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It's NOT The Economy, Stupid!

 

In 1992, then-candidate Bill Clinton used the slogan “It’s the economy, stupid” to help him stay on message and pound President George H.W. Bush for his failure to pull the country out of a recession. The point was that jobs and other economic issues were what mattered most to voters. Yet while that may still be true as far as elections go, it oversimplifies things when it comes to investments. Your results ultimately have more to do with the choices you make in responding to economic conditions, rather than the actual state of the economy itself.

This is an important distinction that underscores the limits of a pure “buy and hold” strategy that just sticks with investments to wait for them to match their average past performance. While stocks do tend to track the general economy over very long periods of time—and stocks, like the economy, have always ultimately prospered—few investors can afford to wait several decades for beaten down investments to bounce back. Instead, it makes sense to take steps to mitigate the risk of sharp losses.

The events of the past two years have forcibly illustrated the fact that equities can be extremely volatile in the short term. And even if you’re still 20 or 30 years from retirement, market ups and downs have a real impact on your returns. It’s only at the 40-year mark that returns tend to fall in line dependably with economic progress, according to a recent study by economist Richard W. Kopcke and researcher Dan Muldoon at the Center for Retirement Research at Boston College.

Their study—“Why Are Stocks So Risky?”—shows that investor behavior has a far stronger influence over returns than do the gyrations of the economy, especially over periods of 20 years or less. The authors define investor behavior as “the way shareholders react to their uncertainty about economic conditions, form opinions about the future, and manage their portfolios.”

The good news is that of the two factors—economic conditions and investor behavior—that influence investment returns, the one that exerts the greater influence is the one you control. What really matters are the decisions you make in setting up and operating your investment portfolio.

Those choices include everything from defining your risk tolerance and setting life goals to diversifying your portfolio and reallocating assets in response to shifting short- and long-term trends. Maintaining broad diversification spreads your risk across and within multiple asset classes, and making regular, strategic reallocations helps you stay diversified even as conditions change.

Now, as the economy embarks on what could be a long, uncertain recovery, we can help you make sure that your portfolio is positioned to reflect who you are and what you want to accomplish.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc. and is not intended as legal or investment advice.




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