Mother Knows Best

Mother Knows Best

In the past month, we’ve seen words like “extraordinary, history-making, and unprecedented” used to describe both the Federal Reserve’s plan to rescue Bear Sterns and the tax rebate program designed to bolster consumer spending and prevent a recession. As I’ve watched experts line up to offer commentary and investment advice, the implication seems to be that the current economy demands some kind of a newfangled investment strategy. In fact, nothing could be further from the truth. When you think about it, rather than pay attention to advice manufactured for this market, you’d be better off to draw on the advice you received in childhood. In fact, in honor of Mother’s Day, I suggest you think back to what your Mother told you about life. Remarkably, her words of wisdom have a direct application in today’s uncertain market.

Don’t put all your eggs in one basket. Spreading your money between stocks and bonds—asset classes that historically have responded differently to market conditions—is your best defense against being hurt by poor performance in any one asset class. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses. Additionally, you should diversify within asset categories by sub-asset class, even by investment style. Note, too, that diversification in any asset category is achieved more effectively through asset class mutual funds rather than with individual stocks. That’s true of all portfolios and in any market.

Be patient. Focusing on your long-term goals can help calm the jitters caused by short-term market fluctuations. Also, keep in mind that volatility can inspire fear, an emotion that tends to result in hasty, counter-productive investment decisions. The cornerstones of our buy-and-hold investment approach are a commitment to investing through all market cycles (good and bad) and a focus on the long-term. As a bonus, a buy-and-hold strategy keeps turnover and transaction costs low, which adds to your bottom line.

Do your best. Market volatility, interest rate fluctuations and inflation are out of your control. However, you can control how much you save, where you invest, and what you spend. Especially in periods of market volatility and unprecedented federal responses, it’s important to adhere to your financial plan and investment policy statement to ensure you are saving enough to meet your goals as well as that your portfolio is properly diversified and reflects your current risk tolerance.

If you’re retired, you’ll want to check that your current spending isn’t jeopardizing your long-term asset preservation.

Look before you leap. When you read the headlines in personal finance magazines, you might think it’s a great plan to sell everything and buy gold and other precious metals. But keep in mind that gold has never continuously outperformed the stock market and has recently reached all time highs. Don’t be fooled by the “this time is different” pitch that argues gold’s recent strong performance will last for the next five years. Remember the technology bubble?

Your friends don’t know what’s good for you. Talk at cocktail parties is just that. Sure, your friends brag about sensational returns, but have you ever heard them discuss their losses? Broadly based asset class mutual funds are a much safer bet than the individual stocks you hear about in the locker room or around the water cooler. Just think about how Mom always closed that “Don’t be a follower” argument: “If everyone else jumps off a cliff, would you, too?”

Don’t believe everything you read. As precedent-setting as the Fed’s moves may be, headlines are written to sell newspapers. In times of market volatility, it’s important to dig a little deeper and to put market events in context. That can be time-consuming, but it’s time well-spent and can often uncover surprises. Our investment approach is built not on speculation, but on the science of capital markets. Research and experience, not hunches and emotion guide our way.

There’s nothing there in the dark that’s not there in the light. Again, headlines are meant to appeal to your emotions and all the recent doom and gloom can cast a dark cloud and rattle even the most secure investors. If you’re concerned, a review of your investment policy statement—and a little market history—could be enlightening and uplifting.

It’s a big world out there. Sure, the economy in the U.S. might be faltering, but if you own a prudently diversified global portfolio then a bump in the road in one economy doesn’t drive your entire portfolio downhill.

Don’t count your chickens before they have hatched. Any investment strategy has an element of risk. Here, again, diversification among asset classes and the use of broadly based asset class mutual funds enables you to avoid the risks of holding too few securities, or betting on specific countries or sectors. Diversification also positions your portfolio to capture the returns of the broad market.

Ask for help. You are not alone if you’re feeling overwhelmed by market events. Study after study reports waning consumer confidence and dissatisfaction with the economy. If you would like to discuss you portfolio, give me a call. A little historical perspective could be just what you need to put your mind at ease.


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