What should you do about your investments?
With the US economy slowing and the European debt crisis still simmering, markets have been in turmoil. Some folks are saying that this is a replay of 1937, when a nascent recovery was choked off by restrictive Fed and fiscal policy. Or if those downplaying the importance of Greek debt are making the same mistake analysts made in 2007 when they downplayed the importance of sub-prime debt in the mortgage market. Everyone seems to be selling; should you be, too?
As tempting as it is, it is rarely a good idea to react to short-term market swings. Strategic asset allocation is the most important decision an investor can make. That decision is typically a function of an investor’s age, health, income, and goals. Those factors don’t change very much just because the stock market moves 10-15%. A clear strategy allows you to think long-term.
And strategy matters. More aggressive portfolios tend to have higher returns, but they’re more risky as well. This is because equity owners are the first ones to suffer if a firm runs into hard times, but they’re also the ones to benefit the most from any growth. So low-quality companies do best in a recovery—if they survive the downturn! The really sketchy firms don’t make it.
It’s best to use a downturn to reassess your strategy and—perhaps—consider rebalancing. But let your portfolio tell you when to rebalance, not some market guru on TV. An investment strategy is like a diet: having a one isn’t hard—sticking to the one you have is.
Douglas R. Tengdin, CFA
Chief Investment Officer
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