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Long-Term Investors: Hold On

Sigma Investment Counselors

October 5, 2011

Markets continue to roil, further depressing equity and portfolio values. Once again, the determination of long term investors is being tested. In our view, the disconnect between the current economic environment and market perceptions continues to widen. The distress in Greece is creating issues that appear to be self-fulfilling prophecies for many financial institutions in Europe. This, in turn, continues to spill over into equity markets around the globe. In addition, investors are questioning China’s growth rate, concerned that the rate of growth is declining. Closer to home, Washington’s inability to find a way to address budget and deficit issues is adding further uncertainty and creating downward pressure on the price of stocks.

Frequent market comparisons are being made to 2008. While the sources of the problems are very different, many asset classes are trading in a similar fashion as they did three years ago. Yet, as we have articulated before, the world is vastly different today versus 2008. In 2008, we faced solvency issues. Today, liquidity issues are responsible for a majority of the concerns. Moreover, recent US data indicates that, although not robust, there is growth. Mortgage and housing problems continue to linger, but the pig is further through the long python. US banks have been recapitalized and markets are fluid, not frozen. Unemployment rates, while still too high, are on the way down from the peak and appear to have stabilized and job creation does exist. If we can keep the economic flywheel moving in a forward direction, this should bode well for equity prices. Thus, I do not believe that we will experience the same magnitude of decline in the equity markets as we experienced from the peak in the fall of 2007 through March of 2009. And as brutal as this market decline was, the market staged a very impressive rally for the remainder of 2009 and 2010. For investors who were late in buying back into the market, their opportunity loss was quite large.

Why This Matters:
As difficult as it may be, I strongly recommend that investors maintain a disciplined approach to investing and not make radical short term trading decisions that run contrary to one’s long term plan. Stocks are a volatile asset class and as history has shown, can turn on a dime. In recent years, we have witnessed extraordinary swings in stock prices, both positive and negative, over relatively short periods of time. Given the difficulty in knowing when these major market moves are likely to take place, investors can do more harm than good by inadvertently selling shares when the market is weak and buying shares during times of strength. In fact, I believe that now may prove to be a great buying opportunity for investors who have excess liquidity and are not fully invested in equities per their long term asset allocation targets.

Denise M. Farkas, CFA

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