Musings
What a Ride August 9 How does one make sense of the last few days? The market volatility as a result of the budget debacle, the downgrading of US long-term debt, Europe’s continuing debt crisis, and the Federal Reserve’s promise to keep interest rates low through mid-2013, has most investors on edge - and rightfully so. I have been providing investment advice for more than 23 years and while I’d like to say that living through periods like this gets easier, it doesn’t. We all know we should stay focused on the long term but the kind of volatility we’ve seen over the last few days makes that a difficult proposition. The question most people ask in times like this is “What should I do now?” Perhaps the following will help. First, news reports about volatility of specific indexes do not reflect your portfolio. A diversified portfolio that holds global equities and bonds, real estate, cash, and possibly commodities, will not track any specific index such as the Dow Jones Industrial Average or the S&P 500 Index. So pay attention to what your portfolio is doing and not what “the market” is doing. Keep things in context. You may be tempted to compare recent events to 2008 but that is not necessarily an accurate comparison. Financial institutions are in much better shape now than they were in 2008, stock prices in many cases are attractively valued, and the economy is slowly moving in the right direction. Also, other than Standard and Poor’s downgrade of US long-term debt on Friday and today’s decision by the Fed, much of the “news” is in fact old news. Congress haggled for months about the budget and Europe’s debt problems go back at least a year. Reaffirm your tolerance for risk in conjunction with your investment time horizon. You may have thought you could handle extreme volatility but times like this may test your limits. Do remember that you should be able to handle more volatility in your retirement portfolio because your money will be invested over a long period of time. Determine the asset allocation for your specific investment goals – education, retirement, etc. –being sure to include all accounts that pertain to that specific goal. For example, include all IRAs and employer-sponsored retirement plans when determining allocations. It takes a bit more work to coordinate but is worth the effort. Rebalance your portfolio at least once per year or when allocations are more than 20% from your benchmark. For example, if you are allocating 60% to equities, rebalance when they fall to approximately 50% or exceed approximately 70%. Some of your investments may do this automatically. Others, like many employer-sponsored retirement plans, do not provide this service so you’ll have to do it yourself. Finally, don’t try to time the market. You may read about people who do it successfully once or twice but rarely do you read about someone who can do so through all market cycles over the long run. None of these recommendations guarantee your portfolio will always make money. But if you keep them in mind, there’s a good chance you’ll sleep better when “the market” is acting like an out of control rollercoaster. Feel free to call if you're unsure about your portfolio, need reassurance or have questions. Crisis in Japan The impact from the devastating Japanese earthquake and tsunami is still unfolding almost two weeks after their occurrence. Even with world attention now shifting back to the Middle East and Libya, the Japanese people are still trying to come to grips with the scope of destruction and human suffering. All this is exacerbated by the potential of a full-scale meltdown at the damaged Fukushima nuclear reactors. How might these events impact global markets as whole? How might they affect investor portfolios? Should investors take any special precautions or move out of Japanese markets? It’s reasonable to expect short-term volatility in global markets until the full extent of the disaster becomes clear. But like other natural disasters – Hurricane Katrina, Indian Ocean Tsunami and Haiti Earthquake – I do not believe this one will adversely affect global markets in the long-term. In fact, I suggest that manmade disasters – financial/mortgage crisis – are far more detrimental to global markets and investor portfolios than any natural disaster. An adequately balanced investment portfolio should limit one’s exposure to Japanese stocks and mitigate some volatility. Consider a hypothetical portfolio that is allocated 70% equities (45% US and 25% Non-US). If 5% of the equities are in Japanese securities, only 3.5% of the total portfolio is actually invested in that sector. If your portfolio is invested properly considering your time horizon and risk tolerance, do nothing. If you’re unsure, please contact me. Additional reading - Crisis in Japan Account Aggregation One of my roles as an advisor is to provide the best service possible. Doing so, however, requires a complete view of your ever-changing financial picture. This is especially important during annual or semi-annual review meetings. With that in mind, I am happy to offer account aggregation services at no charge to existing financial planning clients. This sophisticated service provides easy consolidation of your account information - banking, investment, retirement, insurance, credit card, mortgage, loans and bill information, life insurance, annuities and REITs – using unmatched security to protect your vital information and accurate data reporting. This service truly provides the “Big Picture” while eliminating the need for multiple account statements. Regardless of whether a Roth IRA conversion makes sense for you, I hope you’ll take advantage of account aggregation. Please contact me for details.
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