I often hear the question, “Where do you think the market is going”? Unfortunately, my crystal ball is no more accurate than anyone else’s. I will say, lately, there seems to be more debate fodder to suggest that a downward move has a higher probability than an upward one. Still, there is a case for both.
The case for a downward move hinges upon things like double digit unemployment, unprecedented national debt, a war on two fronts, aftershock from the worst financial crisis in America since the Depression, a feared commercial real estate disaster, and more. However, the case for upward moves in the market is not without merit. Some suggest there is reason for market optimism given the U.S. (and other countries) navigating away from economic Armageddon, a strong 2009 for the market, stabilizing unemployment, terribly low interest rates on risk-free investments, and more.
Like all investors, I want a market that rises, albeit in a rational way. If it goes up, great. If it goes down I’ll buy more shares at a lower price.
Predicting market moves makes for great debate and stimulating conversation, but taking action based on predictions (e.g. timing the market) rarely pays off.
So, what is an investor to do? Like so many things, the answer is…develop a plan and stick to it.
In navigating with map and compass a hiker identifies her destination and starting points on the map. She uses the compass to stay “true” to the heading. Inevitably she encounters obstacles that force a temporary departure from the intended course. While bypassing the obstacle the hiker uses the compass to “re-orient” herself on the true path.
And, so it is with investing. Asset allocation is the means by which you can wind up in the right place while navigating around the inevitable obstacles. Here’s a four step process:
1) Define the financial objective (identify your destination)
2) Draw the map (define the right asset allocation model for your situation)
3) Travel the path (implement the asset allocation model)
4) Course-correct using the compass (rebalance the portfolio to the target asset allocation)
Using the principles of asset allocation is a rational way to manage the balance between risk and reward.
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