Reach investment goals despite the economy

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News of a potential double-dip recession and persistent economic instability has investors running for safety and concerned about whether they can still reach their investment goals.

While the future of the economy is uncertain, and opinions vary about how quickly we’ll recover, one thing is certain: Whether we’re headed for another recession or just prone to “flash recessions” — one-month slowdowns in gross domestic product, or GDP — investors are looking at their portfolios and wondering what to do next.

A recession is defined as two consecutive down quarters of GDP. The last double-dip recession, which is two recessions with a short-lived recovery in between, was from 1981 to 1982. Back then, we had high inflation and interest rates. Once the economy recovered in 1983, the U.S. enjoyed a bull market for nearly 20 years.

But that was then. Now the economic landscape looks different. While investors can consider some strategies to ease their worries, experts say don’t give in to short-term panic by abandoning your investment plan.

Asset allocation vs. diversification

Asset allocation — the division of your monies among cash, equities and fixed income to match your personal investment goals — is “the single biggest decision people make,” says Seth Masters, chief investment officer of asset allocation at AllianceBernstein in New York. Your asset allocation plan should be designed to take you through all the possible economic and market scenarios, including the one we’re in now, Masters says.

“If you have a sound, thoughtful game plan to begin with, it has to have been designed with various states of the world in mind,” Masters says. “There will be good markets and there will be bad markets. (The plan) has to make sense in both, so by definition you have to stick to it.”

Masters sees only two scenarios where a person might change his or her investment plan: a life change or to correct a mistake with a particular purchase or asset. Trying to time the market and anticipate the direction of the economy is a recipe for disaster. “If your strategy is to bail when times are bad and exit at the bottom, you have a double whammy and will not recoup your losses,” he says. “That’s how investment plans can systematically fail. You’re actually guaranteeing failure.”

Chasing yield is another no-no, as is stepping out of your safety zone to gain more income. Take gold, for example, says Masters, which investors have been rushing headlong into for the past year. Investors who think it’s a safe haven are mistaken. In fact, it’s extremely volatile because its value depends on supply and demand and, besides that, it generates no income, Masters says.

According to Tami Simpson, president of Wealth Financial Group West,asset allocation is more important than diversification for investment success, but investors often confuse the two. A diversified portfolio could include large-cap stocks, small cap, international, value, growth and so on, but it’s still a portfolio made up of equities. It is not allocated among different asset classes, and as investors saw in 2008 to 2009, even a diversified equity portfolio can tank upward of 50 percent. It’s true that other asset classes fell as well, but a portfolio diversified among asset classes fared better than one consisting only of equities.

A flight to safety

Simpson says there’s a general air of pessimism not only among investors but also among the experts she consults. Yet, investors are not doing much with their portfolios simply because they don’t know what to do.

“The $64 million question(s) everyone’s asking (are): ‘Where should my money be? Should I move to safety or ride it out?'” Most of her clients, who are close to retirement or already retired, are looking for safety rather than growth, even with lower yields. “They don’t like it, but when push comes to shove, they’d rather have safety.”

Gary Goldberg, CEO of Gary Goldberg Financial Services in Suffern, N.Y., says retired or near-retired investors are mostly concerned they’ll outlive their assets because they can’t get any yield at the banks, so they’re stepping out of their safety zones to get more income. And that’s dangerous.

So is there any safe haven that has some yield? Simpson and Goldberg say it’s not in bonds, though Masters says that doesn’t necessarily mean investors should abandon bonds altogether. He believes they’re an important diversifier in a balanced portfolio.

Both Goldberg and Simpson are seeing a surge of interest in annuities, which can guarantee a set income for life, but at a cost, either in lost upside earnings potential or in fees.

Goldberg likes a managed variable annuity that guarantees an income for life with the remainder going to heirs, but that can come with high fees. Simpson’s clients are interested in the fixed-index annuities, which are pegged to a specific market index. Investors can get a guaranteed minimum return (typically between 1 percent and 3 percent) or whatever the market is returning, less a percentage for the annuity company.

Investors shouldn’t allocate their total portfolio toward annuities, say Goldberg and Simpson, but a portion may make sense if they’re craving safety and in need of income. It’s important to fully understand annuities and research them before buying. Many have early-surrender charges, so they should be considered long-term solutions.

Goldberg also likes high-dividend, high-quality stocks. His firm has researched and selected 15 top-performing stocks from the Standard & Poor’s 500 index that they offer to clients. “We call them dividend aristocrats because the dividends go up every year.”

Simpson suggests market-linked CDs, a hybrid product that provides the safety of a CD with a guaranteed return and some of the upside potential of a market index. Once again, you’ll sacrifice upside earnings for the guarantee of safety. There could also be lockup periods (typically five years) and penalty fees for early withdrawal. Plus, you’ll pay tax on interest earned.

Opportunities, but with risk

There’s opportunity in every market scenario, and for those with a stomach for risk, some long-term strategies might pay off with higher overall performance in your portfolio. Just don’t bet the farm on them. Masters believes that unless they’re very rich, most investors can’t abandon growth equities in favor of safety. There still needs to be balance, even if the equity portion of your portfolio isn’t as robust as it was during the bull market.

Simpson sees room for growth in precious metals, commodities and somewhat in emerging markets. Goldberg sees opportunity in international stocks and emerging markets.

But the main takeaway in these turbulent economic times, whether we go into a double-dip recession or are in for a slow slog of a recovery, is not to panic and ditch your investment plan. Keep your sights on your investment goals.

“Don’t be a trader,” says Goldberg. “If you have a solid foundation, you can take some risk, but you have to be able to sleep at night.”