Investing is never easy.
But investors are wary of more land mines than usual.
Whether it is the weakening dollar, the potential for inflation caused by the huge economic stimulus, the massive federal debt, or the specter of consumers clinging to their money and stunting economic growth, there is no shortage of worries.
“It’s reached a level that I haven’t seen in 25 years in this business,” said Greg Merlino, president of investment management firm Ameriway Financial Services Inc. in Voorhees, Pa. “It’s literally taking a physical toll on some people,” he said.
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The numbers indeed are painful: Between 2007 and the second quarter of this year, the value of direct stock-market holdings by U.S. households fell $7 trillion, and housing values dropped $3 trillion, according to the Center for Retirement Research at Boston College.
Because of that wipeout, the part of U.S. households at risk of not being able to maintain their standard of living if they retire at 65 climbed to 51 percent from 44 percent two years ago, the center said in a report last month.
Now, the problem many investors face is that a year ago, fearing financial Armageddon, they pulled their money out of the stock market after suffering huge losses and put it into cash and Treasuries. Then this year, many missed the run-up in stock prices and are feeling a frantic need to play catch-up.
Both reactions are mistakes, experts said, because the only way to succeed in the long term is by developing a balanced investment strategy that one can sleep with even in the worst of times and then stick with it.
“Our balanced portfolios are back to even,” compared to 2007, when equity markets hit all-time highs, said Ronald Florance Jr., director of investment strategy and asset allocation at Wells Fargo & Co.’s private bank. Florance defined “balanced as 40 percent stocks, 30 percent bonds, 15 percent real assets (real estate and commodities), and 15 percent in other types of investments.
Sticking to a strategy that entails only as much risk as one can tolerate in volatile times is better than trying to use clever moves to outsmart the market. Besides, Florance and other investment pros said, many of the economic issues that have grabbed headlines this year are not as troubling as they seem.
The long-term weakening of the dollar, for example, may be disconcerting, but it is not such a bad thing, as long as the dollar does not suffer a shock, or a sudden sharp devaluation.
The declining dollar is “a symptom of the fact that international and global economies are growing so much,” said Jason Pride, director of research at Haverford Trust Co. in Radnor, Pa. “There will be less investment in the U.S. as the dollar comes down. On the flip side of it, it leads to our companies being better capable of selling their goods internationally.”
Pride and others said that American shoppers, for once, are not going to lead the world into economic recovery and that consumers elsewhere will have to pick up the slack.
“The recovery is not going to be a U.S. recovery. It’s going to be a global recovery,” said Florance of Wells Fargo.
However, Fran Kinniry, a principal in the Vanguard Group’s investment strategy group, warned that investors “should be a little bit worried about being overly pessimistic on the U.S.”
The potential for an outbreak of hyperinflation caused by the unprecedented levels of stimulus provided by Congress and the Federal Reserve in the past year is another threat that is easy to get worked up about.
But Kinniry said being too worried about inflation is actually a land mine to avoid because investors may put too much money into commodities and Treasury Inflation-Protected Securities, known as TIPS.
The threat of inflation two or more years out is overrated, Kinniry said, because even though the Federal Reserve may have poured trillions into the financial system, that does not mean the money was lent back out, which could be inflationary. It went into the restoration of balance sheets that were devastated by the residential real estate collapse.