      |
|
September 5, 2010 |     |
|
|
|
|
Newsletters
An Ongoing Lesson... Staying the Course During Changing MarketsAn Ongoing Lesson... Staying the Course During Changing Markets In every quarterly newsletter, we provide you with both the short-term and long-term performance of the Plan funds. It is important for you to know how your funds are doing. However, we find that some participants use this information to make changes to their investment allocations. For example, no one can ignore the impressive returns produced by international and small company stocks in recent years. Does this mean that you should move more money to those categories? The answer is no, and this article will explain why. The stock market works in cycles. The chart on the next page demonstrates this. The chart lists the annual returns of six asset classes from 1983 through 2006. Each year, the best performing asset class is highlighted. As you can see, the best performing asset classes can change dramatically from year to year. The category producing the highest returns this year can be earning among the lowest returns within a few years. Recent past performance is not a reliable guide to how well a fund will do in the future. Since no one can predict the future, asset allocation and diversification are critically important to help reach your investment goals. Asset allocation is the process of choosing how you will invest your plan assets. Once it is determined how much stock exposure you want, the next step is to diversify among various types of stock funds. In order for Plan participants to invest in diversified portfolios, we have selected highly rated funds which represent each of these asset classes and our five model portfolios provide recommended percentages in each fund. For example, our conservative growth model consists of:
By diversifying among different types of investments you spread out your risk. While one investment is performing one way, another may be performing another way. This is because the different types of investments react differently to various factors such as interest rates, economic growth cycles and foreign issues. When you rely on the performance of just one investment (or a small number of investments) you can suffer substantial losses if that investment does poorly. Diversifying reduces your dependency on one type of investment. It may be tempting to move a large percentage of your account to an investment that posted big gains last year. For example, the Harbor International Fund returned 32.69% in 2006. Moving a large percentage of your account to this category would be a very risky move. The risk of chasing the latest "hot" sector is that the hot streak might run for a while but at some point you are likely to encounter a dramatic slowdown. Also, shifting more assets to categories such as international and small company stock shifts the overall risk profile of your account. International stocks carry certain risks that domestic stocks don't such as exchange rate risk and political risk and are thus more volatile. Small company funds also tend to be more volatile. Alternatively, it may also seem logical to sell all of your investment in a fund that did poorly last year. For example, after several years of double digit returns, REIT stocks, represented by the Cohen & Steers Realty Shares Fund, have slowed down, producing negative returns so far for 2007. This does not mean that it is a bad fund and should be sold. It is normal for a category to go through cycles. This fund is still a top rated fund within the REIT category and the long-term diversification benefits still remain. We know that the market segments go through cycles, but the length and magnitude of those cycles are unpredictable. Trying to time the market consistently over time has proven to be near impossible, usually resulting in investors buying and selling at the wrong times- they buy high and sell low. By diversifying, you are guaranteed to own a portion of the fund that earns the most, and you are guaranteed to not have all your money in the fund that does the worst. The model portfolios created by Scarborough cover all of these asset classes with allocation percentages designed to deliver strong long-term returns, while controlling risk. Once you have selected a portfolio that suits your risk tolerance and time horizon, it is important to monitor your allocations. As time passes, your percentage in each asset class will change. This happens because the investments gain and lose value at different rates. Those asset classes that earned the most during that time period will become a larger percentage of your total portfolio and the asset classes that earned the least will become smaller percentages. To maintain your target allocation you may need to rebalance, bringing your allocations in each fund back to the target allocation. Knowing that the asset classes go through cycles, if a fund has had an impressive run and its allocation is above its target, it makes sense to sell that portion above the target while it is high, knowing that this asset class will eventually slow down. That portion is then bought into an investment while it is relatively low, knowing that it will likely be a better-performing category in the future. It is important to note that if a fund is not performing as well as others in the plan; it does not mean that it is a bad fund. The performance of the funds in the plan should not be compared to each other because they represent different asset classes, which are at different points in the market cycle. Scarborough monitors the funds in the Plan quarterly to ensure that you own top-performing funds in each category. This process includes comparing a fund's performance to the index that it is trying to beat as well as to other funds within the same category. From this, we hope that you will select a diversified mix that suits your individual situation and that you will be able to filter out all the short-term "market noise" in order to keep focused on your long-term investment goals. This takes patience and discipline but we are here to help so please feel free to call us at 800-223-7608 for assistance.  Stable Value performance is actual plan performance; Stock asset classes are represented by the following indexes: Large Company- S&P 500 Index; Mid-Cap- Russell Mid Cap Index; Small Company- Russell 2000 Index; Foreign Company- MSCI EAFE Index; Real Estate- NAREIT Equity REIT Index. (Published: 11/7/2007) Back to Index |
||||||||||||||||
|
© 2010 Scarborough Alliance Corporation. All rights reserved. Printing Instructions |