Eye on the Market
Wayne Wicker, ICMA-RC’s Chief Investment Officer, Comments on the Financial Markets
December 10, 2009
Are the financial markets signaling the recovery is underway?
Trying to predict what will happen in the stock market over the short term is tricky, even for professional investors. That's why at ICMA-RC we emphasize the value of a long-term investment strategy that includes a well-diversified portfolio suitable for investors building retirement security. Only time will tell if the market reversal that began in March will continue or if it will retreat again before a sustained market recovery begins.
The stock market has improved significantly since the lows of March. What caused the reversal and will conditions remain favorable?
The U.S. economy is still recovering from the recession. However, the stock market is generally considered a leading indicator that looks six to eight months ahead. It's possible that the stock market could be getting ahead of fundamentals but we cannot make that prediction.
What we have seen to date was a 17-month stock market decline that accelerated in the six months ending in March 2009. During this period, weakening fundamentals were displaced by panic following the demise of Lehman Brothers, difficulties at AIG and other problems.
The stock market, as measured by the S&P 500's total return, increased more than 60% from March 9 through November 30, and many investors question whether this recent stock market rally has staying power, or if it is a “bear market rally” that will give way to more losses.
Do you still believe in buy and hold strategies?
We believe that short-term, even year-to-year, volatility should not lead investors to abandon long-term investment strategies. Attempting to time market changes is very risky for most investors, including professional investors.
How can diversification benefit investors who are saving for retirement? Did this strategy work during the recent downturn and will it work in the future?
During market downturns investors may question the benefits of diversification. This was especially true during the most recent downturn when many different asset classes were negatively impacted. Regardless of market conditions, we believe it is important for investors to have a diversified portfolio. Over-reliance on a particular asset class or security often can result in costly errors as markets evolve and rotate through market cycles.
How should long-term investors deal with increased market volatility?
Volatility is always present in the financial markets in one form or another. One way for investors to deal with this uncertainty is to focus on their long-term goals. Many tools are available from ICMA-RC to help investors establish their retirement goals and determine an investment strategy to accomplish them. Over the years, investment strategies may need to be adjusted as investors near retirement. An annual review of investment strategy at an established time, or when significant changes occur in your life, rather than in response to market conditions, is recommended.
What is the outlook for financial markets in the months ahead?
For most ICMA-RC investors, the months ahead are far less important than the years ahead. In the long run, a strategically invested, diversified, and well-balanced portfolio with an appropriate level of risk is more likely to build retirement security than arbitrary and short term attempts to invest.