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Economic Soft Spot or Sink Hole: What does it mean to you?

July 8, 2010

Equity markets are full of unknowns.  It is quite possible that we currently are experiencing turbulence in what will prove to be a continued market run.  Nevertheless, the likelihood that we are in the early phases or on the verge of a significant double dip recession has increased substantially over the last several months, and prudence dictates that individual investors ask, “what does this potential mean to me?”

Every investor is unique. We all bring different experiences, psychology, family needs, and financial goals to our investment strategy, so there is not a one size fits all prescription. 

Below are three investor profiles, though, one with which may resonate with you:

Profile One: You are invested in an appropriately diversified portfolio consisting of stocks, bonds, cash, and alternative / non-correlated investments.  You may have experienced the shock and awe of 2008 and early 2009 in this same type of portfolio and have demonstrated the discipline to allow the market to take its course.

If you find yourself in this camp, there is a good chance that the hands off approach will serve you well under current circumstances, also.  However, consider taking a goal based look at your portfolio:

If you match your various investment accounts to your goals, would a 20 to 30% decline in the  S&P 500 the accomplishment of your respective goals at severe risk? Factors to consider include time to the goal, relative importance of goal (i.e. a “nice to have” versus a “must accomplish”), and current cash-flow being directed toward that portfolio.  If you answer, “yes, my must accomplish goals would be put at severe risk and I do not have additional cash flow to direct,” some level of portfolio modification may be appropriate.  Modest moves towards non-correlated asset classes and / or more tactically driven equity strategies may be appropriate.

Profile Two:  At some point during the market action of 2008 – 2009, you called “uncle” and left the equity markets behind.   Perhaps you have begun to reinvest, but you still hold considerable amounts of cash. 

Whether you have a physical segregation by goal or hold your investments in one or two accounts, look at your portfolio from a goal-based perspective.  Identify the types of returns you require to meet various goals, which will help define the range of ultimate portfolio allocations that will be appropriate for each goal.  Now, the question becomes one that is a bit more manageable:  “how quickly or how slowly should you buy into the market to land you at your ideal portfolio?”  Your solution will depend on time frame, cash-flow being allocated, relative importance of goals, and expectation of future returns based on various entry points in the market.  Ultimately, consider setting targets (time or market level triggers) and stick to the plan.  Trouble will arise when emotions overcome the predetermined prudence of your plan. 

Profile Three: When the market hit its bottoms in March of 2009, you “backed up the truck” and purchased more equities in your portfolio.  As a result, you experienced a terrific 2009 perhaps making up most or all of your losses in 2008. You now find, though, that your “tactical” decisions have left you in a more aggressive stance than otherwise would be natural for you. 

Starting with the end in mind, review your various objectives and return requirements, thereby identifying an appropriate range of long-term allocations that would be suitable.  Depending on the gap between your existing portfolio and your ideal long-term allocation, you will identify strategies that ultimately may provide you a second opportunity to create a dry-powder reserve and potentially an opportunity to “back up the truck” one more time to some terrific bargains. 

Regardless of the camp in which you find yourself, note the procedural themes:

  1. Identify your goals
  2. Match components of your portfolio to various goals
  3. Recognize the types of returns you need
  4. Identify the appropriate long-term allocations
  5. Strategize and stick to plan 


You’ve worked hard and made sacrifices to accumulate your wealth. Focus on your goals / objectives / aspirations and avoid financial regret regardless of the twists and turns  we see in the market over the next several weeks, months, years, and I daresay decades. 

*This post is intended to provide general thoughts on approaches to portfolio management in volatile times and should not be viewed as a recommendation for any readers’ specific situation.

 At Terra Firma Financial, we work with clients to incorporate the totality of their financial life (including professional security, current positioning of  balance sheets, other extraneous risks) to make the best financial and investment decisions in pursuit of life goals.  

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