, so the yield is zero. On top of that, the interest that is paid is taxable.

Give me gold, any day.

PROS: For thousands of years gold has been used as a store of value. The metal has become an alternative currency for people who fear inflation or an economic calamity.

Utah legislators are so enamored with precious metals that they passed a bill earlier this year allowing gold and silver coins to be used as legal tender in the state — and for the value of their precious metal, not just the face value of the coins.

CONS: Nobody knows what gold is really worth. At more than $1,600 an ounce, it may be horribly overvalued — or it may not. If you buy gold, you have to keep it someplace safe.

Here’s another issue. Lots of investors buy gold through convertible funds that are traded on exchanges, much like stocks. You don’t physically possess gold purchased through funds unless you convert. The problem is there is so much ownership of gold through funds that there may not be enough to go around if everyone wants to convert.

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Contributors:

• James Derrick, chief investment strategist at Smedley Financial Services, Salt Lake City.

• Ryan Gibbons, managing partner at GPS Capital Markets, Salt Lake City.

• Sterling Jenson, regional managing director, Wells Capital Management, Salt Lake City.

• David Young, president, Paragon Wealth Management, Provo.

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Compiled by Tribune reporters Steven Oberbeck and Paul Beebe