2008 posed a difficult market for investors.A significant sell off in the fourth quarter added to losses in equities for the year.The returns for most categories of the bond market were also disappointing as the crisis in the credit markets impaired liquidity and put downward pressure on prices. Combining stocks and bonds usually serves as a good diversifier—meaning a tough time incurred by one will be offset by the other—but this was not the case in 2008, as investors sold stocks and bonds indiscriminately in a search for liquidity with the goal of protecting assets. This correlation likely led to sub-optimal returns in your account. Even if your account beat its benchmark, the absolute return may not have met your expectations. We can agree that 2008 was a very difficult year.However, I would like to take this opportunity to think about positive takeaways from last year and, even more importantly, formulate a plan for applying them to investing in 2009.
First, we believe that stocks and bonds, with the exception of Treasuries, are presenting investors with the opportunity to buy at significantly discounted prices. The widespread impact of the market downturns made a variety of assets relatively cheap. As you know, the goal of any investment strategy is to buy when the market has pushed prices down and sell when market forces have pushed prices higher. As the axiom goes, “Buy low and Sell high” While the timing of a recovery is difficult to predict, we believe that this is a great opportunity to buy low.
This market also gave us all of us an opportunity to gain a better understanding of our risk tolerance and financial goals, which is, unfortunately, a lesson many of us learn best in difficult markets. If you have adjusted your own view of your risk tolerance, we may want to fine-tune your portfolio with that in mind, if you would like to do so.
Finally, we learned that managers and asset classes with a long track record of expected behavior can act in unexpected ways in extreme markets. While this provided challenges for investment managers, it also reinforced the importance of diversification and elevated the importance of alternative investment mutual fund strategies. Such alternative strategies can work when market volatility is at extremes.
2008 felt like a year of many “firsts” in the markets. And while in many ways it was, the reality is that we have seen many of these situations before—just not all together and not to such extremes. As always, if you have any questions in the face of these difficult markets and want to discuss your portfolio, I encourage you to contact me. I continue to urge you to stay invested and focused on meeting your investment goals.
LPL Financial
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance tracking #511184
This entry was posted on Tuesday, February 10th, 2009 at 4:13 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed.
You can leave a response, or trackback from your own site.
February 10, 2009
2008 posed a difficult market for investors. A significant sell off in the fourth quarter added to losses in equities for the year. The returns for most categories of the bond market were also disappointing as the crisis in the credit markets impaired liquidity and put downward pressure on prices. Combining stocks and bonds usually serves as a good diversifier—meaning a tough time incurred by one will be offset by the other—but this was not the case in 2008, as investors sold stocks and bonds indiscriminately in a search for liquidity with the goal of protecting assets. This correlation likely led to sub-optimal returns in your account. Even if your account beat its benchmark, the absolute return may not have met your expectations. We can agree that 2008 was a very difficult year. However, I would like to take this opportunity to think about positive takeaways from last year and, even more importantly, formulate a plan for applying them to investing in 2009.
First, we believe that stocks and bonds, with the exception of Treasuries, are presenting investors with the opportunity to buy at significantly discounted prices. The widespread impact of the market downturns made a variety of assets relatively cheap. As you know, the goal of any investment strategy is to buy when the market has pushed prices down and sell when market forces have pushed prices higher. As the axiom goes, “Buy low and Sell high” While the timing of a recovery is difficult to predict, we believe that this is a great opportunity to buy low.
This market also gave us all of us an opportunity to gain a better understanding of our risk tolerance and financial goals, which is, unfortunately, a lesson many of us learn best in difficult markets. If you have adjusted your own view of your risk tolerance, we may want to fine-tune your portfolio with that in mind, if you would like to do so.
Finally, we learned that managers and asset classes with a long track record of expected behavior can act in unexpected ways in extreme markets. While this provided challenges for investment managers, it also reinforced the importance of diversification and elevated the importance of alternative investment mutual fund strategies. Such alternative strategies can work when market volatility is at extremes.
2008 felt like a year of many “firsts” in the markets. And while in many ways it was, the reality is that we have seen many of these situations before—just not all together and not to such extremes. As always, if you have any questions in the face of these difficult markets and want to discuss your portfolio, I encourage you to contact me. I continue to urge you to stay invested and focused on meeting your investment goals.
LPL Financial
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance tracking #511184
This entry was posted on Tuesday, February 10th, 2009 at 4:13 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.