Gurus stress discipline

Fear and turbulence have abounded in the market in recent months. Some top strategists say the way to combat them is to stay disciplined.

By John Reese Sep 10, 2010 7:04PM

While investor sentiment shifted this week amid some better-than-expected economic reports, a number of fears continue to lurk beneath the surface -- fears that have pushed investors out of stocks and into bonds at a rapid rate in recent months. From the week ending Aug. 4 through the week ending Sept. 1, investors yanked a total of more than $20 billion out of equity mutual funds, according to the Investment Company Institute. At the same time, they were pouring more than $35 billion into bond funds.


What to do during such turbulent, emotional times? A couple of the top strategists I keep an eye on have recently pointed to the same thing as one of the keys: staying disciplined.

One of those gurus is Liz Ann Sonders, Charles Schwab's chief investment strategist. Sonders (who was one of the few to correctly call the start of the 2007-09 recession, and appears to have been very close to the mark in calling its end) recently stressed the importance of rebalancing one's portfolio -- both within and between different asset classes. "Many investors have probably skewed their portfolios too far away from stocks and toward bonds," she wrote in her latest market commentary. Her advice: Use "a plan that takes advantage of volatility and includes rebalancing and reallocating gains to areas of your portfolio that are underexposed."


Sonders says that means investors shouldn't chase gains too far, and may want to take profits in some longer-term Treasuries if more concerned about price appreciation than the income such bonds offer.


Top value fund manager Mario Gabelli, meanwhile, is also seeing the negativity toward stocks as an opportunity for disciplined investors.


Gabelli is a buy-and-hold investor -- something that currently seems to be in short supply. Many pundits contend that buy-and-hold is dead, and the equity fund exodus indicates that many individual investors believe them.


But that, Gabelli told CNBC, is nothing new -- the "buy-and-hold-is-dead" refrain has popped up at various other points in market history. And, Gabelli says, the fact that it's popped up now is actually very good news for those who stay disciplined, focus on strong companies selling at good prices, and have horizons of three to five years. Of buy-and-hold investing, he said, "Not only does it work -- I am encouraged by the fact that everyone wants to go to algorithmic trading, fast trading, flash trading." While fast traders jump in and out of stocks, good buy-and-hold investors are able to find big-time bargains, stick with them, and reap the benefits down the line.


"We're delighted to have people look elsewhere [than stocks] -- less competition," he said. That enables good investors to buy low, and then make out big-time when things swing back in favor of stocks.  


Buying low and selling high is, of course, just what a good rebalancing plan helps you do. Chasing gains, on the other hand, can get you into trouble. Sonders notes that in the 20-year period ending at the end of the first quarter of 2009, stocks actually trailed bonds -- a very rare occurrence. "Only twice before in history have we experienced such an extended period during which investors fared better in Treasuries versus stocks," she says, adding that she often hears recent bond outperformance cited as the reason investors are leaning heavily toward bonds today. But, she adds, in the other instances when bonds have had such lengthy periods of outperformance, stocks have crushed bonds in the ensuing five-year period. "Although investors didn't lose money in bonds, they missed out on strong stock returns by bailing on stocks at the trough of relative performance (like in March 2009)," she says.



John Reese is founder and CEO of, a premium investment research site, and Validea Capital Management, a separate account advisory firm. He is author of the new investing book, "The Guru Investor: How to Beat the Market Using History's Best Investment Strategies".






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