Posts Tagged ‘stock market’

What Should You Do When the Market Gets Crazy?

Wednesday, August 17th, 2011

This is a letter I sent to my clients on the recent market votility.  I thought I would share it with everyone.

“Dear Clients,

With the recent quick decline in the stock market and talk of a double dip recession and rising interest rates, I wanted to take a moment and share with you my perspective on the recent stock market declines.

  1. This too shall pass.  The stock market goes up and it goes down.  In times of uncertainty like now it does it more frequently.  This is why each of you have an asset allocation strategy where you understand the downside risk in your portfolio.
  2. Historical perspective is important.  Is anyone talking about the crash of 1987 when the market dropped over 22% in a single day?  The Wall Street Journal ran a series of articles comparing 1987 to 1929, hinting that another Great Depression was on the way.
  3. Interest rates on US Debt dropped yesterday even though it was downgraded.  When money was pulled from stocks there was really no other place to put it which drove bond prices up and interest rates down.  Even if interest rates rise in the future they would still be very low from a historical perspective.  Did you know that in 1965 mortgage rates were 6% and did not drop below that level again until 2003?  The interest rates we see today are lower than they have been in a very long time.
  4. Sometimes press coverage does not reflect an accurate picture of what is really happening.
    a. On a given day only a very small percentage of outstanding shares are traded – most people are not selling and for every seller there is a buyer.
    b. The press is often interested in covering the unusual because that is what sells.  I received several press requests over the past few days asking me if I had any “panicked clients” who were calling me about the market. They did not wish to speak to clients who were not panicked for their stories.  So they only report one side of the story, which is not at all representative of reality.
  5. Emotional investing decisions often lead to poor outcomes.  The typical investor who tries to time the market usually underperforms significantly.  This is because they tend to sell after a big market sell off and wait until the market recovers to get back in.  This is the “Sell Low, Buy High” theory of investing.  Not too many market timers were jumping into the market in March, 2009.  Even the pros (mutual fund managers) who practice this type of strategy, underperform the market by about 2% per year .”

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The Financial Meltdown Continues . . .

Friday, September 19th, 2008

Lehman Brothers an investment bank files for Chapter 11 Bankruptcy, Bank of America buys Merrill Lynch at a fire sale price, and insurance giant AIG needs a huge loan from the Fed to avoid bankruptcy. All of these problems are the result of the mortgage excess with its roots in greed that have now spread across the financial sector. Banks no longer want to lend to each other because they don’t trust that the bank they are lending to is actually solvent or ready to implode.

The Fed and the Treasury Dept. have now developed a plan to address the financial sector meltdown and the stock market shot up yesterday and today, but there is likely more bad news ahead.

Despite the bad not all is not lost. You should not move all of your retirement money to cash. The S&P 500 (the best measurement of “the market”) is still over 50% higher than it was 6 years ago. If you are having trouble sleeping or you are worrying a lot about your investments, I recommend you do the following:

  1. Check your retirement account balances and calculate how much your portfolio has declined.It may have declined less than you thought because most investors are invested more broadly then the Dow or S&P 500 indices which are often used to represent the stock market.
  2. Review your results with the downside risk inherent in your asset allocation.Your financial advisor should have reviewed this with you when he or she wrote your investment policy statement and reviewed it with you.If your advisor did not do this or if you need an advisor who can develop a good investment strategy for you go to www.napfa.org
  3. If your losses are within the range the advisor projected as possible but you still are uncomfortable then you may want to review your overall risk tolerance.You may be less risk tolerant than your thought.
  4. If your risk tolerance has changed, you may want to consider changing your asset allocation strategy.Understand that moving to a more conservative allocation may mean that you need to save more or be prepared to work longer.
  5. Understand that investing is for the long-term and that almost no long-term strategy that provides a reasonable long-term rate of return can protect you completely from short-term losses
  6. Also understand as humans we are wired to respond to short-term changes (positive or negative) and discount long-term changes that are more significant

For example, only a short-term increase in gas prices got us to reduce our gas consumption, not the possible larger but longer term effects of global warming.

Next blog, what to expect in the future.

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