Consistency is key Featured

8:00pm EDT October 26, 2007

People who rely on media headlines or talking heads on television for investment advice will often be too scared to maintain their investment plan during trying times in the market. Conversely, they will find themselves encouraged to ignore the risks and over-invest during the good times. Creating and sticking to a consistent long-term plan is the best way to grow your investment dollars, says Robert Leggett, CFA, chief investment officer with FirstMerit Bank.

“In my opinion, people who do not have an investment plan should always be ‘afraid’ of the market,” Leggett says. “People who have well-thought-out investment strategies customized to their financial situations and longer-term plans should never fear the market.”

Whether the U.S. dollar is weak or strong, whether the Federal Reserve is cutting or raising rates, or whether the talking heads are screaming, “Buy, buy, buy” or, “Sell, sell, sell,” you will be better off to follow the reasoned advice of a trusted adviser than to allow your emotions to drive your investment actions.

Smart Business spoke with Leggett about investment options and how to approach the market.

Whom should a person consult if he or she is looking to invest for the first time?

People who are looking to invest for the first time should generally look to the company they work for. There is probably a 401(k) option that allows them to set aside a portion of their income in retirement savings. Most companies match at least a portion of your annual contributions. Many people are fully capable of managing their own investments, but few people actually have the time to do so. That is where investment advisers come into play.

How can you determine when and how much you can invest in the market?

Simply start investing as early as you can, invest as much as you can spare, invest consistently and get the long-term advantage of compounded earnings. ‘Dollar cost averaging’ over many years has proven to be a successful approach to amassing funds to pay for college education, retirement, etc. The exception to this is for individuals with large amounts of high-interest-rate debt. The best investment in that case would be to pay off your debts, so they do not compound against you.

Why do investors need to diversify, and how do they achieve diversification?

The most important decision to be made is allocating your assets among various asset classes. Asset classes include stocks (equities), bonds, money market funds, real estate and commodities. The allocation of your investment dollars among these alternatives is the key factor in determining the growth of your assets.

Diversification means investing in two or more classes. True diversification requires investing in multiple subasset styles. It is very risky to put all of your eggs in one basket. If you diversify, you won’t do as well as the best investment, but you’ll do far better than the worst investment.

Mutual funds are one way to diversify. Another way is to hire a qualified professional adviser to handle diversification using a Separately Managed Account approach. SMAs, also known as ‘wrap’ programs, use individual securities rather than funds. A separate account is set up for each style-specific manager employed.

What is the Market Meter?

The FirstMerit Market Meter is the basis of our disciplined approach and the keystone to our investment philosophy: asset allocation. The allocation of your financial assets between stocks, bonds and cash will be the primary determinant of the growth of your assets. While the stock market has returned more than 10 percent annually over the past 80 years, it can also be difficult for extended periods, as was reinforced by the 50 percent drop in the Standard & Poor’s 500 between 2000 and 2003.

Strategic allocation shifts are crucial if you want to limit losses when trends are bearish. We think that is critical to meeting the goal of helping investors reach their financial goals. The Market Meter signals whether an investor should be fully invested or should allocate assets away from the stock market.

The Market Meter is a combination of quantitative and qualitative, fundamental and technical, and trend-following and turning-point forecasting factors. It is not for short-term ‘market timers,’ as it has given only two major signals in the past several years: a bearish signal from 1999 into early 2003 and bullish since then.

How can people utilize the Market Meter?

As with many asset allocation models, there are complicating factors, which require the interpretation of the creator of the model. The bad news is that a ‘late cycle’ +4 rating has different implications than an ‘early cycle’ +4. A continuation of current trends would drop the economic and technical trends to neutral or negative before year-end, forcing us to implement a defensive strategy. This would include raising cash and reducing exposure to cyclical opportunistic stocks as well as exploring investments that are uncor-related to equity market returns. At the current time, the Market Meter is signaling that higher stock prices lie ahead.

ROBERT LEGGETT, CFA, is a chief investment officer with FirstMerit Bank. Reach him at Robert.Legget@firstmerit.com.