People who rely on media headlines or
talking heads on television for investment advice will often be too scared to maintain their investment plan during
trying times in the market. Conversely, they
will find themselves encouraged to ignore
the risks and over-invest during the good
times. Creating and sticking to a consistent
long-term plan is the best way to grow your
investment dollars, says Robert Leggett,
CFA, chief investment officer with
FirstMerit Bank.
“In my opinion, people who do not have
an investment plan should always be
‘afraid’ of the market,” Leggett says.
“People who have well-thought-out investment strategies customized to their financial situations and longer-term plans
should never fear the market.”
Whether the U.S. dollar is weak or strong,
whether the Federal Reserve is cutting or
raising rates, or whether the talking heads
are screaming, “Buy, buy, buy” or, “Sell,
sell, sell,” you will be better off to follow
the reasoned advice of a trusted adviser
than to allow your emotions to drive your
investment actions.
Smart Business spoke with Leggett
about investment options and how to
approach the market.
Whom should a person consult if he or she is
looking to invest for the first time?
People who are looking to invest for the
first time should generally look to the company they work for. There is probably a
401(k) option that allows them to set aside
a portion of their income in retirement savings. Most companies match at least a portion of your annual contributions. Many
people are fully capable of managing their
own investments, but few people actually
have the time to do so. That is where
investment advisers come into play.
How can you determine when and how much
you can invest in the market?
Simply start investing as early as you can,
invest as much as you can spare, invest
consistently and get the long-term advantage of compounded earnings. ‘Dollar cost
averaging’ over many years has proven to be a successful approach to amassing
funds to pay for college education, retirement, etc. The exception to this is for individuals with large amounts of high-interest-rate debt. The best investment in that case
would be to pay off your debts, so they do
not compound against you.
Why do investors need to diversify, and how
do they achieve diversification?
The most important decision to be made
is allocating your assets among various
asset classes. Asset classes include stocks
(equities), bonds, money market funds,
real estate and commodities. The allocation of your investment dollars among
these alternatives is the key factor in determining the growth of your assets.
Diversification means investing in two or
more classes. True diversification requires
investing in multiple subasset styles. It is
very risky to put all of your eggs in one basket. If you diversify, you won’t do as well as
the best investment, but you’ll do far better
than the worst investment.
Mutual funds are one way to diversify.
Another way is to hire a qualified professional adviser to handle diversification
using a Separately Managed Account
approach. SMAs, also known as ‘wrap’ programs, use individual securities rather than funds. A separate account is set up for each
style-specific manager employed.
What is the Market Meter?
The FirstMerit Market Meter is the basis of
our disciplined approach and the keystone to
our investment philosophy: asset allocation.
The allocation of your financial assets
between stocks, bonds and cash will be the
primary determinant of the growth of your
assets. While the stock market has returned
more than 10 percent annually over the past
80 years, it can also be difficult for extended
periods, as was reinforced by the 50 percent
drop in the Standard & Poor’s 500 between
2000 and 2003.
Strategic allocation shifts are crucial if you
want to limit losses when trends are bearish.
We think that is critical to meeting the goal of
helping investors reach their financial goals.
The Market Meter signals whether an investor should be fully invested or should allocate assets away from the stock market.
The Market Meter is a combination of quantitative and qualitative, fundamental and
technical, and trend-following and turning-point forecasting factors. It is not for short-term ‘market timers,’ as it has given only two
major signals in the past several years: a bearish signal from 1999 into early 2003 and bullish since then.
How can people utilize the Market Meter?
As with many asset allocation models,
there are complicating factors, which require
the interpretation of the creator of the model.
The bad news is that a ‘late cycle’ +4 rating
has different implications than an ‘early
cycle’ +4. A continuation of current trends
would drop the economic and technical
trends to neutral or negative before year-end,
forcing us to implement a defensive strategy.
This would include raising cash and reducing
exposure to cyclical opportunistic stocks as
well as exploring investments that are uncor-related to equity market returns. At the current time, the Market Meter is signaling that
higher stock prices lie ahead.
ROBERT LEGGETT, CFA, is a chief investment officer with
FirstMerit Bank. Reach him at [email protected].