Time to take cover?

I got an interesting question earlier this week. It began with a list of some of the many challenges facing our economy and markets, from the subprime mortgage mess and our energy dependence to funding the military budget and social security. We had just said to be prepared for more market turbulence, but to stay the course with their long-term mutual fund investment program.

The question: “With all this risk ahead of us, wouldn’t it be prudent to do something about it? Shouldn’t I be taking some money off the table?”

Answer to the first question – Yes

Answer to the second question – No

In times of turbulence (in fact all the time), WE the investment managers are investing to reflect our expectations of the future. And, we share the many concerns listed. So, WE are “doing something about it” in our selection of the individual investments in the funds (for several months we have had more exposure to energy, less to housing, more in high quality, etc.) That’s what active managers (as opposed to indexers) do.

But, we rarely take our investors’ money out of the markets they have chosen to be in long-term and temporarily put them into “safe” investments, expecting to get back in later. Such market timing just doesn’t work long-term. People find it nearly impossible to invest when the future looks most grim and raise cash when things look most rosy. Instead, we would tend to sell when we’re scared (like now), and buy when we’re feeling cocky (like last month when our investments were all going up).

The point is this. When we say, “stay the course,” we don’t mean there is nothing that needs to be done. We’re saying, “Don’t YOU do anything WITH THE ALLOCATION OF YOUR INVESTMENTS.” Don’t expect to – don’t even try to – avoid weak markets with your long-term investments. But, do expect your investment managers to invest prudently and with a good understanding of and appreciation for the risks facing investors.

Other questions?