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October 2009
Finding a Better Option in a Confusing Market Today's conflicting economic and market news presents what feels like a no-win scenario to investors. The situation reminds me of something Harry Neale once said. Harry is a former coach of the Vancouver Canucks, a National Hockey League team. Back in the early 1980s, the team had one season in which it lost most home games, followed by another season in which it lost most away games. A reporter asked Harry what he thought was the biggest problem, to which Harry replied: "Last year we couldn't win at home and this season we can't win on the road. My greatest failure as a coach is that I can't think of anyplace else to play."1 Investors are no doubt feeling something similar, because conflicting or not, this economy and this market are the only games in town - there's nowhere else to play! So are there any helpful conclusions we can safely draw from this paradoxical environment? Let's start with the economy. Good news is on the horizon, according to Federal Reserve Chairman Ben Bernanke — or is it? Although he said on Sept. 15 that the recession is "very likely" over, he also said he doesn't expect job numbers to improve significantly any time soon (nearly 7 million jobs have been lost since the recession began in December 2007). With the primary driver of gross domestic product (GDP) being consumer spending, and unemployment at a 26-year high of 9.7%, it appears very unlikely consumer spending will resume in a meaningful way in the near term. Bernanke also acknowledged that 2010 growth is likely to be at a "moderate" pace. So is the economic news good or not so good?2,3 If you could ask The Market, it would respond, "all appears to be well" (or better, at least). Bernanke's remarks left little impression on the Dow Jones industrial average (Dow), which stubbornly continued its upward climb toward 10,000 with only mild hiccups through Sept. 30 — a roughly 47% surge since its low in March. On the face of it, that would seem to qualify as good news. Unfortunately, history hasn't been kind to such swift outperformance. The market rebounded similarly in the 1930s and 1970s, followed both times by major declines.4
Should I stay or should I go? Their dilemma is understandable: Those who fled when the markets fell now can't decide whether to stay out and possibly miss the entire upswing, or get back in and risk losing even more if the rally collapses. Those who stood by equities throughout the downturn are torn between staying in to try and recoup losses, or moving recent profits out of equities and into more conservative investments. A rock and a hard place, indeed. So what can you do when faced with such an investment impasse — is there a better option? I keep recalling an old adage that seems like good advice right about now: Hope for the best, prepare for the worst. That nicely sums up an attitude all of us would be well advised to adopt. But what does it mean in real terms? It means being mentally prepared for virtually any market or economic eventuality by having a financial plan you trust. One you can stick with no matter what, because you believe it's designed to bring you success. A solid financial plan is a good way to get comfortable with this market — or any other. So how do you get one of those?
Begin with the end in mind: financial success As with any plan, yours will need to consider numerous factors — some of which are under your control, some of which are not. Three you control include:
Factors you can't control include what the economy and market do and how long you have to invest (your time horizon). That second one may surprise you, because your time horizon is one of the key factors in planning. What I'm referring to here is the idea of planning for uncertainty — unexpected illnesses and family circumstances that could derail your success. Good plans are those that take into account all possibilities. (Hope for the best, prepare for the worst.) Of course, as with so many areas of life, preparation is as much about attitude as action. Here are three "attitude items" I believe you must undertake to develop a solid financial plan: 1. Rely on
yourself for wealth, not the market. That bull market appeared to be limitless — until the technology bubble of 1999, followed by the recession of 2000-2002, followed by the real estate bubble and recession of 2007-2009. The take-away? Markets go up, markets go down - be ready for either prospect. How? By saving as much money as you can afford. Though I know it can be difficult when economic times are hard and unemployment is high, savings are truly the foundation for long-term wealth. Some Americans have already relearned this lesson — according to the Commerce Department, the personal savings rate in the U.S. rose from essentially zero last year to 6.9% in May, its highest point since December 1993. (It settled back to a little over 4% by mid-July.) That quiet revolution is one you want to join. Your savings, in the form of contributions to your investments, will in most markets constitute the largest percentage of your portfolio balance. If you don't believe it, review your account statements and compare the amount of your balance that came from your contributions to the amount due to earnings on those contributions. Many of you will be gratified by the role you've played in creating wealth for yourself.5 That's not to say earnings on your savings aren't important. Earnings play the critical role of helping your savings to grow as well as helping to protect your wealth against inflation. So the lesson here is: The stock market alone won't make you rich, but the stock market (via your investing plan) and you (via your savings) together can help achieve your financial goals. 2. Know your
investing self. This information is important in helping you determine how much risk you can afford to take and still sleep at night — the true sign that you've found your investing comfort zone. Many advisors ask their clients questions similar to those in the box, especially when a new account is being opened. Studies6 have shown that investors' answers to those questions can vary not just month to month, but week to week and perhaps even, after reading the financial news with your morning coffee, day to day. That's why it's so important to discuss your answers with your financial advisor, so he or she can devise a plan that works for your emotional risk tolerance and your finances.
3. Work with an expert If you don't have a financial advisor, I suggest you talk with family and friends to obtain a referral from someone you trust. Remember that an advisor is there to build and put to work a plan you can realistically embrace in all market cycles. A good client/advisor relationship is one in which you do your part — fund the plan with contributions - and the advisor does his or her part - manage the plan according to your agreed-on goals. Our part: Earning
your trust The bottom line is, we want to do more than just "hope for the best" for you — we want to give you the best: the best service, the best products, the best investing experience. We want to provide the appropriate products that fit within your investing comfort zone. That's why we focus on doing one thing well: managing your money. I welcome your comments and questions at phil@invescoaim.com. 1 Source:
sportsillustrated.cnn.com/vault/article/magazine/MAG1120357/index.htm Invesco Aim is the source for all data unless otherwise noted. Investment Perspectives feature market and economic commentary, research and education, and strategic investment insight from key investment professionals, including Invesco Aim CIOs, to help advisors and investors put market conditions in context. Any views and opinions expressed are those of the author and are subject to change based on factors such as market and economic conditions. Any views and opinions expressed are not necessarily those of Invesco Aim and are not guaranteed or warranted by Invesco Aim. Any such views and opinions are not an offer to buy a particular security and should not be relied upon as investment advice. Past performance cannot guarantee comparable future results.
To learn more about Invesco Aim or other mutual fund companies, visit Fund Companies. For particular fund information, visit Fund Selector. |
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