posted 04/30/10 | Wealth Management
D. Patrick Schumann, CFA
Vice President & Investment Advisor, Enterprise Trust Company
As we enter 2010, now is a great time for investors to take stock (no pun intended) of their investing strategies and goals. Investors have been through an extraordinarily challenging past couple of years, which has tested the resolve of many. Because of that, we believe it is so important now to reassess long-term goals, re-evaluate risk tolerances if needed, and make any necessary adjustments to long-term investment strategies where portfolios may have gotten off course. Here we offer some thoughts to chew on.
Before hitting the road, a couple of points to keep in mind for investors –
1. There are no guarantees in life
2. There are no free lunches
3. If it looks too good to be true, odds are it is
4. Expect the unexpected
5. Risk is needed for return, but it is still a four-letter word
RULES OF THE ROAD THAT WE RECOMMEND FOR LONG-TERM INVESTORS:
Have a basic understanding what you own, and why you own it. While you may not have enough time to know the minute details of an investment, knowing why it is in your portfolio should help stay focused on the ultimate result (reaching financial goals) during the trying times. For example, if we know that a quality emerging market fund is in our portfolio to manage risk (diversifying from only developed markets) while having exposure to growth (markets very likely will outpace developed markets over time), that can help us stay the course when the fund is down.
Utilize professional management to add growth while managing risk. This is particularly important once we get outside the typical realm of investing (US stocks) that most people are familiar with. Investing outside the U.S. carries additional risks (political, regulatory, economic, currency, etc), and can be a dicey proposition if done haphazardly. Higher quality investment managers that invest globally tend to have resources on the ground and/or a firm grasp of global markets and industries, helping to minimize the risk.
If you are a true long-term investor, do not take undue risk (in other words, own that precious commodity through a professionally managed mutual fund). Know what you want to achieve through investing, and make sure that the level of risk taken is appropriate. There is no return without risk, but taking too much risk for too little return can punish a portfolio. Be the tortoise, not the hare. Investors that can avoid major declines in portfolios should be better off over time. If a portfolio falls 50% in value, it will take an 100% return just to get back to breakeven.
Take advantage of the market downturns (and there will always be downturns) to buy low for the long-term. No doubt, the current recession and market downturn have been among the worst in decades. This too will pass, we are already seeing signs of improving conditions (although slight and gradual, still improving). Remember buy low, sell high.
Try to minimize the emotional impact on your portfolio. Stay focused on the long term, and invest and rebalance systematically. Timing the market is a fool’s game. Prudently craft an investment plan, and stick to it through thick and thin. That has shown to be a highly effective way of achieving financial goals. And no, we don’t think the buy and hold strategy is dead.
Markets tend to go too high on the way up, and fall too low on the way down, but eventually end up somewhere in the middle (ah, reversion to the mean). Understanding this helps to keep emotions in check. Investing systematically, owning higher quality securities, and staying invested through the ups and downs, helps to alleviate the heartburn of volatility.
Diversify to manage risk. Never put all your eggs in one basket. That is, unless you have the ability to predict the future. In that case, call us.
Recognize that the US is roughly 4.5% of the world’s population, and that there is substantial growth occurring outside this country, so position portfolios to benefit from that growth. Odds are that the U.S. will remain a strong economic force for years to come, but the fact of the matter is that the U.S. economy is relatively mature. There are numerous countries around the world whose growth will likely outpace the U.S. for the next 20 years. Astute investors will recognize this and act accordingly.
Do not listen to the doomsday prophets (those that were forecasting 4,000 on the Dow earlier in 2009) any more than the sky’s-the-limit forecasters (that were forecasting 36,000 on the Dow in the late 1990s). Within today’s noisy marketing and media environment, extreme positions tend to grab the headlines, although they also are frequently way off base. Market pricing has to have some foundation. When hearing one of the extreme forecasters, check if they have a book or newsletter on the market.
Do not be afraid to occasionally turn off CNBC or skip checking your quotes on the Blackberry. Life is too short to worry about things that are typically outside of most investors’ control. Sure, be informed, but keep it all in perspective. Most of us invest to achieve certain financial goals to help us live as we desire, raise families, fund our retirement and set the stage for future generations (where applicable). Investing should not be our life.
Pay attention to Warren Buffett. Really. One of our basic rules here is to listen carefully to anyone that has $50 billion more than we do. His thoughts on value investing, knowing what you own, owning quality and long-term time horizon are quite valuable.
Have realistic expectations. Sorry, but on paper, the next 10 years to us look good, but not great. So, if your prior expectations for stock returns were 8-10%, expect 6-8%. If your bond return expectations were 6-8%, expect 4-6%. Maybe we will end up underestimating the U.S. economy and markets, but we would rather be pleasantly surprised than disappointed.
Keep in mind that the US economy and marketplace are rather resilient. In the past 80 years, stocks have averaged close to a 10% annualized return, even though that time period included a depression, a number of recessions, inflation, deflation, stagflation, wars, assassinations, housing bubbles, dot-com bubbles, financial crises, oil shocks and so on. Historically, it has not paid off to bet against the U.S., and we don’t see reason to begin now.
Hail the coming of thriftiness! We expect consumers to continue to boost savings and pare back on debt, and also to tweak consumption patterns toward necessities and less to luxuries (at least for lower and middle income folks). Of course, this could remain in place until we forget about what got us here, which may be in about 3-5 years.
Keep perspective on the municipal market, as we are likely to hear even more about localized economic challenges. We envision intensified pressures on SOME states and municipalities in 2010. However, we expect the majority of municipalities to be ok. To manage risk, we recommend investors stick with high quality muni bonds, particularly if the focus is on principal preservation.
For now, stay calm on bonds. Inflation is not yet a viable threat in the near term, there is enough weakness and overcapacity to likely soften the inflation blow in 2010. However, the next few quarters should be a good time to reevaluate portfolios as positioned against inflation (with the level of government spending, inflation has to appear at some point, doesn’t it?).
Cash is king? Appropriate levels of emergency funds are essential. But, keep in mind the opportunity costs of holding too much cash at current low yields. Most asset classes will outperform cash over the long term. As perspective, getting a rate of 50 basis points (0.50%) on cash means you will be double your money in only 144 years.
The worst of the economic storm has likely passed but still-fragile economic conditions persist. With growth recovering and a significant level of cash on the sidelines, we would view a pullback in 2010 opportunistically for long-term investment.