I trust all who are reading this had an enjoyable holiday season. Unfortunately, now it is back to the real world and for the most part, the economic picture remains ugly. In fact, early this week minutes from the December meeting of the Federal Open Market Committee of the Federal Reserve revealed that an economic recovery is not likely until 2010. Interestingly, there was no real negative market reaction to that comment.

Major market indices have been trending upward since late November. It seems the Santa Claus rally occurred, in spite of dismal sales reports and spiking unemployment.

Over the past couple of weeks I’ve watched and read opinions from numerous experts advising investors on the best way to recover from the significant losses most incurred in 2008. Most of these supposed experts told investors to simply hang on and wait for the market to rebound. In other words, they offered no genuine, specific plan to help investors recoup their losses.

It is possible that some of these experts are not offering any new insights because they don’t have any. The strategies and philosophies that worked for them in the past have failed and they do not have an alternative. Some comments from a column by market analyst Ben Stein called “Lessons from a very bad year” are appropriate:

“…Efficient market theory is sunk. The problem is that we have nothing else to replace it except the predictions of many different analysts.”

“Buy and hold as a strategy is very questionable…. It’s worked in the past, but in times of severe market stress it just doesn’t work. We’ve now gone 10 years–many of which were banner years for profits–without a gain in the broad indices.”

In the end Mr. Stein acknowledged that while these accepted methods had failed, he knew of no better alternatives available. That isn’t very reassuring for investors who find themselves with portfolio losses of 30% to 50% or even more.

Here are some tidbits from an article in the latest Consumer Reports magazine on rebuilding your nest egg: “Work longer, keep saving. Reset your retirement clock. Stay in the market. Start early and diversify.”

Correct me if I am wrong, but except for the part about delaying your retirement, the rest of that advice sounds exactly like what most financial advisors have been saying all along. In other words, it is the same advice that many people have followed which led them to the current losses in their portfolios.

Ali Veshi, a CNN analyst, has written a book about recovering from this downturn called Gimme My Money Back. His advice includes: “…The strategy you should follow should be a function of your investment time horizon–how many years you’ll be contributing to your portfolio before you start taking money out of it–and your ability to tolerate volatility.” What is then described is a system focused primarily on asset allocation. Once again, nothing he advocates would have protected investors from this recent major market correction or from significant losses in future downturns.

Many economic experts quoted in the media continue to state their belief that the worst is over and investors who are out of the market now are in danger of missing out on a recovery. Often these are the same experts who failed to warn investors about the current economic crisis. Continuing to follow their advice seems imprudent, particularly when members of the Federal Reserve seem to believe that the economic downturn is likely to worsen in 2009 and continue into 2010.

Because of the failure of most widely accepted market theories to protect investors from this economic onslaught, we again state our belief that the best investment strategy is one that utilizes active risk management and active allocation. Active allocation means overweighting portfolios toward stronger market sectors. We believe this combination is also the method that offers investors the best hope for recovery in the current situation.

There could be rallies during this bear market that offer investors opportunities for shorter-term gains. But for right now, risk continues to outweigh the possibility of reward. The safest place for investments is on the sidelines in a money market fund.

F.S.

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This entry was posted on Thursday, January 8th, 2009 at 4:22 pm and is filed under Newsletter. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.