SCOTT REED: You can’t go wrong with patience, diversification

By Scott Reed

I am wondering what 2012 will bring to us in the investment world. What do the experts say? I always like that question because you can find an expert that will say anything you want to hear. I’m reading a book, “Aftershock,” at the request of one of my clients, and it says traditional investment strategies are going to hell in a handbasket. On the flip side, I read a white paper by the “Wizard of Wharton,” Jeremy Siegel, who explains why the stock market should do well in 2012. There is much mathematics that will back up both of these positions and any other of the myriad predictions by other experts.
These are not easy times to predict. We are not in uncharted waters, but we certainly are in waters that few have had to tread.
As I have said often, the fundamentals of the markets win out eventually, but in the short-term the markets are driven by the collective psyche of the investors. The more volatile the emotions of the investors, the more volatile the moves of the markets. We certainly have seen that over the past couple of years.
I am never sure of what the next six months or year are going to look like for the reasons I’ve mentioned. And more importantly, no matter what the markets do, I don’t know how that will affect your investments. Everybody’s investment portfolio is different.
All that being said, I do have some thoughts on the markets that may be helpful in preparing your portfolio for the next five years:
• It seems reasonable to me to believe that the bull market in bonds will come to an end soon. How soon really depends on a lot of variables such as the Fed’s push to keep interest rates low as we climb out of the 2008 recession. If interest rates start to rise, it will be bad for bond holders because they will see the market value of their bonds decline. Although it will be good for bond holders living off the income because they will begin to see their income rise as they reinvest into higher paying yields.
• Rarely have we seen an entire decade of flat stock market returns like we have experienced in the first decade of this century. I hear investors talk about the possibility of a double-dip recession. They must have forgotten that the second-longest and second-deepest recession in history occurred in 2000. It was eclipsed by what is now the second-worst recession in history in 2008. We already have doubled-dipped in my mind, and triple-dipping is much less likely.
To add to that, corporate earnings have gone up considerably in the past two years without the commiserate rise in the underlying securities. Historically, the stock market has thrived in an environment of high unemployment, and equities tend to do well in a rising interest rate environment. It is not hard to justify the idea that the stock market should do well in the next five years.
• Real estate has the tailwind of rebounding from the catastrophic events of 2008 and that, like commodities, real estate tends to do well in an inflationary environment.
If you are not a market-timer and you are patient with your portfolio, it is not hard to see where the opportunity lies in the coming years. One factor, such as the forecast on inflation, can drive your moves across the board in your portfolio. Just remember that diversification is the key. Make sure you don’t bet everything on anything. Half of the experts are wrong on any given day. You will be, too.
Scott Reed, CIMA, AIFA, is CEO of Hardy Reed LLC in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.com.