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If You “Sell Everything” You Sell Yourself Short

The year got off to a terrible start. Fears about China’s slowing growth grew and investors started to worry that a potential global recession was at hand. Investors’ concerns about weak inflation, which has been paltry since the financial crisis, turned to deflation. If developed nations’ currencies began to fall it could create a negative feedback loop driving a mild recession to something worse.

US markets had dropped 6% and international markets had fallen close to 7% since the start of the year through January 11th. At this time the Royal Bank of Scotland (RBS) issued a stern warning to clients: “sell everything except high quality bonds.” They told clients global markets were headed for another crisis so it was time to get out of any risky assets like stocks. However, from the time the warning was issued, through the end of April, US stocks rallied over 7.5% and international stocks gained over 9%.

RBS is a large, well respected investment house with a large research group. They have hundreds of bright research analysts pouring over data to make their projections. This is yet another reminder of the folly of trying to time the markets and the severe costs you can endure by doing so. Unfortunately, it’s likely that some investors heeded their warning and are likely worse off because of it.

The markets will always be volatile. There will always be risks. There will always be prolonged times of losses. We have no doubt that at some point in future RBS’s warning may appear to be sage advice. However, in order to benefit from the long term expected return offered by the stock market an investor has to remain invested. Even if an investor sold out before the beginning of the year, they would need to know exactly when stocks had bottomed out and buy back in to benefit. It necessitates making two market calls right, when even getting one right is unlikely. By the time it appears “safe” to get back in an investor has already likely forgone significant gains. Only missing a few strong days can have a significant impact.

Instead investors should use large market declines to review their portfolio allocation in relation to their targets. If stocks fall and moves the portfolio away from its equity target it creates a natural opportunity to buy in at a lower level and sell from other areas that are likely up – like high quality bonds. By remaining disciplined and adhering to your long term investment strategy you can ignore the prognosticators whose next market call will likely throw your portfolio off track.



Index Performance                                  April    YTD    Trl 1 Yr       

US Stock (Russell 3000)                                 0.62%   1.59%    -0.18%
Foreign Stock (FTSE AW ex US)                   2.69%   2.33%  -10.40%
Total US Bond Mkt. (BarCap Aggregate)    0.38%    3.43%     2.72%
Short US Gov. Bonds (BarCap Gov 1-5 Yr) -0.01%   1.54%      1.56%
Municipal Bonds (BarCap 1-10yr Muni)      0.51%     1.76%     3.65%
Cash (ML 3Month T-Bill)                                0.01%   0.08%     0.09%




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