Highlights
* One single strategy will increase the odds of success more than any other.
* Reacting to markets or the economy are not reasons to flee your plan.
* If income is paramount, there are a few possibilities to look at now.
News of a potential double-dip recession and persistent economic instability has investors running for safety and concerned about whether they can still reach their investment goals.
While the future of the economy is uncertain, and opinions vary about how quickly we'll recover, one thing is certain: Whether we're headed for another recession or just prone to "flash recessions" -- one-month slowdowns in gross domestic product, or GDP -- investors are looking at their portfolios and wondering what to do next.
A recession is defined as two consecutive down quarters of GDP. The last double-dip recession, which is two recessions with a short-lived recovery in between, was from 1981 to 1982. Back then, we had high inflation and interest rates. Once the economy recovered in 1983, the U.S. enjoyed a bull market for nearly 20 years.
But that was then. Now the economic landscape looks different. While investors can consider some strategies to ease their worries, experts say don't give in to short-term panic by abandoning your investment plan.
Asset allocation vs. diversification
Asset allocation -- the division of your monies among cash, equities and fixed income to match your personal investment goals -- is "the single biggest decision people make," says Seth Masters, chief investment officer of asset allocation at AllianceBernstein in New York. Your asset allocation plan should be designed to take you through all the possible economic and market scenarios, including the one we're in now, Masters says.
"If you have a sound, thoughtful game plan to begin with, it has to have been designed with various states of the world in mind," Masters says. "There will be good markets and there will be bad markets. (The plan) has to make sense in both, so by definition you have to stick to it."
Masters sees only two scenarios where a person might change his or her investment plan: a life change or to correct a mistake with a particular purchase or asset. Trying to time the market and anticipate the direction of the economy is a recipe for disaster. "If your strategy is to bail when times are bad and exit at the bottom, you have a double whammy and will not recoup your losses," he says. "That's how investment plans can systematically fail. You're actually guaranteeing failure."
Chasing yield is another no-no, as is stepping out of your safety zone to gain more income. Take gold, for example, says Masters, which investors have been rushing headlong into for the past year. Investors who think it's a safe haven are mistaken. In fact, it's extremely volatile because its value depends on supply and demand and, besides that, it generates no income, Masters says.
According to Tami Simpson, president of Wealth Financial Group West,asset allocation is more important than diversification for investment success, but investors often confuse the two. A diversified portfolio could include large-cap stocks, small cap, international, value, growth and so on, but it's still a portfolio made up of equities. It is not allocated among different asset classes, and as investors saw in 2008 to 2009, even a diversified equity portfolio can tank upward of 50 percent. It's true that other asset classes fell as well, but a portfolio diversified among asset classes fared better than one consisting only of equities.
A flight to safety
Simpson says there's a general air of pessimism not only among investors but also among the experts she consults. Yet, investors are not doing much with their portfolios simply because they don't know what to do.
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Source: Bankrate
