Investing for the Long Uncertainty Ahead

Don't be fooled by last week's rally. The outlook for when and how investors can start to rebuild their retirement savings is grim

By David Bogoslaw

Economists are characterizing the current financial crisis as everything from the Great Recession to possibly something on the scale of the Great Depression of the 1930s. Just how long will the pain and uncertainty last? Nobody knows. With the jobless rate expected to keep climbing, consumer spending, a key prop of the U.S. economy, may not rebound anytime soon. Meanwhile, Washington has yet to articulate a viable solution to the banking morass. That makes the odds for a recovery within the year or even the next two look worse with each passing day.

The implications for when and how investors can start to rebuild their retirement savings are equally grim. Let's be honest. Investors probably don't want to listen to anyone telling them to stay the course and stick with the classic asset allocation at this point, after a nearly 60% plunge in the major stock indexes from their October 2007 peaks.

Don't be fooled by last week's stock-market rally. Yes, it was the first time stocks ended higher on four consecutive days since November 2008, but ask yourself: What on the economic horizon has substantially changed since then? Unfortunately, very little.

Criticizing Obama

The use of taxpayer dollars under the Troubled Asset Relief Program (TARP) to recapitalize banks and other financial behemoths isn't working. There has yet to be a consensus in Washington or progress toward removing toxic assets from these institutions' balance sheets to promote lending, and there's a growing sense that the Treasury Dept. isn't any closer to a solution today than it was under former Secretary Henry Paulson a few months ago.

"You listen to [President Barack] Obama and [Treasury Secretary Timothy] Geithner, and people are very confused to know what to do," says William Rutherford, president of Rutherford Investment Management in Portland, Ore. "They don't have a plan that's clear." He believes the clarity needed from top policymakers to lead us out of the woods will only come after another serious drop in stock prices. "I'm expecting it if they don't get their act together. I don't see what they're doing that's going to resolve the problems," he says.

He cites the apparent flip-flop on the "stress tests" the government intended to perform on each of the major banks. Initially, the idea scared people since nobody knew what the stress test would entail or what the outcome would be. "Now we hear the stress test is so easy that just about everybody can pass it. So it's not going to tell us anything," he says. "We'll have wasted another month or more."

Buying on Dips

Rutherford, who says he has long held to a defensive, diversified portfolio, is not doing much that's different from what he had been doing with the $20 million in separately managed accounts he manages. He's done some buying on dips as the market rotates through various sectors and has been able to capture some upside that way. More recently, however, the moves haven't been so much dips as just straight down, which makes it hard to know when to buy a stock, he says. He's sharply reduced his accounts' weight in cash and bonds from between 60% and 70% last fall.

The investment strategists who seem the most grounded these days are those who understand that in the current environment their primary focus needs to be capital preservation. That makes them clear about their role to first preserve their clients' wealth and only then worry about growing it.

Dean Barber, chief investment officer for the Barber Financial Group in Lenexa, Kans., said he began adjusting and safeguarding his clients' portfolios 15 months ago with an eye toward preserving their capital. Most of his firm's clients are already retired.

Federated Prudent Bear Fund

To reduce downside risk in his portfolios, Barber analyzes every mutual fund and exchange-traded fund, searching for the best performers in all the various asset classes. Based on certain expectations, his portfolios use a quantitative model to weed out fund managers with excessive exposures in certain sectors. For example, if he thinks health-care stocks may be in for a rough spot because of the Obama Administration's efforts to reform the industry, "our program will automatically pull managers out of our portfolios who are too heavily invested in health-care," Barber says. "We'll use inverse strategies as they're appropriate," funds that bet on declining prices of particular assets.