FUNDAMENTALS IMPORTANT IN VOLATILE TIMES

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Saves you time. Saves you money. Makes you smarter. The News Tribune, Tacoma, WA - Sunday, June 1, 2008

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Tacoma, WA - June 1, 2008

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Fundamentals important in volatile times
THE NEWS TRIBUNE
Published: June 1st, 2008 01:00 AM
The past eight months, investors have been jolted by stock-price swings of magnitudes not seen since the summer of 2002 in the aftermath of the "dot-com" bust and string of accounting scandals. The market's volatility – triggered by the housing slump and subprime mortgage crisis – has been exacerbated by a global credit crunch. While the brunt of the market sell-off was initially borne largely by financial stocks, the damage subsequently spread beyond that sector on mounting evidence of an economic slowdown.

NOTE: ASSET ALLOCATION IS VITAL. LEARNING IS EQUALLY IMPORTANT.

With few places to hide beyond safe but low-yielding Treasury bonds, novice investors – and even those more experienced – may question whether to be in stocks at all. To better navigate uncertain markets and build confidence in your investment strategy over the long-term, consider these five investing fundamentals.

PLAN

Whether saving for a home, college tuition or retirement, there's nothing quite so freeing as putting your plan to paper. Doing so gives you a map, compass and investment time horizon. Investors who don't plan are more likely to overreact to big market movements by chasing performance, aiming excessively high, or selling in a panic. Because investors can be their own worst enemy, it's important to consult with a third party. A trusted financial advisor can help you determine your risk tolerance, and then work with you to align an investment strategy with your long-term goals.

FOCUS ON ASSET ALLOCATION

One of the key contributors to portfolio performance is asset allocation. Your time horizon – the years until you'll actually need the money – will determine what percentage of your investment will be in equities (e.g., stocks) or fixed income (e.g., bonds). As you construct your portfolio, you'll want to include U.S. stocks of various sizes – large-cap, mid-cap and small-cap – and various styles, including growth and value. In our increasingly global economy, you also want to include some exposure to non-U.S. stocks, including allocations to emerging markets if appropriate for your risk profile.

You also may want to consider fully global stock and real estate portfolios where managers have full discretion to invest across U.S. and international boundaries.

In addition, the recent market volatility underscores the importance of having some exposure to fixed income, such as government, corporate or other sectors of the bond markets, with the allocation again dependent upon your investment time horizon.

Assigning investments to each slice of the portfolio "pie" – a percentage weight – provides diversification benefits. By distributing your investment "eggs" in multiple baskets, you will improve the odds of long-term success.

NOTE: LEGAL MATTERS IS ALSO IMPORTANT!

BE TAX AWARE

As you consider how to allocate your investments, be sure to consult your financial professional or tax adviser. Proper implementation of your investment strategy, including buy and sell decisions, whether to invest in tax-free funds, and the timing of withdrawals can help minimize your tax burden.

REBALANCE

To stay on target, you should periodically rebalance your portfolio. As various asset classes diverge in their performance over time, your asset allocation can be thrown out of whack, causing a slice of your asset allocation pie to grow beyond your plan. Some investors rebalance annually, others quarterly.

Periodic rebalancing will help you to capture profits (sell high) and shift assets into portions of the market that may offer better opportunities (buy low).

While the stellar gains of non-U.S. and emerging markets in recent years may have tempted investors to let their winners run, the sharp sell-offs in 2008 are reminders of the benefits of rebalancing your asset allocation back to the ratio you and your advisor have defined.

BE PATIENT

Finally, to absorb the paper losses of bear markets and not turn them into permanent losses, you need to resist the urge to tinker with a well-balanced strategy. If your investment horizon is short, say, less than two to three years, a stocks-only portfolio – even a well diversified one – may not be the best investment vehicle for you. In addition to regular contributions and rebalancing, an investment plan requires patience beyond months or quarters to years and even decades.

Disciplined investors and their advisors don't have the market figured out. In fact, a false confidence that you actually can figure out the market is often the first sign of trouble.

While euphoria or panic can lead investors astray, adherence to these five fundamentals can help improve your chances of outpacing inflation and achieving financial security.

Ann Duncan is a portfolio manager for Russell Investments. This article is part of a series of monthly columns by Russell associates.

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