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Aug 29, 2016

What can I do to protect my investments during uncertain times?

Every so often, the events happening around us seem so unprecedented, it’s an easy leap to assume that the future is at risk or that all previous assumptions were wrong. These days, during a particularly polarizing election year, and a time when interest rates are poised to rise here in the United States and more than 60 percent of the world’s economies are offering zero and negative interest-rate government bonds, many investors unsurprisingly find themselves in a position of uncertainty.

Since there is no way to predict what the market will look like at the end of this year (or any year), it may be helpful for investors to focus on the things that provide some sense of control.

TIME IN THE MARKET: When we think about risk and investing, we think of the risk that comes with participating in the market. Less consideration is given to the risk of not participating. While exiting the market can relieve you of worry, it can also cost you more in the long run.

According to the consulting firm DALBAR, which produces annual analyses of investor behavior, returns over time are more dependent on investor behavior than on the investments themselves, or the larger market.

That’s because investors tend to change course and move money based on panic or fear, instead of staying invested for the long term. In the 20-year period beginning in 1995, the average investor portfolio re- turned just 2.5 percent, compared to nearly 10 percent for stocks, according to the Standard & Poor’s 500 Index; and 6.2 percent for bonds, according to the Barclays U.S. Aggregate. DALBAR found that the most successful mutual fund investors are those who hold on to their investments over time.

DIVERSIFIED ALLOCATION OF ASSETS: While avoiding risk altogether is not a solution, balancing your investments with a tolerable amount of risk can help. A diversified portfolio with multiple assets, selected based on an analysis of personal goals and risk tolerance, can minimize some of the swings that come with broad market exposure.

To be sure, as the movement of stocks and bonds has become more correlated over the past 20 years, the argument for balancing stocks and bonds in a 60/40 or 40/60 mix today has detractors. Today’s advisors may recommend alternative as- sets to help dampen volatility. Still, the benefits of a balanced portfolio become clear in times of extreme market volatility. Blended portfolios diverged from the S&P 500 after it hit its peak in 2007, and were able to re- cover years before the broad market index righted in 2012 (see chart below).

QUALITY INVESTMENTS: We believe another way to bolster against uncertainty is to invest in high-quality businesses, or those with strong free-cash flow, low debt, efficient management and a competitive advantage.

PROFESSIONAL ADVICE: All of these strategies are likely to be enhanced (or at least encouraged) when you work with a comprehensive wealth manager or financial planner. Having a trusted fiduciary in your corner won’t change the market, interest rates or election. But it might make it easier to ignore the headlines and stay invested for the long term.

Information expressed herein is strictly the opinion of Kayne Anderson Rudnick and is provided for discussion purposes only. This report should not be considered a recommendation or solicitation to purchase securities. Past performance is no guarantee of future results.

This article was originally published in the August/September 2016 issue of Worth.

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