In Today’s Market, Stick to Your Plan

U.S. News and World Report Smarter Investor

Investors are probably better off leaving their investment strategy alone right now.

In the game of craps, seven is the most likely number to be rolled. After that it’s six and eight. The least likely numbers are two and 12. The farther away from the number seven you get, the less likely that number is to appear.

The thing that most people seem to forget is that each roll is independent of the previous, no matter what superstitions exist. If you roll a two, and roll again, the fact that you just rolled a two has nothing to do with the fact that your next roll could be a two again.

This is kind of like the market—just because it has doubled from the bottom does not mean it is going to pull back or keep going up for that matter.

It has been almost two months since I wrote about missing the doubling of the S&P 500 off the March 2009 low, which marked the quickest doubling of that index since 1936.

My point was that I was not sure if most individual investors actually participated in the doubling of the S&P 500. Simple indexing, eschewed by most active managers, may have almost doubled returns for investors that were actually in the market. Not a bad result.

Over the past few years, I suspect many people flew by the seat of their pants with an undisciplined investment strategy, trying to do everything imaginable to avoid losses, and then trade the market on the way up. Or worse, they sold and went to cash waiting for the market to turn around to get back in. They were worried that because they rolled a two, they were going to roll a two again.

But what about those who were disciplined through the crisis and recovery? What should be done now that the market has regained its losses? It’s as if investors are worried that because they just rolled a winning number on the craps table, they cannot roll another winner. Investors are wondering if they should take their gains off the table. They want to know, “What should I do now?”

Well, I’m going to answer that question with a few of my own. Has your personal situation changed? Do you have a new need for liquidity that requires access to cash? Does your financial plan dictate a change to your asset allocation? If you take profits, are you planning to reinvest that cash and if so, in what?

Depending on your answers, there could be a good reason to take some profits and raise cash. Reasons could include pending retirement, loss of a job, buying a home, or that your financial plan calls for a reallocation of assets based on some benchmark such as age.

It’s also very likely that the answer may be pretty straight forward if not downright simple: Do nothing.

If you don’t need the cash, what would you do with it? If you take money out of the equity market, would you keep it in cash earning less than 1 percent? How about bonds? They will lose value as interest rates rise. While blanket advice is not applicable to every situation, unless you have a need or plan for the cash, you are probably better off leaving your investment strategy alone right now.

Unlike craps, we have economic information that can help us make educated and insightful decisions over the long term. Right now, corporate revenue and profits are coming in nicely for the first quarter. That’s a good sign.

For you craps players, you are holding a six or an eight.

David B. Armstrong , CFA, is a managing director and cofounder of Monument Wealth Management in Alexandria, Va., a full-service wealth management firm. Monument Wealth Management is backed by LPL Financial, the independent broker-dealer and Registered Investment Advisor. David has been named one of America’s Top 100 Financial Advisors for two straight years by Registered Rep Magazine (2009 and 2010 based on assets under management) and has been interviewed by several national media sources over the past several years. David and Monument Wealth Management can be followed on their blog Off The Wall, their Twitter accounts @MonumentWealth and @DavidBArmstrong, and on their Facebook page. Securities and financial planning offered through LPL Financial, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance references are historical and are not a guarantee of future results. Asset allocation does not ensure a profit or protect against a loss.

Corrected 5/2/2011: A previous version of this article incorrectly stated the S&P 500 Index low.

Read the article on U.S. News & World Report here! >>

Get Monument #Unfiltered: Our Free Private Wealth Newsletter

Our no B.S. wealth advice delivered 2x per month, max. Tuned specifically for busy, high-net-worth business professionals and investors who want straightforward advice without the fluff.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance is no guarantee of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Monument Capital Management, LLC [“Monument”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Monument. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. No amount of prior experience or success should be construed that a certain level of results or satisfaction will be achieved if Monument is engaged, or continues to be engaged, to provide investment advisory services. Monument is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice.

A copy of Monument’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.monumentwealthmanagement.com/disclosures. Please Note: Monument does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Monument’s website or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your Monument account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Monument accounts; and, (3) a description of each comparative benchmark/index is available upon request.

Please Remember: If you are a Monument client, please contact Monument, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.