5. Find your 'sleep number' Investors often find themselves running with the crowd when markets trend higher, increasing their investment allocations to stocks, bonds or real estate. Sometimes this happens just through the growth in an investment's value, increasing its weight in the portfolio. Other times it happens because the investor sees the high returns in one market and wants to increase his exposure to that market.
David Stevens, CFA, CIMC, a senior investment strategist at Wells Fargo Family Wealth Group in Minneapolis, suggests that now is a good time to re-evaluate the amount of risk you are comfortable with in your portfolio and adjust it accordingly. He thinks investors should find the level of risk in their portfolio where they can get a good night's sleep whether it's an up market or a down market. Call it your sleep number.
If there is too much risk in the existing portfolio, Stevens cautions that the investor should avoid getting too defensive in how they invest, running to cash investments only to jump back into other investments later and too late.
Signs of a slowing economy:
- Less traffic at your local airport means less business and personal travel. Check your local newspaper for airport traffic statistics.
- More "For lease" signs in storefronts and office buildings when it isn't right after the holidays could mean businesses are consolidating space or laying off employees.
- Desperate discounting by airlines, car dealers and stores. "You get 15 percent off coupons for one store item all the time," says Cassidy. "But 25 percent or 50 percent off any item in the store sounds like desperation."
- Politicians and economists start saying "slowing growth" or "soft landing," because they never want to say the word "recession" too early.
- Consumer consumption stalls or begins to drop. See whether same store sales growth for companies like McDonald's is flat or decreasing.
- Stock prices of major retailers like Target or Kohl's decrease when the rest of the stock market is reasonably OK.
He wants his clients to hold well-diversified portfolios that include: stocks, bonds, cash, real estate and commodity investments. The whole portfolio needs to be internationalized, Stevens suggests, not just the stock portion of the client's investments.
Stevens suggests that a client who is convinced that hard times are ahead should consider long/short mutual funds where the investment manager of the mutual fund is looking to capture returns from underperforming sectors and markets, too.
6. Start looking for value plays Tomas J. O'Loughlin, CFA, of Investment Portfolio Management, suggests that the best investment decisions in hard economic times are counterintuitive.
"Sectors or companies that you liked in good times but have been hit in today's markets may represent buying opportunities."
Buying the best of breed in these sectors can position investors to take advantage of the next bull market.
His checklist in evaluating these firms includes:
- Are they going to go out of business in the next three to five years?
- Does the company have a strong management team?
- Does the company have both strong financials and access to capital?
- Is the company expected to continue to lead in its field?
An investor can't be in a hurry to buy or sell, says O'Laughlin.
"Don't try to catch falling knives," says O'Laughlin, and "try to get a measure of the firm's downside risk."
By looking at the downside risk of firms and by taking an investor's perspective, looking over a three- to five-year investment horizon, versus a trader's point of view, the investor can identify firms with value, O'Laughlin says.