Like a tiresome dinner guest, the recession has long outstayed its welcome. But there are some clear signs that the economy has begun to turn around. If that is indeed the case, how should you, as an individual investor, respond?
Before we get to that question, let’s quickly review some of the key factors that suggest the recession may be ending. First, we’ve seen four straight months of gains by the Conference Board’s Index of Leading Economic Indicators. Also, the job market is improving somewhat and bank lending is increasing. The Federal Reserve’s efforts to stabilize the financial system have improved conditions in the corporate credit markets, as indicated by a dramatic increase in the amount of new bonds issued by companies thus far in 2009. We’ve also seen improvements in the housing market and in industrial production.
Even if all this evidence indicates the recession is ending, does that necessarily mean that boom times for investors will follow? A look back in time shows reasons for optimism. In 10 recessions, extending from 1949 through 2001, the S & P 500 rose, on average, 9.5 percent six months following the recession’s end date, and 15.5 percent after 12 months, according to Ned Davis Research. Of course, as you have no doubt heard, past performance is no guarantee of future results, but in years gone by, staying in the market rewarded long-term investors —those who could look beyond the recession at hand.
In any case, if the recession is ending, let’s return to our original question: What investment moves should you make? As we’ve already seen, the most important step you can take is to remain invested — and if you’re out of the market, consider getting back in. As exhibited by the strong market rally this summer, large gains can come quickly, but they only come to those who aren’t on the investment sidelines.
In addition to staying invested, consider these other post-recession moves — which are actually pretty good moves before and during a recession, as well:
• Look for quality. In any economic environment, you’ll be making a smart move by focusing on quality investments that fit your unique situation. You may look for the stocks of those companies with strong management teams and competitive products. And stick with investment-grade bonds, if fixed income is appropriate.
• Diversify. Build a portfolio containing a variety of investments, including stocks, bonds, government securities and certificates of deposit. While diversification, by itself, can’t guarantee a profit or protect against a loss, it can help you reduce the long-term effects of volatility on your holdings.
• Keep a long-term perspective. It’s not easy to overlook market fluctuations, especially severe ones, but if you can keep your eyes on what you hope to achieve in the future, you might be less likely to over-react to short-term events. While you may need to periodically adjust your investment mix in response to changes in the economy and in your own life, you’ll be better off, in the long run, by establishing a strategy that’s appropriate for your individual risk tolerance and goals — and sticking to it.
As individuals, we’re all subject to the ebbs and flows of the economy. But by focusing on those things you can control — such as buying quality investments, diversifying and thinking long-term — you can become an investor for all seasons.