Be ready to capitalize when recessionary period is over

The bear market reared its head well before the atrocities of Sept. 11. The attack on the World Trade Center exacerbated it. Because Wall Street is a bastion of optimism, economists and strategists had dragged their feet in admitting that the U.S. economy was heading south.

When the attack took place, it became easier, perhaps even accepted, to say that terrorists tipped us into a recession, but the die already had been cast. Now we have to deal with ferreting out reality from perception in terms of the economy and investing; so let's take a critical look at where things stand.

Let's start with the economy.

Here's an axiom you can take to the bank: Economies go through cycles of boom and bust. No amount of government intervention or wishful thinking can alter that fact. (Remember the technology analysts that told us that "this time it's different," and that the old valuation rules relating to earnings and economic cycles had been repealed?)

There are several signs that, although not evidence of the recession ending, point to a more buoyant economy:

Interest rates are low (and likely to go lower); oil prices are down substantially despite the public's fears of high gasoline prices (I was in Springfield the day of the attack on the WTC and know what happened in the buying panic); taxes have been cut and may be cut again; auto sales are up dramatically, spurred by the Big Three offering 0-percent interest deals; consumer disposable income should increase significantly, based on the huge jump in refinancing (up 115 percent in three weeks!) and lower gasoline prices; and the Federal Reserve has been adding liquidity to the system at a furious rate. (On this last point, but without going into a long treatise, there is an interesting correlation between money growth [M3 + Commercial Paper] and the markets. In the three-week period in which M3 was up over $144 Billion, the S&P rallied 13 percent!)

It is easy to overlook economic positives when the news is all about anthrax and bombing raids and guesses about what will happen next; however, it is a multidimensional world, one in which we are best served by paying attention to all aspects of our lives, not just those garnering media coverage.

So let's look at the markets and what to do about our investments. For all those who pooh-poohed the idea of asset allocation and instead chased returns among the "hot" areas, the lesson has been harsh. Allocating portfolio assets on the basis of the individual's risk tolerance and goals does work. It won't always prevent a portfolio from declining in value, but it does mitigate such declines, as any investor who has allocated a portion of his portfolio to U.S. Treasury obligations will tell you.

While stocks have declined, government bonds have performed very well. If your portfolio was diversified between only two asset classes, stocks and Treasury bonds, you should have handily outperformed the market and most equity mutual fund managers.

If you diversified further into seven or eight asset classes (small and large cap growth and value stocks, international stocks and corporate bonds) you should have seen a much lower level of volatility than average with a return that beat most exclusively equity investors.

If you have a portfolio without an investment plan, especially a rational, disciplined method of allocating assets for YOUR needs and risk tolerance, see your financial professional NOW.

We will be coming out of this recessionary period that's the definition of a cycle and as we do, you should have investments structured to carry you though the next up-and-down cycle.

Don't chase performance. Don't try to time the market. (nobody has ever figured out how to do that over a long period, and if they had they wouldn't tell anyone about it). Maintain reasonable expectations based on the long-term market returns, not those of the four or five years prior to the bubble bursting.

Do it now. Here's why: The market, as measured by the Dow Jones Industrial Average, has proven very resilient after major crises.

From the first day of trading when the following occurred to a date one year later, the DJIA provided these returns: Korean War 21 percent+, Cuban Missile Crisis 38 percent+, Kennedy Assassina-tion 30 percent+, Iran Hostage and Oil Crises 22.3 percent+, and the Persian Gulf War 10 percent+.

The key? You had to be invested. Investors could not sit back and wait for everything to be OK.

If your time horizon is greater than 24 months, don't let this opportunity pass you by.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. He can be contacted by mail via SBJ, 313 Park Central West, 65806 or by e-mail at sbj@sbj.net.)