Time for all weather portfolios?

Kate Warne, PhD, CFA, Market Strategist, Edward Jones: Warren Buffet recently said "the economy will be in shambles throughout 2009 - and for that matter, probably well beyond - but that does not tell us whether the stock market will rise or fall."

The problem for investors is the future is always uncertain. However, when news about companies and the economy is bad, most assume that prices will decline nonstop. It's easy to forget that prices have always begun to rebound after past downturns, and usually the stock market has begun to rise whilst the economic news was still bad. Instead of guessing which way the stock market will move short-term, our approach is to build "all-weather" portfolios. As the name implies, they're designed for all types of weather, although clearly they do better when market skies are sunny.

To see if your portfolio is built for all types of weather, check your mix of assets and rebalance if needed to keep them aligned with your portfolio objective. Maintain proper diversification, keeping each investment a small part of your overall portfolio. Although some individual investments have performed much worse than expected, the process of selecting quality assets and holding them in appropriate proportions long-term is time-tested.

In uncertain markets, we think adhering to these investment principles continues to provide the best guidance for investors. Focusing on these principles can help keep you from making emotional investment decisions.

Controlling Bear Market Emotions

Global markets declined on 2 March 2009 due primarily to:

New worries about the magnitude of the global slowdown, which pulled commodity prices lower.

HSBC declined 19% as it announced a dividend cut and a rights offering at a lower price than expected. Other financial shares fell alongside HSBC.

We know each day seems to bring a drumbeat of more bad news, and it is hard to imagine when the markets will rebound. Fear is high, which is typical after a prolonged stock market decline. It's normal to be concerned, but remember that the long-term strategy of staying invested in quality investments has worked well in the past. There's no reason to believe it isn't appropriate this time.

Historically, staying invested has produced attractive long-term returns for investors, including past market declines similar to this one. Good returns followed past decades of low returns, as shown in the following table. By keeping your emotions in control, you can remain appropriately invested during the downturn and be well-positioned long-term for when the markets rebound.

Investing in today's market is difficult as we hear so much bad news on a daily basis. However, by remaining focused on your long-term goals and not letting your emotions get the best of you, you can help assure your portfolio is positioned for all types of weather.

For more information, visit edwardjones.com