By Kevin C. Krul
 
 

What to do in volatile times?

These are surely volatile times! Subprime, credit crunch, recession, corruption, bankruptcy, bailouts and last but not least, politics!

If you’ve turned on the TV lately, these are sure to be the headlines. Our media does a great job of creating fear and panic, which leads to irrational behavior. Let’s remember one thing as we try to navigate through these turbulent waters: No matter what lies ahead in these uncertain markets, the most important thing is to always keep focused on achieving your long-term goals and objectives.

Some thoughts to consider:

MARKET DECLINES ARE NATURAL
They are a part of the normal business cycle in our country. Although we cannot predict how long and how deep this decline will last, even after the most significant bear markets, the stock market has always gone on to reach new highs.

FOCUS ON THE POSITIVE
As I mentioned earlier, the media loves to create fear and panic. Our country has always risen to the occasion and through difficult times in the past, we have moved forward with better corporate discipline and regulation. The current challenges are no different and our nation’s leaders are responding.

STAY INVESTED
In a recent meeting with our Investment Advisory department, Brian Koble, CFA®, made a good analogy of the current circumstances, comparing pain to injury. Pain is different than injury. Pain is terrible, but pain goes away. If you take the wrong action now, pain can lead to permanent, irreversible injury and put your long-term investment goals at risk.

STAY DIVERSIFIED
Diversification and rebalancing are two critical components of your long term investment success. Your financial plan should include a wide range of funds holding U.S. stocks, global stocks, bonds and cash. Proper allocation should help weather market volatility.

MANAGEMENT MATTERS
You should use experienced money managers that have a proven long-term track record of managing money in good times as well as bad.

Some strategies to consider:

A good strategy starts with addressing key concerns.
Review your goals and objectives.

  • Address short-term cash needs and consider potential future expenses.

  • Outline alternative strategies using the pro and con approach.
    Investors usually fall into three phases, each with their own pro and con strategies. The Accumulation phase and the Preservation phase are very similar.

  • Shifting to all cash - Your current asset level is protected, but your future growth potential will be gone.

  • Shifting to all bonds - Your portfolio will be less volatile but you will give up the ability for future appreciation to fight inflation.

  • Maintain current strategy (if you and your advisor have one.) Your portfolio has the potential to recover and grow but the downside is the volatility may continue.
    The Income phase has been the most affected during the recent market volatility and can be a little more difficult to navigate.

  • Shifting to all cash - Your future growth will be gone. The income generated from your portfolio may or may not be efficient enough to meet your needs.

  • Shift to all bonds - Your portfolio should be less volatile. The income may be sufficient to meet your needs even though there is a higher expected return than cash, but there will be no future appreciations for inflation protection.

  • Maintain (once again if you have a plan in place) - Your portfolio has the potential to recover and appreciate. Although the volatility will continue, your portfolio with the current plan in place should be able to provide you with the income you need.
    Other investment strategies to consider in the Income phase:

  • Shifting current investments into more balanced funds that have the potential to pay higher dividends with the ability for partial recovery.

  • The use of variable annuities with income guarantees. Although the volatility will not change and the internal expenses can be higher, many insurance companies can now provide a lifetime income benefit to meet your income needs.

No matter what you decide to do going forward, please remember one thing: a successful investment strategy starts with a well designed financial plan. Every decision you make must lead to accomplishing your goals and objectives. If you are interested in learning more about HT and our Masterplan approach, please call my office at (412) 258-1101.

Kevin C. Krul is First Vice President and Financial Advisor with Hefren-Tillotson. He may be reached at 412-258-1101 or kkrul@hefren.com. The Wexford office of Hefren-Tillotson is located at 4001 Stonewood Drive.