In part three, we discuss investment strategies during today’s economic downturn.
Imagine you’re in a large building with numerous elevators, says David Magee, president of Contango Capital Advisors, Inc. “One opens and you step in with the expectation that it will take you up. Though you may start in the desired direction, imagine that the elevator suddenly reverses course and takes you to the basement instead. For most people, this is exactly what has happened to them and their investments over the course of 2008.
“In 2008, the S&P was down, the Dow was down,” Magee continues. “By its own admission, the famed Harvard Endowment, with a long history of consistent double-digit returns, is expected to be down as much as 30 percent. From the small mutual fund investor to the wealthy hedge fund investor, and from the unsophisticated do-it-yourselfer to the most sophisticated institutions, hardly anyone was spared.
“So, continuing our analogy, chances are you have unexpectedly found yourself in the basement. What do you do now?” Magee says. “Well, assuming your investments are liquid, meaning they are readily convertible into cash, you have choices. First, you could sell what you have and hold cash until you see clear evidence that elevators are moving up again. We might think of this as waiting it out in the basement lobby. Second, you could sell what you have and use the proceeds to purchase a different investment strategy; in other words, switch elevators. Third, you could stay with your current strategy and wait for it to move up again.”
Which strategy does Magee recommend? “Unless you have a near-term cash need, the first option — however emotionally attractive — is probably not the best one,” he says. “Here’s why: In your attempt to ‘time the market’ you are likely to ‘miss the market.’ History demonstrates that, generally speaking, markets tend to move upward in spurts. Investors who aren’t invested on the spurt dates experience significantly lower returns than investors who are. Moreover, these spurt dates are all but impossible to forecast.
“As for options two (switching elevators) and three (staying with your current elevator), these are worth some discussion,” Magee says. “In times of severe crisis, markets tend to move in tandem. We say they are ‘highly correlative.’ That’s why virtually everyone ended up in the basement. As the crisis abates and conditions improve, markets will, generally speaking, become less correlative. As a result, different markets are not likely to improve simultaneously and at the same rate. Hence, some elevators will move up sooner and more quickly than others.”
Magee recommends sitting down with a financial adviser to review your current situation and asset allocation to determine the best strategy for moving forward. Remember, your retirement plan should be as tailored to you as are your retirement dreams.
David Magee is president of Contango Capital Advisors, Inc., the wealth management affiliate of Zions Bancorporation. The opinions expressed in this article are his and not necessarily those of Contango or Zions. Contango Capital Advisors, Inc. (www.contangoadvisors.com), offers an innovative approach to managing assets. It focuses on individuals’ real-life goals and uses sophisticated analytical techniques and risk-management tools to design clients’ investment portfolios.
Please note: Investment products and services offered through Contango Capital Advisors Inc., a registered investment adviser and a nonbank subsidiary of Zions Bancorporation, are NOT insured by the FDIC or any federal or state governmental agency, are NOT deposits or other obligations of, or guaranteed by, Zions Bancorporation or its affiliates and MAY be subject to investment risks, including the possible loss of principal value of amount invested.
Featured in the May/June 2009 issue of Zions Bank’s Community magazine.
*Artwork from Felipe Skroski under Creative Commons license at Flickr.com.
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