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No Magic Bullet for Making Sound Investments

CHICAGO — There was a time not so long ago when decision-making for savers and investors was a relatively easy task.

The ultra-conservative investor who wanted to minimize risk and was satisfied with giving up potentially large gains could stick with bank CDs or money market accounts, enjoying a steady income stream while sleeping soundly at night. The younger investor with a longer window of opportunity could invest heavily in equities, relying on historical averages to assure solid growth.

It’s not that easy these days.

The investing environment underwent gut-wrenching changes with the 2008 market meltdown. The resulting market volatility introduced emotional considerations that have benefited some and caused crippling financial pain for others.

A friend of mine who now lives in Florida was so rattled by the 2008 market crash that he sold off all of his equities at market lows and parked his money in CDs and money markets. “I was so afraid that another crisis was just around the corner that I just sat and watched while the market bounced back,” he says. Now, of course, he’s missed out on one of the best three-year stock market runs ever. His financial losses have left him feeling financially devastated in retirement.

Others took a different approach in fall 2008. Some decided to do nothing at all, relying on a long history of market recoveries to recoup their paper losses. Depending on their allocations between stocks, bonds and cash, many of the “do-nothings” who just sat tight not only find their portfolios back to pre-2008 levels, but they are enjoying inflation-beating gains as well.

Still others, the most daring among us, had the guts to follow some time-honored advice from gurus like Warren Buffet to buy when everyone else is selling. By recognizing an extraordinary buying opportunity, those hardy souls have generated sensational profits in their investment accounts.

But all of that is history now—a closed chapter in the book of finance. The decision facing investors today is what to do now. No one knows for sure what the future will bring, of course, but professionals who devote their careers to the world of finance probably have a better shot at hitting the mark than most of us, so I asked a few pros for their thoughts.

 Lydia Sheckels, chief investment officer with Philadelphia’s Wescott Financial Advisory Group, believes this may be the time to invest globally. “Non-U.S. companies had a difficult year in 2011, which provides opportunities to invest in great companies at cheap prices,” she says. “Market declines and underperforming areas of the market give us many ‘buy low’ opportunities.”

Sheckels also offers a caution on bond investments: “Understand how bonds react to rising interest rates; investments should never be made on yield alone. Under current conditions, long-term bonds have the greatest risk for those who seek capital preservation. To be defensive, stay with high-quality, shorter-term bonds so that you can benefit as rates rise.”

Brenda Wenning of Wenning Investments, Newton, Mass., agrees with Sheckels on bond investments. “Many investors’ portfolios continue to be over-weighted in bonds,” she says. “If the 10-year Treasury yield surpasses 2.45%, interest rates will likely move higher. This move will have a negative impact on longer-maturity bond portfolios. Consider shifting out of the longer-maturity bonds and buying shorter-maturity bonds or bond funds with short durations. Reduce your allocation of bonds if it represents a large part of your portfolio.”

Revealing a slightly bearish position, Wenning refers to what she calls a potential for continuing financial problems: “I recommend reducing exposure to risky assets and considering high-quality defensive companies with low price/earnings (P/E) ratios. Typically, in a declining market, stocks with low P/E ratios decline less than growth companies with high P/E ratios.”

Benjamin C. Sullivan, Certified Financial Planner, Palisades Hudson Financial Group, Scarsdale, N.Y., is among those professionals who believe that the most important investment strategy is maintaining an appropriate allocation of assets. “Rather than trying to identify the next hot sector or investment opportunity, investors should maintain broadly diversified portfolios suited to their personal circumstances.”

For younger investors, Sullivan suggests an allocation of approximately 80% equities and 20% bonds. For those at or approaching retirement, a more conservative blend of 50% equities and 50% bonds would be appropriate. “Of course, there are many variables in each person’s circumstances that would affect these approximations. That’s why I feel that professional guidance in setting asset allocations is important. In any event, once an appropriate asset allocation has been determined, it should be maintained in good times or bad by rebalancing at least once a year to maintain the target allocation, more often in a highly volatile market.”

Sullivan also cautions against investing in stocks any funds that may be needed during the next five years.

If there is one investing philosophy shared by all professionals, it is summed up by Sheckels: “Never invest in any company that is offered as a ‘hot tip’ at a cocktail party or any gathering that includes alcohol. With a few drinks, people tend to remember only the winners, and often confuse yesterday’s news with tomorrow’s potential.” 

There is, of course, no magic bullet when it comes to making the right investment decisions. Arguably, keeping abreast of the changing environment and looking for consensus among investment professionals is our most reasonable approach.

Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an accountant or tax adviser for advice regarding your particular situation.

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Have a question or comment? E-mail our editor Dave Davis at [email protected] .