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San Clemente Journal

Improving Performance in Low-return Environments

Feb 01, 2009 04:15PM ● Published by Don Kindred

by Michael Vandenburg, CFP®

How do you start an article on the stock market when that is the last thing people want to see or hear about right now? It has been a painful year so far for investors and we’re only halfway through. The S&P 500 is off almost 20% from its highs last October putting us well into bear market territory and the economy seems to be getting worse every week. On top of all the economic and financial problems, inflation has been hitting hardest on the items we use most, namely gas and groceries. It looks as though the only available solution to those in control would be to adjust interest rates upwards, which would help slow down inflation, bring up the US dollar, and in doing so, lower the price of oil. The problem with this is that it comes at a price, and that is slower growth. Slower growth will eventually equate to lower expectations for market returns. So how do we get through these times of economic uncertainty and slower growth? Here are a few suggestions to help you navigate through this current market cycle.

-The first thing I would suggest is to stick to your investment schedule. If you invest on a regular basis or are dollar cost averaging, keep it up. Don’t stop just because we are in a downturn in spite of what many Wall Street mavens may tell you, they don’t know where the bottom will be any better than you or I do. Dollar cost averaging is a great way to improve long-term performance. If you have cash on the side that you are waiting to invest when the market gets better, don’t wait too long. Buy back in when nobody else wants to be in, the days when the market gets hammered for several days in a row. We have had several opportunities so far this year and I would bet that we will have several more. Buying on dips may not get you in at the bottom, but knowing that you invested when the market was discounting its value is just like buying something on sale. 

-Another suggestion I would make is to use your losses to your advantage. A common mistake people make is to sell their winners and buy more of their losers, thinking that they will eventually come back up. I would tell people to do the opposite and get rid of the losers and use the losses to offset gains from some of the winners, and then rebalance your portfolio to improve it going forward. A good example of this is what happened in the muni bond market earlier this year. Muni bond insurers were in trouble and so many munis were being priced as though there was no insurance at all. California muni’s were down about 10% for a short period, and if you took advantage of this, you could have sold your muni’s at a loss, then used that loss to offset gains in stocks (selling your stock at a profit without paying any taxes), then use the proceeds to buy new muni’s or a muni bond fund at a discount thereby increasing your yield. 

-Another key point during volatile times is to stay diversified. Unless there is strong evidence suggesting that an asset class or sector is extremely undervalued it is best to stay broadly diversified across all asset classes. If you think you’re missing the boat on the rise in commodities and oil, you don’t have to look back too far to see what happens when you buy into hot sectors...remember the tech boom and then bust. The bottom line here is don’t chase performance. The market has always had hot sectors that experience big runs during short-term periods but it always seems to revert to the mean…meaning, in the end, if you don’t time your entry and exit from hot sectors very well, you’re better off staying broadly diversified.

-The last suggestion I would make is to be patient. We didn’t get into this mess overnight and we won’t get out of it fast either. Americans borrowed way too much on the inflated values of our homes and now that debt needs to be repaid. The current deleveraging cycle must run its course for the financial markets to return to normal. Unless your investment time horizon is to be completely out of the market in the next couple years (which should not be anyone, even retired people need equities to hedge inflation), you will need to be patient and do what you can to improve your performance along the way.

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