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Investors bail; rally predicted

By Sheyna Steiner ·
Thursday, October 6, 2011
Posted: 11 am ET

It's difficult sometimes to get a big-picture view of everything that is going on with so much information. There's so much news about everything that the forest gets lost in all of the trees. Two news stories really highlight that phenomenon today.

The first comes from the USA Today website. "Many investors quit stocks: Is it a buy signal?" focuses mainly on the influences that have investors fleeing the stock market -- of which, of course, there is no shortage.

If you can't understand why small investors are getting out of the stock market, you haven't been watching it lately. The average stock mutual fund shed 17.4% in the third quarter vs. a 13.9% loss for the Standard & Poor's 500-stock index, according to Lipper, which tracks the funds.

But it's not just the losses, which investors used to take in stride. Political turmoil over the budget is taking its toll on some investors. The debt problems in Europe are making other investors nervous. Flash trading by hedge funds and others makes the stock market seem rigged.

When trends trickle down to small investors, has the tide already turned? I would also ask if selling out of a maybe perfectly good mutual fund that has lost 17 percent in recent volatility is the best choice.

Conversely, reports today that some analysts are predicting that the S&P 500 "will post the biggest fourth-quarter rally in 13 years even after they cut forecasts at a rate exceeded only during the credit crisis."

In the story "Biggest S&P 500 rally since 1998 seen by Barclays, UBS evading bear market," reporter Inyoung Hwang wrote:

The benchmark index for U.S. stocks will climb 14 percent from yesterday to end 2011 at 1,300, according to the average estimate of 12 strategists surveyed by Bloomberg. The last time they were this bullish in October was 2008 when the group predicted a 27 percent gain and the index lost 18 percent.

The people that make big bets and happen to be right will write books. For everyone else, it's a crapshoot.

It's tough to balance risk and reward when the future stubbornly insists on inscrutability. The best way I know of to cushion the downside and enjoy decent returns is through a diversified portfolio including some very safe investments mixed in with riskier assets such as stocks. For good measure throw in a couple of asset classes that are completely non-correlated to the stock market such as commodities and REITS.

It's not a perfect strategy, but at least you won't be the person calling a financial planner on March 11, 2009 to say that you just sold out of all of your positions on March 10 -- now what do you do?

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