It would be a gross understatement to suggest that the current investment market conditions are very difficult. (Some of my more colourful friends would add a few different adjectives in front of difficult.) In my reading over the week I have come across an article coming out of the USA which I thought was worth sharing to try to add some perspective as to what investors should do.
The article comes from FundAdvice.com - Don't Dump Those Dogs. It looks at the temptation to dump all the poor performing asset allocations and transfer into better performing assets. The author of the article is an advisor for Merriman Berkmann Next which uses a very similar approach to our firm. They recommend that their clients invest in U.S. large-cap, U.S. value, U.S. small-cap, U.S. small-cap value, U.S. real estate, international large-cap, international value, international small-cap, international small-cap value, international real estate and emerging markets stocks.
The article suggests that in any given week, month, year or decade some asset classes will shine and some will lag. One of the problems for investors at present is that all growth asset classes have struggled over the past 12 months. Does this mean that we should dump all growth assets and move to cash and fixed interest?
The author, Jim Whipps, suggests not:
"Market declines are a normal part of long-term investing. Fortunately, they don't last forever. It's tempting to think that a falling market will keep going down indefinitely (or that a rising market will keep going up indefinitely) and as a result of that to make emotionally based transactions (usually at precisely the wrong time). History has one piece of advice about that: Don't do it."
"If you get out of the market now, at some point you will want to get back in. That is tougher than you might think. If you wait until it is comfortable to re-commit, you will almost certainly have missed a big rally - possibly even the majority of the market's next upswing."
Jim goes on to look at some recent historical examples where jumping out of asset class dogs turned into missing out some significant rises in returns from these allocations.
These statements are easy to say but when you are in the middle (hopefully nearer the end) of one of the most significant downturns in investment markets the psychology of investing plays a much greater role. In a recent blog I suggested that if the turbulence has been too great it may be worth reconsidering your risk profile and as cash comes into your portfolio from your investments not to automatically reinvest this cash but strategically consider what you want your asset allocation to be going forward and then structure any future investments to get you to that point.
All this being said, there are some positive signals out there with the USA bail out moves, organised activity on the part of central banks around the world including our RBA and as I write news is coming through that Warren Buffett is investing $5 billion into Goldman Sachs with the option of investing another $5 billion, one of the investment banks at the centre of the financial crisis.
I am definitely not suggesting we have reached the turning point. All I am saying is that we can't be sure and after sustaining the 20% or more falls over the past 9 months I for one, sure do not want to miss a rebound when it comes.