The only two things that were ever considered to be absolutes in life were death and taxes. I would suggest that we add two other items to that list; the predictions for the coming year in January of every year followed by the December list of reasons why the predictions for the past year were wrong.
Many of the so-called forecasters are feeding on the fear of the investing public and the uncertainty they feel with their statements in the red. Many investors will be tempted to trash their year-end financial statements - unread - rather than face the grim facts: The Dow Jones Industrial Average along with all the other major stock indices posted another losing session for 2002, for the third consecutive year.
Investors need to open their statements and evaluate the performance of the holdings within the accounts and not trash or avoid the issue all together. Throwing away the statements would be a mistake, especially for investors who will have the opportunity to correct past mistakes.
In fact, a down market can be the ultimate buying opportunity for investors who do their homework and set up a balanced portfolio and who have realistic expectations as to the long-term performance of the market.
Yes, that's right, a BALANCED PORTFOLIO in this volatile market, what a concept.
Instead of being concerned with the prognosticative powers of all the talking heads and magazine writers, why not build a balanced portfolio that will protect the downside while providing for returns, no matter what the markets and economy do in 2003. Build a portfolio that reflects the investors true needs and risk tolerances and allows for the overall movement of the markets.
No one could have possibly predicted the events of 2001. Even as the market made a quick recovery from the tragedy of 9/11 we entered into the next phase with the accounting scandals. Then, there were all the other issues that followed with World Com, Martha Stewart, K-Mart and the list goes on. Even so, staying with a balanced approach would have provided for a better portfolio than trying to time the entry and exit points within the market. For instance, over a 20 year period, if you miss just 25 of the best trading days, you have lost almost 6% in the market while missing less than & of 1% of the trading days available. Who, really, is good enough to pick those particular trading days?
Now we are looking straight down the barrel of crisis with Iraq and North Korea. Will we go to war with one or both or will the conflict be resolved through other means? What is ahead for the economy and the new range of talks from President Bush on the economic stimulus package? The possibilities are too involved to accurately predict the market or economy, yet I am constantly being bombarded with information from the internet and magazines about the predictions of why to be in or why to be out of the market.
Instead of worrying about the outcome of the year and attempting to be positioned in just the right investment based on the rhetoric from the talking heads on TV or the ramblings of the magazine writers, build a portfolio that is balanced and allows you to participate with assets that work together. Too many investors completely give up on one or more asset classes in an attempt to pick the area that has the highest potential only to find they guessed wrong and pay the price for doing so.
Investors should also evaluate if their retirement plans include a guaranteed investment contract option, guaranteed by the claims paying ability of the issuing company, which is a fixed- income account currently returning 4 percent to 5 percent & yielding more than a money-market with about the same level of security. They need to maintain, and in some cases add to equity positions while the market is still down. They should have always maintained income holdings and not run to them over the course of the past months. There is risk in bonds and the principal value of bonds are more likely to fall than rise in the coming months.
What about real estate or real estate investment trusts (REITs)?* These are similar to mutual funds that buy real estate of any type except single-family homes - because they are a good diversifier away from stocks and pay a comfortable dividend. We even use a private placement REIT to assist in balancing a portfolio that has no market price fluctuation but pays a high, consistent dividend. It will not make you rich but it will help during volatile times.
As for bond mutual funds, a bottoming out may mean it is too late for investors who have not already shifted savings from stock funds to bond funds. Bonds are expensive right now because interest rates are so low. Shifting now would be selling low and buying high. If investors are committed to buying bond funds, they should be very short-term maturities of one to three years.
For younger investors with shorter-term goals, hanging tough amid the downturn is crucial. Do not allow the short-term volatility to coerce you from your overall investment approach; again the balance of a portfolio is crucial here as well. Even young investors should have income components within their portfolio and should have a sufficient amount of cash reserves available to meet short-term needs.
You could transfer the mutual funds into a money market fund until the market starts going up, but we don't recommend trying to be market timers (see graph). Historical evidence just does not lend itself to any real success in this strategy. You simply cannot tell when is the right time to be in or be out of the market.
It is not a matter of being in the market when it goes down; the problem is not being in the market when it goes up. Most individual investors are in for the down side to the market but far too many of them miss the eventual recovery. Money taken out of the market the last time it was down this steeply, in 1973-1974, took four years longer to make back returns than money left in the market, according to a study by Lazard Asset Management.
I cannot over emphasize the true importance of keeping some funds in equities to make sure investors who have been battered do not then miss the boat when the stock market does come roaring back.
My recommendation for the year ahead; make sure you are looking at your investments with the goal of staying in the game, as long as the original plan was sound and reasonable. A balanced approach to investing and managing the assets will reduce the overall volatility within the account while maintaining positions to take advantage of potential growth opportunities as they present themselves. If you are timing when to be in and when to be on the sidelines you are risking whatever losses you have already incurred and at the same time forfeiting the returns that will eventually come.
*REITs value fluctuate so that an investors shares, when redeemed may be more or less than their original cost. Investment in private REITs involve special risks including restrictions on ownership and transfer of shares, and no public market for the shares currently exists, and there is no assurance one will develop.
Allen R. Taylor is a Registered Principal of and offers securities through FSC Securities Corporation (Member SIPC).