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Investing Without a Crystal Ball

If you read or watch the news, you’re bound to hear market predictions. You’ll find some pundit explaining why the stock market will continue to go up and another reporting that the market is due for a sell-off. One expert touts the reasons why housing will be the best performing sector this year, while another points to the reasons why technology will lead.

It’s easy to get caught up in these predictions. These stories usually seem logical, and they’re told by smart people, leaders in their fields, people who we think must know more than we do about the state of the market or the economy. But what if these predictions are just stories? What if no one truly knows what the future holds? How then can we invest?

Some believe the best solution is to cover all bases. These investors hold growth and value funds, large- and small-cap funds, and foreign and domestic funds. But markets change over time. Different areas of the market come in and out of favor, and these cycles tend to last years. This means these investors will likely end up holding both lagging and leading areas of the market–and lagging areas may be out of favor for years. As financial writer Carl Richards put it, “a diversified portfolio all but guarantees you’ll be unhappy with at least one investment each year.”  The idea is that if these investors hold long enough, it will all average out in the end, but not all investors can stomach holding lagging investments year after year.  

Follow the Leaders

If we can’t predict the market, then investing in many areas of the market does make sense, and it’s one of the most common and conventional solutions to this problem. However, changing markets represent a tremendous opportunity for fund investors like you. When market cycles last years, you may have enough time to capitalize on these changes, even if you can’t predict them in advance. 

Our Upgrading strategy is designed to help you take advantage of major market trends. Upgrading keeps you invested in funds with strong recent returns. We believe these funds are in sync with current market leadership, and often this leadership lasts awhile. By focusing on these funds, we can help align our portfolios with leading areas of the market and avoid holding lagging areas indefinitely.

When foreign markets were in favor from 2003 to 2007, foreign funds had strong recent returns and we were led to own them. When markets changed and domestic markets began to lead in 2009, U.S. funds had better returns and we shifted our portfolios into U.S. funds–and that’s where we’re invested today. But we know we won’t be invested domestically forever. Markets change over time, and when markets inevitably change, we’ll change, too. No crystal ball required.

Diversification does not assure a profit or protect against loss in a declining market.​

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