Back in the day (1995 feels like history), gold
was the flavour of the day. Investors had an insatiable
demand for gold stocks. As long as the price of gold
was rising, gold stocks were expected to move up.
2000 does not seem to be all that different, if we compare
the emotions attached to gold stocks to that of the
technology sector. Today, technology companies are the flavour
of the day, and as long as they show exceptionally
growth rates, they will continue to rise.
Bottom Line:
While precious metals and technology are two contrasting
sectors of the economy, the comparison was made to illustrate
that stocks need reasons to move up. If you buy sector mutual
funds specializing in technology, keep an eye on industry
leaders such as Oracle, IBM, and Sun Microsystems. If any
of them fail to meet market expectations, changes in the
economic climate (for example, rising interest rates or
higher employment costs) will suggest a decline in the sector's
profit growth rates.
HOW MY STOCKS WILL COPE WITH A HIGHER INTEREST RATE ENVIRONMENT
Think of investing as a pendulum. It swings from the "safe
haven" to the "stock market". The pendulum swinging faster
from one end to the other characterizes market volatility.
Higher interest rates make the "safe haven" side of investing
much more attractive. T-Bills and cash are examples of such
safe havens, and will continue to pull money away from the
stock market as interest rates keep moving up.
WHAT DO I DO WITH…
…MY MUTUAL FUNDS?
Below are selected sectors that are rated as buy, accumulate
or hold. Notice there are no "sell" or "reduce" recommendations.
Mutual funds are long term investments and should be invested
as such.
…MY STOCKS?
Evaluate your holdings. If you bought them on speculation,
sell them during short term rallies. Consider large-cap
stocks (companies with a market capitalization of over 1/2
a billion dollars) who are leaders in their field and are
run by an excellent management team (a management with a
vision).
HOARDING CASH?
In the long term, the return from cash is reduced by high
taxes on interest earned, as well as inflation. Even though
holding cash appears to contradict investing, always remember
the phrase "Cash is king, baby". Why? Cash gives investors
opportunity. In today's market, well run companies
with a low stock price will eventually rebound.
