Oil

The price of oil affects more than how much you pay for gas. It impacts the price of just about everything you buy. Whether something is shipped by freighter, rail, air or truck, it is affected by the price of oil. Thus, rising oil prices become a brake on the economic engine.

That means oil prices can impact your investments—in fact some of the recent market turmoil can be attributed to the price of oil. Professional investors recognize that rising costs will cut businesses’ profitability. So traders aren’t willing to pay as much for stocks in general.

This doesn’t mean you should go buy energy-related stocks. With a $10-$15 a barrel terrorism premium in the price of oil, prices could quickly decline as more supplies come on-line and as world uncertainty levels off. If you own these stocks, hold them but take profits if prices begin to decline.

Interest rates

The Federal Reserve recently raised its target Federal Funds rate from 1.25% to 1.5%. We should be in a rising interest rate environment for the next several years. Currently, short-term rates are increasing faster than long-term rates.

This is another area where it makes sense to play a little defense. Instead of buying a 10-year bond that might pay 5%, put that money into a Certificate of Deposit that matures in 6 or 9 months. Currently, short-term Certificates of Deposit yield as much as 2% and are directly guaranteed by the U. S. Government. By the time they come due, interest rates could be 1% higher. At that point you can switch to offense, lengthen your maturities and have a dependable income stream.

The Election

The stock market hates uncertainty. Pension and mutual fund managers, who literally control trillions of dollars of investments, invest based on expectations of how the economy and particular companies will grow over the next several years. The faster the growth, the more these managers are willing to pay for a share of stock today.

The difficulty comes when current events cause them to question those growth assumptions. The close presidential race has created uncertainty in the market. If these managers had a better indication of who the winner would be, they could better determine the impact and invest accordingly. They don’t, so investment decisions are made more cautiously. In other words, they are playing defense instead of offense.

Recently, the daily number of shares being traded in the stock market has been below normal. Buyers are content to sit on the sidelines and watch. If the market drops low enough, they will step in and pick through the bargains. There is so much money on the sidelines that when they decide to put it to work the markets could recover quickly.

Terrorism

Many investors are concerned about the effects of terrorism, and rightly so. The Republican convention makes an attractive target. The threat level has been raised in the New York financial district. Terrorists were able to influence Spain’s elections through the Madrid bombing.

For those who are retired or near retirement, your ability to sleep at night is a good indicator of your comfort level with your current investments. If preserving what you have is a higher priority than growing it and you aren’t able to sleep at night, then you may want to reduce your risk.

For my clients who are concerned about terrorism, we have been playing defense for the last several months. I have reduced the percentage that they have exposed to the stock market and have used Exchange-Traded Funds for the money that remains. They still have some exposure to the market, but we can move money to safety in a matter of minutes.

The markets will always move up and down. And long-term, the prospects of the economy are still quite positive. Playing both offense and defense will help ensure you aren’t on the losing end of the financial game.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA. He’ll answer your financial question – FREE at http://www.guardingyourwealth.com