Is it time for new strategies in retirement investing? It is nice to see that I am not the only person struggling with the market volatility of 2006.
Then again, I am not convinced that rebalancing is the answer. Just say "60/30/10"" doesnt answer the question of what stocks or what bonds...
Getting Somewhere On Stock Treadmill
September 5, 2006
The nation's 47 million or so 401(k)-plan investors can hardly be blamed for feeling like they are plodding on a treadmill.
Stocks rang up a double-digit gain in 2003, but over the past five years, the Dow Jones Industrial Average has posted a 2.7% average annual gain. Things may not change soon. When the 1982-to-1999 bull run started, interest rates were sky-high and stock valuations were low. Today we have the opposite.
Frustration can lead many to toss account statements in a drawer and let their portfolios hibernate. At the same time, it isn't a good idea to get in touch with your inner trader-self.
Luckily, sometimes the soundest approach is the simplest. That might be plain-old rebalancing. The strategy -- employed quarterly or annually -- involves using new investments, or exchanges among mutual funds, to keep your exposure to stocks, bonds and cash within a chosen range. Due to tax consequences, it is easiest to do in a tax-deferred account such as a 401(k) or IRA.
Rebalancing can keep you out of trouble. Instead of being lured by the siren song of hot funds, a rebalancing investor automatically puts more money into categories that have shrunk in value and less into those that have swollen. "In this environment I believe in rebalancing instead of buying and holding," says Steve Henningsen, a financial adviser with Wealth Conservancy in Boulder, Colo. "Buy and hold works if stocks are going to rise steadily for several years, but that's not likely."
August also had conflicting advice.
Will Stocks Continue to Rally?
Fed's Pause, Corporate Earnings Loom as Wild Cards for Investors Amid Signs of a Slowing Economy
August 28, 2006
History suggests that periods of transition in Fed policy usually don't end well for investors. Analysts say that the key issues in this inflection period include whether big-name companies can continue a long-running streak of profitability and whether investors can justify paying ever more for those results.
"We're definitely cautious at the moment," says analyst Ed Clissold, of Ned Davis Research. "Just because the Fed stops doesn't mean it's a definite buy signal for the market."
The biggest concern is the state of the residential real-estate market: Homes -- their construction, sales, financing, refinancing and resales -- have been a dominant source of wealth creation for the past couple of years. But two reports last week showed sales of both new and existing homes coming well off the torrid pace.
"There seems to be a disconnect in the market right now," with Wall Street expecting ever-better corporate earnings even as the economy slows, says Keith Hembre, chief economist at the mutual-fund firm First American Funds, which recently cut its recommended stock allocation for clients to 60% from 67%.
Securities analysts on average expect year-over-year corporate earnings to grow 15% in the third quarter at S&P 500 companies, and 14% in the fourth quarter, according to research firm Thomson Financial. If the Street is in the ballpark with those numbers, companies in that market index will have enjoyed double-digit earnings growth for 14 straight quarters, a record. Michael Thompson, Thomson's research director, acknowledged that such gains are heady, but he expects the streak to continue through the end of the year.
"Earnings growth is slowing, but we don't think it will reach the single digits until next year," Mr. Thompson says. "The thing is, we're not facing a derailment in the economy."
Mr. Thompson's bullish case also included evidence that, by historical measures, stocks are cheap right now: At its current level, the S&P 500 trades at 14 times the average per-share earnings of its component companies, based on expectations for the next 12 months' results. Over the past 20 years, the index has traded around 15 times on average.
