There’s no sugar-coating it — slow economic growth, diminished investment returns, higher unemployment, tighter credit, the threat of inflation and higher taxes is “the new normal” for investors. While facing an investment world with plenty of uncertainty and limited upside is difficult, here are seven strategies to help make the adjustment:
1. Don’t follow the herd. About every decade, talking heads tell us that the investment world has changed for good, but don’t believe it. During the “New Economy” of the late 1990s, popular opinion said technology stock valuations were no longer subject to the laws of gravity. It’s just as dangerous to think that we are in a period of diminished returns and volatility that requires us to turn our back on equities. It’s easier to live with market uncertainty if you trade your view that ‘It’s different this time’ for ‘This is a normal secular bear market.’
Economies have gone through major expansion and contraction cycles that generally last from 5 to 25 years. Accordingly, the planning lens must change to ensure dual goals: protecting existing wealth and positioning to take advantage of the bull rallies.
2. Increase diversification. While most portfolios are split between stocks and bonds, the downturn has underscored that cash, too, is a valuable asset class. Investors looking to mitigate risk by diversifying further might also include commodities, gold and real estate or other alternative. The traditional relationships between asset classes have changed and therefore portfolio adjustments may be in order. In the increasingly global economy, domestic equities and international equities are tracking closer together, decreasing the diversification benefit.
3. Think locally, invest globally. Some believe that as government debt soars the U.S. dollar will lose its role as the world’s reserve currency. At the same time, growth is occurring in the developing world, specifically in emerging markets like India and China. While conventional wisdom has suggested investing a maximum of 25 percent of your stock portfolio abroad, it may be time to increase that allocation, especially given that approximately 60 percent of the world’s total stock market value lies outside of the U.S.
4. Get portfolio active. Regardless of what asset classes you own, investment returns likely will be lower. That means being in the right place at the right time is more critical than ever. Seeking to capture a short-lived opportunity, take gains, or avoid a potential decline may require more frequently trading their portfolio. ‘Staying the course’ has never meant doing nothing.
5. Spend less, save more. It sounds very basic, but you can only control what you save and spend. If what you sock away is going to grow more slowly, you need to save more and if you are already retired, you may need to withdraw less. In addition, taxes can take a heavy toll on retirement savings, so it’s important to ensure that investment plans are as tax efficient as possible.
6. Manage risk more tightly. Although diversification can be an effective risk management strategy, dispersing your eggs among numerous baskets didn’t work in 2008 and 2009. The approach of diversifying once and then adopting a buy and hold philosophy needs to be supplemented with much more responsive risk management. Consider constructing a portfolio where just part of it is held for the “long term” and carving out a percentage that is managed more actively to capitalize on emerging opportunities. Once you set your ideal asset allocation, you may need to rebalance more frequently to maintain it, perhaps two to four times a year.
7. Remain an investor, not a trader. You can’t win trying to time the market. But there are three reasonable ways to potentially profit from market volatility: First, stick with your investment plan and review it at regular intervals, so your portfolio isn’t as impacted by market highs and lows; second, keep some cash for opportunistic bargains; and third, if you decide to exit the market, first construct a plan that outlines how and under what conditions you will re-enter.
While the past few years have been challenging for investors and more challenges are likely ahead. Step up your portfolio’s defenses but don’t give up on the prospects for growth from a well-diversified, well-tended portfolio.
Jim Coleman is founder of Coleman Financial Advisory Group in Waterbury and is president of the Connecticut Chapter of the Society for Financial Awareness. He also hosts “All About Money,” a radio talk program, and has authored a book titled, “Educated Investing: Your Guide to Surviving and Thriving in the Fast-Paced Global Markets of the 21st Century.” Reach him through his website at www.ColemanAdvisoryGroup.com.
