Where are we now in the investment cycle?

The question in the headline comes from many sources. You, too, have likely asked this question of your advisers recently.

First, let me say that I am NOT an economist. However, I’ve been working in the business of advising clients on matters financial since 1983 and consider myself a lifelong student of the field. Therefore, I do have an opinion, my own bias, and I’ve integrated the information from many very smart people along the way.

Recently, I returned from a symposium held at the University of Chicago, Graduate School of Business. Thirty-five advisers from across the country were present. The list of presenters was impressive and included economists Arthur Laffer, Eugene Fama, PhD (Finance), Ken French PhD (Finance), and other senior investment strategists for a global management company. The biographies alone would fill up several installments of this column. Now I am not implying that these endorse my ideas but quite the contrary; my opinions and beliefs are molded by elements of their opinions and others.

Many clients want answers to questions such as, “Have we seen the bottom of the market?” and “How is the economy doing?” “Should I change my investment strategy?” was a question that came through the Financial Planning Association “Ask a CFP Professional” link on its Web site, www.fpanet.org, where you can post such questions.

First, here are some of my beliefs:

1) Although the technical indicators do not support the “official” recession, we believe we are in a slowdown (easy one).

2) We believe that a globally diversified portfolio is needed to properly manage risks in an investment account.

3) We believe that there are several risks worth taking in the markets; to be specific, the risk of stocks over bonds, the risk of small over large, and the risk of value over growth. While these will not always produce superior returns, we believe over time this will be a productive strategy.

4) We believe that the foreign and domestic markets take turns in leading the way towards prosperity.

5) We believe the “bottom” may have already occurred on Jan. 17 or March 17, 2008, but time will tell.

6) We believe low cost, low turnover, consistency and low volatility are important at a portfolio level.

Additionally, we believe in being cautiously optimistic and building toward the future while making a difference in the lives of those we serve and the communities around us.

Answers to questions of changing an investment strategy really depend on your risk tolerance, your time horizon (properly defined in my March 2008 column), your current reliance on the portfolio for cash flow, global diversity and other factors your adviser has incorporated into the portfolio. If all these consideration have been addressed, it may be appropriate to be patient rather than attempting to outsmart the market.

It also is very important to consider what you are comparing to in the effort to evaluate your investments. As an example, I ask clients if the goal was to have a 50/50 portfolio of international and domestic stocks for risk management, assuming the balance was always exactly 50/50 in the allocation. The return would be roughly the average of the two portfolios, correct? Therefore does it matter which market does better? Answer: from the intellectual side most say, “No, it does not matter which market leads” but from the behavioral side it DOES matter.

WHY? If the domestic market was underperforming the foreign as in the last six years or so, it would appear that your portfolio was beating the “market” since the indexes most widely seen are the S&P 500, NASDAQ and the Dow. If, however, the foreign markets lagged the United States then it would appear that you underperformed the “market” since you are hard-pressed to see the EAFE index anywhere. If your portfolio was built for risk management first, then it really shouldn’t matter; but it does. We are, after all, human beings.

Dale Terwedo, certified as a CFP, ChFC and CLU, is principal of Terwedo Financial Services LLC, an independent financial services firm in Edmonds. In practice since 1983, Terwedo offers securities and investment advice through FSC Securities Corp., Atlanta Ga., a Registered Broker/Dealer, Member of FINRA/SIPC and a SEC Registered Investment Advisor. For more information, visit www.tfsadvisors.com, e-mail retire@tfsadvisors.com or call 425-776-0446.

The views expressed are not necessarily the opinion of FSC Securities Corp. and should not be construed directly or indirectly, as an offer to buy or sell any securities mentioned herein. Investing is subject to risks including loss of principal invested.