Slowly but surely, the equity market is emerging from a long storm and shifting to a more temperate climate. With improving earnings and better news in the economy, investors may be tempted to assume there is smooth sailing ahead.
But, now is the time to make plans to ride out future storms.
During the the last few years, many investors' 401(k) accounts have taken a beating, especially if they were heavily invested in growth equities. Don't be lulled by improving performance -- adjust your thinking to prepare for and accommodate the swings in the market. While the market is still turbulent and investors are wary of its effect on their savings, they should embrace two fundamental concepts: maintaining a balance and thinking long term.
Ninety-five percent of the success in accumulating wealth is accounted for by the balance you strike in your portfolio through asset allocation -- not the individual funds or securities you select.
Some people accumulated substantial gains by selecting certain stocks; however, many more lost substantially on the same approach.
Balancing your portfolio between equities and fixed income investments helps shelter your savings. The average return for an all-equity portfolio over time is 13 percent; the average return for a portfolio balanced between equity and fixed-income investments is 12.5 percent.
Time is as critical in the accumulation of wealth as performance. The market ebb and flow impacts your savings, so the most important consideration is the point at which you cash out.
In the short term, it's not possible to predict what might happen. But over the long term, with tracking and historical knowledge, financial advisers can make predictions based on research and prior performance. They can see trends in the market and the reasons for overall market movements while putting them in context. And despite periodic storms, the market has made generally positive movements over time.
So, if you are a long-term saver, act like one. If you're comfortable with your asset allocation, leave your investments alone. Continue with your plan, whether the market is soaring or tanking. Over the long term, a balanced, well-diversified portfolio should move with the market.
If you're not a long-term saver, you should become one -- it will help you avoid being caught in a storm without an umbrella. Roger St. Cyr is vice president and senior consultant, Fifth Third Bank Investment Advisors. Reach him at Fifth Third Bank Investment Advisors, (614) 233-4672 or www.53.com.