During early January, we noted within our annual year-ending client letter that “2010 will be a year in which stocks move in fits and starts, but end the year modestly higher, perhaps by high single digits.” Despite the issues with our domestic economy, problems in Greece as well as the European Union, a what many perceive is a slowdown in China, and an approximately ten percent selloff in the major stock averages over the past month, we continue to hold to this prediction.
That said, despite these strong headwinds and as noted above, we are also not forecasting a bear market for stocks but rather one that will remain within this tight trading range, perhaps seven percent to either side of its current value for the remainder of the Spring and well into the Summer. If we are wrong, we believe that our outlook will prove too bearish and that stocks will move higher.
What’s an investor to do? An investor should do what he/she should always be doing. Focus on your objectives and make certain that you have the proper asset allocation that will enable you to reach those goals. Maintain diversification within asset classes (stocks, bonds, cash, real estate) and maintain diversification within those asset classes. We also strongly recommend extend your intended holding period and time horizon.
Accurate asset allocation helps an investor make objective, rational decisions during volatile periods in the market rather than emotional, irrational ones. One also needs to place the current market movement in historical perspective. Market conditions like these are not without precedent. It pays to keep this in mind when you’re listening to all of the talking heads on television.
Finally, as harsh as it may sound, either you have faith in the stock and bond markets or you don’t. Regardless of whether stocks are trending up or down, if you do not have faith that you are getting a fair deal, get out! If you have faith, stay the course. For those that don’t have faith, keep in mind that exiting the markets for good also carries risk, risk that you will be earning around one percent on your money for the foreseeable future.
THE BOTTOM LINE – For many, investing in stocks and bonds provides the greatest opportunity at achieving your financial objectives. Keep this as well as the fact that stocks usually bottom during uncertain times, not make tops.