Investing now: should I zig or zag or what?

By Timothy W. Suffish, CFA, CPA, Vice-President St. Germain Investment Management Look out! The stock market is down so far in 2008 after five straight years of gains. Is this the turn in the market? Has the bull given it up for the bear? How do we respond to the market? In times of market volatility, investors are looking to their investment managers for guidance on what to do. As you might expect, the answer is, "it depends." Rebalance for the long haul You have little reason to panic if you look at your investments as if they were a pension plan. In other words, think like a long-term investor. With a proper "balanced" mix of assets, you have the flexibility to zig when others zag. OK, now what exactly does that mean? Let's say that your target asset mix is 65 percent stocks, 25 percent bonds, and 10 percent cash. This is a good, balanced mix of assets that has historically provided a return well above the rate of inflation, while at the same time subjecting you to a lot less volatility than a pure stock portfolio. After a strong move up in the market, the stock allocation may get up to 72 percent of the portfolio. Without "rebalancing" the portfolio, your asset mix may be more aggressive and volatile for your comfort level. To rebalance, you simply sell what's high and buy what's low. In this case you would be selling some stock and buying bonds. If the opposite had occurred - and a down market left you with a mix of 56 percent stock, 34 percent bonds and 10 percent cash - you would sell some bonds and buy stock. Sounds easy enough, doesn't it? It can be, if you are very mechanical about it. Emotions (fear and greed, e.g.) are difficult to overcome, especially when money is involved. So please realize that rebalancing means selling the investment that you are currently feeling great about, and buying that which is giving you heartache. This is often very difficult to do. Trending toward a better outlook Now that we know how to keep our portfolio in order, what can we expect for the upcoming year? If you read the headlines, you know that the US economy is slowing due to problems in the housing and credit markets. Some economists are actually predicting a recession for the economy. Although the economy is certainly in a soft patch right now, we at St. Germain are currently in the "no recession" camp for a variety of reasons. In spite of some negative news, a few glimmers of light do exist. First on the list is the current expectation and acknowledgement amongst everyone that the economy needs help. In other words, the weakness that we are experiencing is not a surprise, and there are currently massive efforts from all sides to remedy the situation. The Federal Reserve is cutting rates and providing additional capital to the banking system, the government is trotting out a stimulus package to put cash in the hands of consumers, and investors both here and abroad are putting money to work in all sectors of the market. Additionally, we have an improving trade deficit, rapidly growing foreign economies contributing to global growth, and economic models that forecast slow, but positive growth continuing. With all of the economic concerns getting so much media play, the market, in our view, is fully aware of potential problems. When the worst of these fears are not realized, we believe the market may surprise us all: to the upside! Column provided to PRIME by:St. Germain Investment Management; 1500 Main Street, Springfield, MA; Phone is 413-733-5111 or 1-800443-7624; web site:www.stgermaininvestments.com www.stgermaininvestments.com