Consider These Strategies for Coping With Difficult Markets

News reports of the woes of the economy and the stock market surround us daily. There is the sub-prime credit crisis, the housing downturn, the hedge fund collapse, the soaring price of oil, the budget deficit, and talk of a recession, just to name a few. What is an investor to do?

1. First, realize we’ve been here before! Over the years we have managed through many tough times. Each and every time, our economy and financial markets have rebounded.
   
   Three years after the 16-month recession from July 1981 through November 1982, the stock market traded 15% higher. Three years after Iraq invaded Kuwait in 1990, the S&P 500 was up 58%. Following the September 11, 2001 World Trade Center attacks, the stock market increased by 15% within three years.
2. Don’t let the gloom and doom of the media get you down. The stock market may already be looking past the current event! In its role as a leading indicator, the stock market often starts reflecting the future long before it gets here.
   
   It may sound perverse, but based on the principles of behavioral finance most investors are wired to make the wrong decisions. Waiting for the economic clouds to clear often means that prices have already gone up. Smart Money magazine (September 2001) reported that based on 75 years of market data, you’re nearly always better off buying near the middle of a recession than waiting for the start of the recovery if you are investing for the long term. For an example of how headlines may be “old news,” look at the fierce bear on the July 2002 front cover of Business Week. The bear market was nearly over by the time the magazine hit the newsstands. July 2002 turned out to be a fantastic time to buy stocks because 2003 was a spectacularly bullish year for the S&P 500, which experienced a gain of 28.6%!
3. Make sure your asset allocation makes sense. It isn’t easy to assess the best asset allocation when news reports create anxiety about the poor health of the economy and the dangers of the financial markets. Feeling higher levels of risk can cloud the best judgment. Wholesale portfolio changes are usually not a good idea when markets are volatile. Selling out of the market would be the wrong thing to do, because when the market rebounds (and history has shown that it always does) you would not be participating. Missing a few days or months of a strong market can significantly reduce your return. The market often rallies when you least expect it, and in clumps.
4. Ignore the herd mentality. There is comfort in doing what the mass public is doing. If everyone else is selling, it must be the right thing to do, right? Wrong! The crowd most often gets it wrong. For example, just as stocks were peaking in early 2000, equity mutual funds reported record cash inflows. By the end of 2000, the S&P 500 was down 9%, followed by declines of 12% in 2001 and another decline of 22% in 2002.
   
   As it turns out, today stock funds are experiencing outflows. So it may just be smart to take a contrarian approach and buy stocks.
5. Keep your investment costs low. You can’t control whether the markets go up or down, but you can control your costs. Pay attention to the fees, commissions, and expense ratios of any funds you are in. The less you pay in investment fees, the more return you get to keep.

There is no denying that there are plenty of things to worry about. Recent declines in stock prices show that fear has already spread among investors. To quote Benjamin Graham, “In the short term the market is a voting machine, but in the long run it is a weighing machine.” He said this in the 1930’s to characterize how investors can stray from trading on the intrinsic value of the underlying business to trading on emotion. When we are bombarded by negative news, we need to keep a disciplined, high quality long-term investment approach, which will prove to be a very rewarding strategy.

For assistance in applying these ideas, please contact one of our Schenck Investment Solutions LLC advisors, or call Kathy Lakritz at 888-556-5580 or 414-465-5557.

Kathleen A. Lakritz, CFA, CFP®, is an investment manager with Schenck Investment Solutions LLC. Kathy is based in Milwaukee, where her areas of specialization include personal investing, managing retirement plan assets, portfolio analysis, asset allocation, security review, retirement planning, and portfolio construction.

March 2009