BOSTON (TheStreet) -- The deadly earthquake in Japan, military action in Libya and geopolitical volatility in the Middle East and North Africa dragged down markets for much of last week.The subsequent rebound means any hit your 401(k), IRA or stock holdings took was temporary. So rash, headline-inspired allocation moves may prove to be a poor decision.
|Libyan rebels on the move Monday. Experts urge investors to not let events such as civil war in Libya or Japan's natural disasters spur rash changes in a portfolio.|
Bad news for some can be opportunity for others, says Andy Goldberg, executive director and U.S. Market Strategist for J.P. Morgan ( JPM - Get Report) Funds. "Historically, look at what happens after a disaster," he says. "Near term, you may take a hit. But with rebuilding efforts there is growth, and investments have done fairly well in the aftermath. The knee-jerk reactions in the market may represent opportunities for people. Many retail investors see disaster, they move away; savvy investors see disaster, wait for everyone to move away and then they buy it." "A good time to buy is when everyone else is afraid," he says, pointing to a pattern emerging from tracking of consumer sentiment back to the 1970s: Within 12 months of similar low points, markets rebound significantly. "If the only investment strategy you had was to invest in the market at the point that America felt its worse, every single time you made double-digit returns," he says. Boston financial services market research firm Dalbar publishes the much-cited Quantitative Analysis of Investor Behavior, measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds over short- and long-term time frames. "They found that over 20 years stocks on an annualized basis would have returned in the 8% range, 7% for bonds," Goldberg says. The average American investor realized less than 3%, less than inflation overall. "They attribute it to short holding periods, jumping the wrong way at the wrong time," he says.
The crisis in Japan illustrates that over-reliance in any single country, even your own, can backfire. If you loaded up on energy stocks, political tumult in oil-producing nations and rising fears about nuclear power could pose problems. "One of the things that's concerned me the most over the past two years is to hear from retail investors that diversification doesn't work anymore. That is simply not true," Goldberg says. "Even through the toughest of times a well-diversified portfolio is the best way to do it." The era ending with 2009 has been dubbed "The Lost Decade." It started with Y2K fears and saw one crisis and uncertainty follow after another -- the terrorist attacks of Sept. 11, 2011, controversy over presidential election results, the burst of the tech bubble, Hurricane Katrina, sovereign debt and the global recession among them. Goldberg says the stock market had a -9.1% return for those 10 years. "But a well-diversified portfolio, a very basic stock, bond and international portfolio, rebalanced once a year, was up 65%," he says, citing modeling by his analysts. "I don't think anyone is going to write mom about being up 5% a year. But there's a big difference between being down 9% -- or even much more because people sell at the bottom and get in at the top -- and being up over the decade." 3. Know what you have and why
You need to understand what you hold in your 401(k) or IRA and be prepared to rebalance if there are surprises. Target Date Funds may encourage a "set it and forget it" mindset, but have you ever actually peeked under the hood at the investments within them? Can you name the top holdings of your various mutual funds? Does your global fund, for better or worse, rely heavily on Japan's economy? Is that energy ETF still a good idea amid upheaval in oil-producing nations and concerns about nuclear power? Evaluate even the broadest nature of your allocations and make sure they align with your goals and intentions. Goldberg cites a study by the independent securities regulator Finra revealing an "education problem for the average retail investor." It asked participants multiple-choice questions related to investing, including: When interest rates go up, what happens to bond prices? A: They go up. B: they go down. C: they are unaffected. "Seventy-nine percent of people failed to answer the question the right way," Goldberg says. "People want to own bonds without knowing that if interest rates go up they will be hurt. They don't know that."
Caruso suggests that those being more tactical with their allocations should use the 200-day moving average to gauge "when the market is on offense and when it's on defense" rather than reacting to the news of the day. "Look at the trail of the average price of a security and see what it's done over the last 200 days," he says. "You want to be above it. If you go below, you may want to get more defensive and probably want to sell. Do your homework and it will give you a longer-term sense of what is happening in the markets." "People should be managing their portfolios looking at three important things," he adds. "Valuation -- how are these investments doing historically; look at the fundamentals -- the economy, as much as people don't think so, is growing, and that's a positive sign; use technicals to determine when to get in and when to get out." 5. Don't be afraid to be optimistic
The recently released Employee Benefit Research Institute's 2011 Retirement Confidence Survey, found that the percentage of workers "not at all confident about having enough money for a comfortable retirement grew from 22% in 2010 to 27%, the highest level measured in the 21 years of the study." That attitude goes hand in hand with how many view the overall economy. But, according to Goldberg, this mindset may not be warranted. "The U.S economy has now seen six consecutive quarters, 18 months, of economic expansion when you look at GDP," he says. "Yet, as of last week, 68% of 1,500 American adults surveyed in a Rasmussen poll believe that the U.S economy is currently in recession." Goldberg says this glass-half-empty outlook is understandable, given the barrage of challenges investors have been subjected to before, during and after the recession. "Flows into U.S. equity mutual funds have only turned positive in the last few months, despite the market being up 90% off the low. There were 33 consecutive months of more money going into bond funds than stock funds and during that time the stock market was up 70%. It just goes to show how cautious investors became in the aftermath of the recession and how negative they still are. The result, however, is that they have missed out, to a large extent, on extraordinary market returns." -- Written by Joe Mont in Boston. >To contact the writer of this article, click here: Joe Mont. >To follow the writer on Twitter, go to http://twitter.com/josephmont. >To submit a news tip, send an email to: firstname.lastname@example.org.