Markets are in turmoil once again as the “Greek Tragedy” continues to play out on the European stage. German and French banks are girding for a possible default, and the fear of the contagion spreading to the weaker member states of the Eurozone is freezing investors in their tracks. Stock markets are down on a global basis, a reflection of how interconnected our companies and markets have become in this new age of globalization. Some investment advisors are telling their clients to avoid the risks of the moment and stay in cash or other assets considered safe in these stressful times.
As markets worsen, what is a long-term investor to do? The first reaction should be to ignore your emotions, pause, and remember your best advice for managing your portfolio in a prudent fashion. With bad news filling the airwaves everyday, it would be very easy to react impulsively. Experience tells us that times like these are when are our biggest mistakes can occur, if we allow our emotions to get the upper-hand.
It was none other than Warren Buffett that often noted that it does not take “a stratospheric IQ, unusual business insight, or inside information” to invest successfully over a lifetime, but you must have “a sound intellectual framework for decisions and the ability to keep emotions from corroding that framework.” Simple and sound advice is always welcome from someone that knows what to do from experience. Remain calm and withdraw from the fear. Now is the time to review your current investment strategy and anticipate any modifications that would be warranted.
As the markets continue to search for their eventual bottoms, wisdom tells us that bargains will be available at some point in the process. Preparing for that event means having cash on hand from an investment perspective or net working capital if you operate a small business. Review your diversification objectives and determine if your holdings are aligned with your goals. At a minimum small investors, according to most studies, should hold thirty or more stocks to ensure a desired level of diversification. Owning the entire market through a very broadly diversified, low cost, passively managed investment fund is even better.
Index funds and ETF’s tend to be an excellent new way to achieve instant risk spreading. If you have losers that have hit your selling criteria, decide at what point you want to convert them to cash.
Many consumers that have significant investment portfolios also have small business interests that should also be subjected to an intensive review to create additional working capital. Flexibility equates to having funds on hand. Make sure that lines-of-credit have been arranged for safety-net purposes or that newer sources, like a small business cash advance, have been researched and put in place. With business concerns properly addressed, attention can then return to fine tuning your long-term investment strategy.
While active investment management is not recommended for the average investor, those who want to play that game must determine whether they can buy bargains on high-dividend paying stock, on growth stocks, etc. Preparation will be key to ascertaining which sectors should receive your special attention. The focus is not to become a “trader”, but to employ good trading principles for entering the market. Buying on the dips may provide immediate savings on the front end, but academic studies show that both amateurs and professionals who time the market tend to achieve inferior risk-adjusted results.
For those who believe in technical analysis, indicators may assist in this process to optimize entry points, but there is never a need to be too aggressive. Active investors must take what the market gives them. They should set a long-term performance objective for each purchase, as well as a price level where a pruning would be advised. When markets are in turmoil, cash can be king. Convert your losers to cash and research small business cash advances so that you will have flexibility when you need it.
Contributed by: Tom Cleveland, September 12, 2011Tags: active management