Keep your investment plan focused

Anyone with investable assets is keenly aware of the challenges facing today's market environment. They are uncertain whether stocks can continue their stellar positive run and they are unsure if bonds can help them get to their intended destination. They are also concerned with geopolitical tensions in Iraq and Ukraine and the stimulus-led growth around the globe. With these concerns at the forefront of investors' minds, the logical questions are: how and where should I invest my money?

To get to the answers, we could anticipate that because rates are low, they are poised to rise - causing a decline in bond prices. In stocks, we could guess that valuations are stretched and have

little room for improvement or what room they do have could be at risk as tensions evolve across the globe. Acting on these types of thoughts in isolation, though, could be extremely dangerous to an investor's long-term financial well-being.

Indeed, numerous studies have been published showing the costs of market timing. The concept is simple. If you are not invested on the best days, you could lose out and the long-term implications could be very costly. While it has also been shown that if you missed the worst days, you could end up with a substantially larger amount of money than if you stayed invested all of the time, this strategy could hurt you long-term because of the question of when you would want to reinvest into the market.

The bottom line is that market extremes are difficult, if not impossible, to predict. This is why investing must be approached as a process rather than an event.

Looking at stocks and bonds, each asset class serves a specific function within an investors' portfolio. Stocks offer the potential for growth and capital appreciation (and

dividends where applicable). With the trade off generally being higher volatility over shorter time horizons, over longer time frames volatility tends to get smoothed out, helping well-diversified investors minimize stock-specific pitfalls.

With bonds, and especially bonds in a balanced portfolio, it is essential to be mindful of fixed income investments' ability to: generate predicable income, provide significant diversification benefits to

equities, and help preserve capital during periods of economic weakness.

With these simple concepts in mind, investors with varying time horizons and risk tolerance must focus on three key concepts: 1) extensively diversifying their portfolio; 2) thoughtfully setting an asset allocation based on their tolerance for risk; and 3) sticking to their path. To be absolutely clear, I am not advocating in this article that investors cannot change their

tolerance for risk over time. What I am trying to say is that by investing with a purpose and plan, they can better achieve their goals than they could by trying to speculate what may happen in the markets.

In a sentence, investors stay the course and rebalance their portfolios, while speculators try to guess the movements in the markets. Interestingly, the questions at the beginning of this article are the same questions that plague investors in both good times and bad.

Not surprisingly then, the answer I would advocate is to approach your decisions in today's investment environment with logic and continuity. If a particular asset or asset class feels overvalued and feels overly risky compared to how you thought it fit in your overall strategy, perhaps you should reassess that asset or asset class' weighting to realign with something more in tune with your expectations.

Very few individuals or investment managers will consistently be able to predict what the markets will do, where interest rates will go, or when stimulus

driven growth will become self-sustaining. What a successful investor can count on is that although today's markets certainly are different than those in the past, the best recipe for achieving their goals is to thoughtfully establish a plan and only make changes based on changes in personal circumstances - not on attempts to time the markets. In this regard, today's markets are no different than others.


Brett Gardner is a portfolio manager/analyst for Karpus Investment Management. He can be reached at (585) 586-4680.

Published: Mon, Sep 01, 2014