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For a long-term relationship to work, we need to share reasonable expectations with our clients about the potential rewards and risks of various investment strategies.
We are in the midst of the deepest decline in stock markets (and asset prices generally) since the Great Depression. But recent financial history is also punctuated by periods of remarkable crisis and euphoria and related anxiety and complacency.
Consider the emerging markets, real estate and commodities bubbles (and subsequent bursting) of the past decade; the dot-com boom of the late 1990s and subsequent dramatic collapse of the broader markets in 2000, 2001 and 2002; the nearly unbroken bull market from 1982 to 2000; and the high inflation rates of the 1970’s and the ensuing high interest rates of the early 1980’s. Each era brings its own challenges and requires a considered, disciplined response if an investor is to succeed. Navigation may require tactical adjustments, but strategic success requires a commitment to enduring principles understood in a seemingly new context. In some cases, the appropriate response may be counter-intuitive or require resistance to emotional responses.
The current crisis inspires two natural temptations. One is to believe that market declines can be avoided altogether because of the stories in the press and stories we hear word-of-mouth about “smart” investors who “went to cash.” The temptation is to try and anticipate the next leg of decline (there is always another one!), sell in advance and buy back lower. Study after study shows that market timing is not a sustainable strategy.
The second temptation is to adopt a radically more defensive stance in preparation for a similar market crash. However, as many investment professionals have noted, it doesn't make sense for an investor with a long horizon to structure a portfolio to perform well in a period of financial crisis. Doing so would deny the investor the long run returns that are necessary to support their spending (retirement) and protect them from inflation.
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Financial Fitness is the Foundation |
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Reasonable Expectations - the Current Crisis |
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Enduring Principles |
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| © Copyright 2010 - Frederic T. Kutscher Associates, Inc. All Rights Reserved. |
Disclaimer |
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