Focus On Financial Affairs
Stephen J. Levine is an independent financial advisor who founded his own company, Harbor Financial Inc. a few years ago. The Rockaway resident lives on Beach 126 Street. Harbor Financial is located in Nassau County and can be reached at 516-295-1410. Levine will be writing this column on a monthly basis.
When the markets are on the rise, equities are king. Everybody wants performance, and nobody wants to hear that some of their assets should be in bonds, REITS or other more conservative investments. Diversification goes out the door because, in the short-term, a diversified portfolio can't outperform a portfolio that consists only of the best-performing asset class.
When the Standard and Poor index (S&P) was up 20 percent, who would have thought that they were getting good advice from a financial advisor who recommended a portfolio that delivered 12 percent? Who would have been willing to leave that eight percent on the table year after year as the markets soared? The story is the same on the way back down. When markets are getting crushed, and stocks are on sale, few investors buy. Instead, many look to low-yielding money markets and bonds as safe places to wait out the tough times. Think about this strategy for a minute. If many of the best professional investors in the country not only missed the onset of the bear market, but also got fooled by big companies cooking the books, what are the odds that an individual investor can accurately predict the market bottom just in time to jump back in and make a fortune as the markets bounce back? The reality is that nobody can pick the best-performing asset class year in and year out.
That bull market in the rearview mirror looks better and better everyday. It was a great run, but nothing lasts forever. Uncertainty is a fact of life, and nowhere is this more apparent than in the financial markets. When you hear that soothing statistic about how stocks generally deliver returns of about eight percent per year, it's easy to overlook that a year of -28 percent and a year of +44 percent produce an eight percent average. When the markets deliver successive years of negative returns, that eight percent can be hard to envision.
So what should you do? Do you get out of the markets for good? Your course of action depends entirely on your personal financial situation. If you're wealthy enough that you don't need to worry about making more money, perhaps you have come to realize that you don't have the appetite for risk that you once thought you did. If that's the case, be thankful for your good fortune and, lesson learned, reallocate your assets to more conservative investments. On the other hand, if your personal financial situation will require substantial growth of your portfolio to meet your goals in the years ahead, abandoning the equity markets may not be an option.
What's Your Strategy?
To figure out which investments will serve you best tomorrow, start by taking a look at your investment strategy today. What investments do you have in your portfolio? Why are they there? What are you trying to achieve? If you invest without clear objectives, it is highly unlikely that you will achieve satisfactory results.
To address the situation properly, ignore what is happening in the stock market and focus instead on your personal financial situation. How much money are you looking to save? Why did you pick that number? How much risk do you need to take to achieve that goal? To answer these questions, many investors seek the assistance of a professional investment advisor.
Professional advisors often recommend that you put your goals and strategy in writing. In financial services terminology, this written statement is known as your investment policy statement. An investment policy statement serves many purposes. Initially, it helps you confirm that you have set realistic goals and reasonable timeframes for their achievement. Later, if the markets turn ugly and you're tempted to sell your investments, an investment policy statement helps you maintain your focus. Whether the market is up or down on any given day doesn't change the specific amount of money you will need to fund your retirement, pay for a child's education, or achieve other financial goals. So, before you make a change to your portfolio, go back and re-read your investment policy statement. If your objectives haven't changed, neither should your strategy.
Long-term investing isn't about chasing hot investments to boost performance. Investing is all about strategy, and a good strategy isn't something that should change every time the Dow jumps or the S&P drops. If you've got concerns about the current market conditions, the question you really need to ask yourself is "What's my strategy?" Answer that question and you'll be better prepared the next time the market delivers a steep decline or a terrific advance.