FINANCIALLY
Speaking
The View Beyond the Cliff
by
Jeffrey M. Orth, ChFC, CASL Investment Advisor Representative of HTK
Jeffrey M. Orth is a Chartered Financial Consultant, a Certified Advisor in Senior Living, and an Investment Advisor Representative, with over 10 years experience as a business and personal planning, insurance, and wealth management specialist. Jeff is available for group lectures and private consultations. Visit his website at www. ifitfinancial. com or call 408.842.2716.
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Why 2013 could be a good year if you have a healthy attitude and a good plan
The U. S. elections are over and we know who will occupy the White House for the next four years. Unfortunately, we have less clarity on many of the other major questions worrying investors. Since Washington recently“ kicked the can down the road” regarding the“ fiscal cliff,” incompletely addressing tax issues and doing nothing to provide leadership in the areas of spending cuts and the deficit ceiling, this leaves investors with little certainty as to what will happen in the future.
Companies love good news and can handle bad news, but what companies don’ t like is uncertainty. As a result, corporations are sitting on trillions in cash and are, for the most part, unwilling to use their“ war chests” to make equipment purchases and hire new employees. And past government policies of providing incentives to coax them to spend these funds aren’ t working this time. However, once some of the uncertainties are eliminated, this also means they have the resources quickly available for expansion and growth when the fog is lifted.
Uncertainty of this nature can paralyze investors, but I don’ t think this is a good reason to convert ones holdings to cash or to make abrupt and radical changes to one’ s portfolio. Having previously and successfully guided my clients through recessions there are often tactical adjustments that can be made to help investors get through market downturns, and profit from the upturns that follow. Making adjustments to a soundly and strategically diversified portfolio to take advantage of some timely opportunities is a better approach.
Over the past 10 years, we’ ve been through two large economic bubbles— one in the stock market in technology, media and telecommunications, and the other in the global credit system melt down. The bond market has been overheating for years, and a lot of people who got hurt by the burst of the technology and mortgage bubbles have put a lot of their investable assets in bonds. This will turn out to be a big mistake if they are still holding them when the bond bubble bursts. No one can predict with any great certainty which event will trigger the next major market downturn, but many are watching the European Union and China. For the time being, it seems the European Union has done a much better job than expected in handling the financial problems brought on by Portugal, Italy, Ireland, Greece and Spain’ s austerity policies. And while it is anticipated that China will most likely drop into a recession, the government looks to have the adequate resources to get through it. And so we wait …. Where do we go from here?
Know yourself— It’ s dangerous to make long-term decisions on short-term emotions. It’ s important to remember that when emotions are running high, you need to stop and recall your long term goals. As I see it, my job as a wealth manger and financial advisor is as much about preventing impulsive decisions as it is of picking an optimal portfolio for my clients. Put some of your wealth in a portfolio with built-in safety mechanisms and then try- ideally- to forget about it.
Build a portfolio designed to weather the storms— Diversification across asset classes is critical to surviving periods of uncertainty. Different asset classes respond differently to uncertainty, depending on the nature of the crisis. Some classes are wholly unaffected by volatility, and can still produce a positive return. Although correlations between investments tend to rise in severe market downturns, diversification can still reduce the impact of a down market and provide liquidity when it is needed the most.
Take advantage of timely opportunities but don’ t try to time the market— Adversity becomes opportunity when you are able to forecast future market challenges. This time is no different. As we anticipate a significant market correction when the bond bubble pops, there are some investment strategies and tools we can put in place in advance to help reduce, or perhaps even eliminate, the negative impact to your portfolio while still providing opportunities for portfolio growth.
Jumping in and out of the market based on the news of the day is an alluring strategy. Unfortunately, few people can execute it successfully over time. Rather than trying to determine the severity of a possible recession in China and the impact it will have on the markets, I recommend building a high quality and well diversified portfolio based on your risk tolerance. You should plan on staying the course in good times and bad, while looking for tactical opportunities as they present themselves. This strategy is not nearly as exciting but, at the end of the day, the results tend to look a lot better.
For educational purposes only and should not be considered as specific investment or planning advice. Depending on individual circumstances, the strategies discussed in this presentation may not be appropriate for your situation. Investing involves risk, including loss of value— not a guarantee of future performance or success. There is no assurance that a diversified portfolio will produce better returns than an undiversified portfolio, nor does diversification assure against market loss. Please consult a qualified advisor regarding your individual circumstances.
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