Dow Reaches Bear Territory

With it’s close today at at 11,344.33, the Dow Jones Industrial Average is now officially off 20% from its peak on October 9, 2007.  At a 20% loss, that means that this is now a bear market.

A wise man once told me that bear markets are always preceded by and followed by gains.  Bear markets are never fun since I don’t know too many people who like to lose money.  The problem right now is that our last bear market of 2000 – 2003, one of the longer ones on record by the way, is still fresh in people’s minds and that, coupled with the rising cost of gasoline and food, is causing more anxiety than the average bear market.

What’s a poor, frightened investor supposed to do?  Well, a number of things come to mind:

  1. Review your asset allocation to make sure it’s still in line with your goals.  If not, you may be able to re-allocate it with less of a tax consequence by ‘harvesting’ your losses to offset gains.
  2. Consider alternative investments that have little or no correlation to the overall market.  Have you noticed recently that, each time oil rises, the market falls?  By having a portion (and let me emphasize this again – A PORTION) of your portfolio dedicated to commodities, foreign exchange, real estate and other ‘alternative investments’ you can insulate your portfolio, reduce its volatility and even improve your portfolio’s performance over the long run.
  3. Look for buying opportunities.  If you liked a stock or mutual fund 7 months ago and you still think you want to own it, it’s currently on sale so you may want to buy now.
  4. DON’T PANIC.  Bear markets do end and you want to make sure that you don’t panic, bail out at the bottom, just to watch the market turn around a short time later.

The current stock market conditions are not much fun for anybody.  The important thing is to keep focused, don’t panic and be ready to pounce on opportunities that may arise.


Why Alternative Assets Make Sense

I had an interesting conversation this afternoon with a colleague that specializes in foreign exchange trading.  Now granted, he was trying to get me to move some client money to his firm, and felt that his approach is ideal for a portion of our portfolios.

Surprisingly, unlike a lot of financial planners and certainly contrary to many equity portfolio managers, I actually agree that, for a portion of client portfolios, what have traditionally been called “alternative assets” like real estate, commodities, foreign exchange, hedge funds and private equity, are an integral part of a well designed portfolio.  In fact, there are numerous studies over the years that have shown that, although they can be volatile in the short term, alternative assets, over the long term actually REDUCE portfolio volatility and in INCREASE overall return.  That’s right, you heard it right, portfolio volatility is reduced and overall return is improved.

Over periods of time, like the 1990’s traditional assets like stocks and bonds have outperformed “hard assets” like gold and oil.  Over other periods, the 1970’s for instance, the hard assets have outperformed.  With exposure to BOTH types of assets, your portfolio should perform better over time than a portfolio built around one or the other.

The moral of the story is, don’t be afraid of these other assets.  Although they’re not advertised on TV like some other asset classes, they can prove to be quite valuable to your long term growth prospects.