For fund investors, this unexpected rate cut is like seeing your odometer roll over 50,000 when you're halfway through a cross-country trip: Intriguing, but surely no reason to shift gears.
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Make no mistake, this rate cut is big news that's giving battered stocks a reprieve and providing extra kick to the April rally. Here's what happened: Troubled by sagging corporate profits, the
Fed's Open Market Committee unexpectedly slashed interest rates this morning. Lower interest rates typically lead to higher spending by companies and consumers, a recipe for higher corporate profits and, in turn, higher stock prices. The
Dow Jones Industrial Average
and the tech-laden
almost instantly rocketed up hundreds of points.
The talking heads are breathless,
has filed his take from a
desert getaway, and the ticker is greener than
Oscar the Grouch
. For months, portfolio managers have told us that the stock market won't recover until the economy starts growing again, and that a cut like this would speed that process. Yes, the excitement is palpable, and not doing anything feels like you're reading the paper on the median of the
, but if you're a long-term fund investor, it's important to keep one thing in mind: Your goals didn't change today, so there's no reason for their strategy to change, either.
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"These short-term events -- like rate cuts or earnings warnings -- are strictly noise to long-term investors. They are nonevents that can't be forecast, and they're not actionable," says financial adviser Frank Armstrong, president of Miami-based
Managed Account Services
and chief investment strategist for
The upshot is that these kinds of events -- good or bad -- get a lot of real and virtual ink, but it's nearly impossible for the average fund investor to profit from them. On their way to a 10% historical average annual return, the stock market goes through countless maddening and unpredictable fits and starts like this. Since they are unpredictable, the average investor is constantly told to keep day-to-day market moves at an arm's length by simply building a diversified, market-like portfolio blending stock and bond funds that will chug along with broader indices, racking up solid gains over the long term.
To that end, we've laid out
a model portfolio for those who don't mind tracking a handful of funds and
a low-maintenance version, wherein you can get broad, cheap exposure to the global stock markets with just two funds.
If you do want to do something today, you might consider the idea of play money. This is essentially the money you'd bring to Las Vegas if you were so inclined -- less than 5% of your portfolio and money you're willing to lose. Maybe you think big-cap tech stocks are bottoming, and you want to buy 100 shares of the
Nasdaq 100 Trust
, the exchange-traded fund that tracks the techy
Nasdaq 100 Index
. Whatever your urge, this is the best and least risky way to act on it.
In any event, keep in mind that you're almost certainly making money today if you own stock funds. Those gains could evaporate tomorrow, or this could be the start of a prolonged recovery. Either way, don't feel like you need to do anything.
"People just need to focus on what their needs are, develop a diversified strategy that should get them there over time and just go play tennis," Armstrong says.
Fund Junkie runs every Monday, Wednesday and Friday, as well as occasional dispatches. Ian McDonald writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to
firstname.lastname@example.org, but he cannot give specific financial advice.