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Rotblut: Uncertainty Looms, So Think Long-Term

Charles Rotblut |VP HKSCKPVIamp; Editor, American Ass'n of Individual Investors
Friday, 7 Oct 2011 | 11:14 AM ET

Uncertainty continues to loom over the markets, even after this morning’s better-than-forecast September jobs report.

The U.S. economy is expanding, but at pace that could potentially cause it to eventually stall. Since April, non-farm payrolls have increased at a tepid 72,000 per month pace. It is statistics like these that cause some to fear a double-dip recession, though it’s not a certainty that we will see actual economic contraction. (And, yes, I realize that for many Americans, it feels like the 2008 recession never ended.)

Conditions are more troublesome on the other side of the Atlantic. There has yet to be resolution to the sovereign debt situation and headlines out of Greece seem to change almost daily. Understand that the problem is not only sovereign debt, but worries that a default could cause a loss of confidence in several European banks.

There are reasons to be hopeful, however. A preservation plan for European bankscould reassure investors that a default by Greece or another EU country would not create a widespread financial crisis. (Germany and France will hold a summit on Sunday.)

A bipartisan, long-term debt deal by the congressional super committee and the passage of some type of jobs plan by both houses of Congress could help here in the U.S. Decent third-quarter results (consensus earnings estimates call for S&P 500 profits to have risen 12.9%, according to Thomson Reuters) and favorable earnings guidance from corporations would be another positive development.

Part of the difficulty for investors is that the eventual short-term outcome cannot be predicted by looking at fundamental data or charts. Many stocks are trading at low valuations (as of the end of last week, 187 S&P 500 stocks had a price-earnings ratio below 10 and a price-to-book ratio below 2), but they could get cheaper. Charts are showing a bearish pattern, but price patterns are merely sentiment indicators and daily market sentiment is being influenced by rumors.

If the eventual outcome is uncertain, you’re left with two options. The first is to sit out, wait for signs of certainty and then jump back in. This requires a high level of market timing accuracy, something most investors lack. It can also cause you to lock in big losses and miss out on big gains by getting out of the market too late and waiting too long to get back in.

The second option is to focus on the long term, look for bargains and adjust your stock and bond holdings if they move too far away from your allocation targets. Granted, this disciplined approach may be easier said than done, but given the alternative, it is more likely to build long-term wealth.

Don’t Avoid Stocks

The most common bear market mistake I see investors make is to stop looking at stocks. Though the temptation is to adopt a wealth preservation strategy and sell stocks, doing so exposes you to risks of market timing that I discussed above.

You will likely do better by adopting a long-term portfolio strategy now and sticking to it. Bear Market Grads: What You Should Learn From the Financial Crisis gives several steps that will help you be proactive. Though the article was written in 2009, its lessons remain very relevant in today's market environment.

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Charles Rotblut, CFA is a Vice President with the American Association of Individual Investors (http://www.aaii.com) and editor of the AAII Journal.

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