The quarter in review:
The second quarter taught investors an important lesson: it is impossible to predict the news that will move markets, and consequently nearly impossible to try to time the market's highs and lows. Renewed concern over the European debt crisis in May caused the biggest monthly drop for stocks since last September. The Standard & Poor's 500 Index lost 6 % and overseas indexes did even worse. Things looked pretty bad through most of June. But on the last trading day of the month a surprise announcement that the European union would take unprecedented steps to help Italy and Spain sent stocks soaring, with most markets gaining 3 percent or more in one day. A single trading session turned the month around, helping to erase a lot (but not all) of May's losses. Anyone sitting on the sidelines for just one day on Friday was probably pretty sorry they missed the dramatic rally.
What does the future hold?
No investor or fund manager has any idea how the year will turn out. However, this doesn't put investors at any disadvantage. Prudent investors should avoid acting on emotions and predictions because they typically lead to trouble. Continuous rebalancing (which takes advantage of the fluctuations in the market) and being invested in a broad range of asset classes as agreed upon including investments in stocks, bonds and real estate investment trusts, are two great strategies to help reduce volatility in a portfolio. A prudent investment portfolio should be built in an attempt to handle the various contingencies average investors might face - bull and bear markets, changing interest rates, higher or lower inflation, world crisis and economic booms. Taking the appropriate amount of risk is necessary, and if investors are patient, they should be rewarded for taking those risks. Also, with interest rates at near zero levels, there appear to be no alternative to being invested. Predictions abound these days claiming that investments will continue to suffer through an extended period of low economic and stock market growth. Again, there is no way to know if this prediction will pan out (hindsight is 20 - 20 so please check back on this prediction in 10 years).
What should you do?
Education is the key element to becoming a “prudent investor”. To be a “prudent investor” you must understand The Uniform Prudent Investor Act (UPIA) , which was adopted in 1992 by the American Law Institute's Third Restatement of the Law of Trusts ("Restatement of Trust 3d"), reflects a "modern portfolio theory" and "total return" approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary's performance is measured on the performance of the entire portfolio, rather than individual investments. Investopedia explains 'Prudent Investor Rule':
A “prudent investment” will not always turn out to be a good investment, because no one can predict with certainty what will happen with any investment decision. Thus, the rule only applies to the decision-making process; that is, based on the knowledge the fiduciary has at the time, is the investment a good idea? Investing exclusively in penny stocks, for example, would violate the prudent investor rule, because they are known to be risky at the outset.
The Uniform Prudent Investor Act (UPIA) goes on to say:
The greater the trustee’s departure from one of the valid passive strategies, the greater is likely to be the burden of justification and also of continuous monitoring. (American Law Institute Restatement (Third) of Trusts: Prudent Investor Rule (1992) page 79).
With each of our clients, we have developed a well thought out “prudent investment” strategy and defined it in your Investment Policy Statement. A “prudent investor’s’” portfolios is diversified, passively with Equity, Real Estate, Commodities, and fixed income to dampen volatility. A “prudent investor’s’” equity is further diversified in US, International and Emerging Markets with large and small companies both growth and value. We regularly review this with each of you your strategy to make sure we are only taking the risk you need to take to achieve your objectives. “Prudent investors” avoid economic fortunetellers, stock market soothsayers, interest rate oracles, investment “porn” and market timing conmen /conwomen. A “prudent investor” remembers, “No one can accurately predict the economy.”