You may have seen the predictions. A few market watchers are forecasting a market drop toward the end of 2012. Some call it a correction. Others call it Armageddon.
On the other hand, many economists believe we’ll see a continuation of the gradual recovery we’ve already seen.
I can’t pretend to predict the future, and there’s no historical precedent for the way the current economic data are mixed. That’s the best argument out there for developing a long-term investing strategy that involves diversification.
Spread your investments across several asset classes, and do it methodically. Understand the behaviors you could see from each asset class as the economy changes, and invest in classes that fit your risk tolerance, investing timeline and retirement goals.
If there’s a drop, a correction, a pullback or even another recession, you’ll be better prepared. Here’s the most important thing to remember: whether the economy continues upward or backslides—whether the market is up or down—it’s important to continue to invest. You must invest during down times in order to experience the benefits of a recovery.
And as you hear the many predictions, remember to temper your reactions because we’re really looking at a mixed bag for the remainder of 2012.
Here’s what I see:
- We simply don’t have the spiraling we saw in 2008 just prior to that drop—a toxic combination of shady lending practices, falling real estate prices and Americans sinking in debt.
- Inventory and production data are good. We’ve seen decent corporate earnings, and companies have a lot of cash on the books. However, while it’s not worsening, we’re in a period of worrying unemployment. More people need to make more money in order to drive prices up and strengthen the economy.
- A tighter credit market and better lending practices are good. Further, the Federal Reserve has stated it won’t raise interest rates until at least 2014, which is good for consumer credit, small business development, corporate growth and mortgage lending. The real estate market is showing positive signs in both the residential and commercial sectors.
- The outlook in Europe is sketchy at best and negative at worst. Our economies are inextricably linked through trade, international corporations, international investing and lending and political ties. Linked we may be, but the world turns to the dollar in times of crisis. If we see some negative outcomes in Europe, investors from around the world will flock to U.S.
- There’s no certainty whether the Fed will engage in another round of quantitative easing, which is a mixed blessing in itself. Easing is a shot in the arm for the economy in the short run, but investors smell weakness when the government takes drastic measures, which could contribute to a short-term market pullback.
- A prediction reappearing in the news states that we’re entering the time period during which more Baby Boomers will reach retirement age than any other time. Doomsayers worry all those Boomers will withdraw from the market at once, moving their retirement savings to cash. While anything’s possible, it’s more likely that the crisis in 2008 pushed retirement back for many Boomers. Their exit from the market will likely be far slower than the worst predictions, and the money they take out will likely be injected back into the economy through spending.
- Lastly, we have headline risk. More talk about ups and downs and pullbacks and corrections means jittery investors. To a small extent, the conversation about a pullback could be a self-fulfilling prophecy. The positive side of that story is that headlines generally cause blips—not long-term drops.
Remember not to panic. Devote your energy to creating a solution in the form of your personalized investing strategy, complete with a well-diversified allocation. Be ready to ride out the storm if it comes or take the slow ride up if it continues.
Scott Holsopple is the president and CEO of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.