How to Invest When the Economy Is Weak

Global diversification and patience are key

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Manufacturing growth crept to its slowest pace in 20 months with the index of manufacturing activity experiencing its biggest decline since 1984. Payrolls were also shockingly weak according to ADP, adding a mere 38,000 jobs in May, down from 177,000 in April.

Sadly, this is not just a U.S. problem. This month's manufacturing reports from China, Russia, Poland, Hungary, and Japan were all down with more underwhelming data expected as the month of June rolls on.

This is the moment that the anxious investor begins to panic. Last year, it was all about rising stock prices, commodity investments, and the tech boom. Now, economists are talking about extended weak growth and how we have kicked the debt can down the road and now must pay.

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So what should an investor do? Is it time to "change lanes," and move from one overly weighted allocation model to the next in search of economy-defying returns?

An investor who constantly shifts his allocations is similar to a stressed out driver trying to make his way down Interstate 405—the nation's busiest stretch of highway according to the highway patrol—on a Friday afternoon before a holiday. Traffic is at a near stand still, but he is determined to get to his destination on time despite statistics that show some 320,000 other drivers are trying to do the same.

This driver darts from one lane to the next, hoping to find some small advantage. His lane grinds to a crushing halt while drivers four lanes over seem to be effortlessly slipping by. So with great consternation, the driver slowly but determinedly works his way over, one lane at a time, rudely nosing his vehicle into spaces to finally enter the sought after lane of freedom.

For a few brief moments, a wave of satisfaction washes over the driver as he hits his accelerator and pops up from 5 to 30 miles per hour, finally passing that old lady who had crept along in front of him in the silver Camry, oblivious and out of touch.

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But then it happens. His new lane grinds to a sudden and dangerous halt. He is at a stand still. The frustration builds. Then, as he looks to his left, he notices that the lane from whence he came is now moving freely. As he tries to creep his way back, the silver Camry slips by with the happy old lady smiling away, at peace in the midst of the 405 storm.

This driving metaphor provides an interesting allegory for investing behavior. As globally diversified investors, one participates in the industry of millions of hard working men and women and the growth of their companies and economies. Sometimes these economies enjoy stretches of unfettered growth, celebrated and enjoyed by all, not dissimilar to flying down the 405 on a Sunday at 8 a.m. Then there are times when these businesses and economies become cramped and overburdened. Growth painfully slows as these businesses and economies sort themselves out, kind of like a traffic jam.

The wise investor learns that these patterns are essential and expected components of all economies. They should not have much effect on investment patterns. By accepting the simple fact that she cannot outperform the market, the wise investor can rest at ease knowing through global diversification and intelligent indexing she will reap a reward. Like the happy old lady on the 405, this investor is not happy the economies are moving slowly, but is happy because she planned for this slow down and knows that this too will pass.

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The wise investor accepts that disruptions are part of the investment journey. Although she enjoys years of high double-digit returns, she accepts that her portfolio will also be slow moving at times. There is no need to change lanes. Making significant changes to a portfolio's allocation is expensive and usually unfruitful. Tax friction and trading costs burden such lane-changing investors with a disadvantage that must now be overcome with dramatically increased growth. And as often happens, once such an investor adjusts their allocation, the news hits, economists speak, and once again it is time to make more changes.

During slow growth, each investor has a choice. He can chase after the fast moving lane, jumping from one allocation to the next in search of a miracle, or he can accept the seasonal slow down, turn on his favorite radio station and, like the old woman on the 405, enjoy the journey.

Steve Beck is cofounder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater peace of mind knowing that they are leveraging the best thinking of Nobel laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.