What is a good strategy for this uncertain market? The best strategy for an uncertain market, this one and others to come, is a defensive one in which risk is effectively managed.
In fact, the best strategy for this market is also the best strategy for a strong bull market: Maintain the diversification discipline with as many uncorrelated asset classes as practical.
That's a mouthful and few readers really know what it means. I know because every day I'm asked to look at self-directed portfolios (these are accounts designed by the investor-owner themselves). In the majority of these portfolio analyses I find overconcentrations (the opposite of diversification) and I see missing asset categories, especially asset categories able to help reduce risk or seek to improve overall returns over time.
In the portfolios we design with risk management, not performance, the primary objective we like to see measured exposure to 18 or more asset categories, especially in accounts of $100,000 or more.
A well-designed portfolio should be able to weather the storm in today's uncertain market. It should also be able to take advantage of upturns in a growth market.
If you are looking for hot stocks, if you are timing the market you will be frustrated in the short term with a portfolio allocated in good measures among the key asset categories. In fact, proper asset allocation is primary driver of portfolio performance (as well as risk management). Individual stock picks and timing are portfolio killers.
If you don't believe me, would you believe David F. Swensen, the manager of the Yale endowment, which returned 28 percent in the year ending June 30, 2007? In 2005 his book "Unconventional Success: A Fundamental Approach to Personal Investment," Swensen spelled out the benefits of asset allocation and disciplined diversification.
In The New York Times on Feb. 17, 2008, Swensen's answer to this uncertain market was "Don't try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance periodically to keep your asset allocations in line with your long-term goals" even when markets are in tumult.
Don't be distracted by market forecasts, he said. "You have to diversify against the collective ignorance." Remember however, asset allocation and diversification do not assure a profit or protect against a loss in declining markets. No two experts agree on what's going to happen in the economy.
Donald E. Askey is a Certified Financial Planner TM and a registered investment adviser with Provident Financial Advisors. For your money-related questions write planning@providentfinancialadvisors.com or call 877-815-8500.
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