What’s a Terrified Investor Supposed To Do?

The Dow Industrial Average is down more than 35% so far this year, with an almost 679 point drop today alone.  There’s not doubt about it, but this market is in the midst of a full-blown panic.

Stocks are down, bonds are down or barely hanging on, oil and gold are down, real estate is down.  So given all the doom and gloom, what’s a shell shocked investor supposed to do?  Here are few tips to help you ride out the current market.

  • Don’t panic. Now is not the time to sell all your stocks.  If you were going to do that, the time was 12 to 18 months ago.  By selling now, you’ll simply lock in what is still a paper loss.
  • Remember your time horizon. If you’re young, this market will provide a great buying opportunity.  If you’re nearing retirement, you may want to follow the next piece of advice.
  • Scale back your equity exposure. Don’t sell everything, but it would be wise to have a little more cash than usual.  We currently have our clients with a lot more cash than usual so we can start buying again when the panic subsides.
  • Review your asset allocation. Some asset classes have gotten hit harder than others.  Now is a great opportunity to reallocate your portfolio without the tax bite you might get under more normal circumstances.
  • Talk to your advisor. If you haven’t spoken to, or heard from, your advisor, now is the time to be proactive and schedule an appointment to review the above items.  You’ll most likely leave that meeting knowing you’re doing everything in your power to minimize the damage of our current situation.

This has undoubtedly been a brutal market that has tested the stomachs of even the most seasoned professionals.  While you may have to make small adjustments to your current portfolio to reflect current circumstances, remember that your investment portfolio is built for the LONG TERM and that, over time, your patience and fortitude will be rewarded.

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Media Accountability

The other morning, as I was preparing to go to work, I was watching a local morning news telecast when one of the newscasters, commenting on the IndyMac bank failure, said she thought that our current economic situation was similar to the Great Depression.  I have a bone to pick with non-experts making commentary on a market situation they cleary don’t understand.

First, given the fact that this woman, who shall remain nameless, was under 40 years old, she, like me, has no real idea of what the start of the Great Depression felt like.  Second, with people already nervous about our current economic situation, it’s my opinion that her statement was, to say the least, irresponsible.

The situation at IndyMac bank, after its takeover by the FDIC was chaotic.  Panicked customers lined up at their branches in an effort to get their money out.  News reporters on site made sure to pan through the large crowds and interview those people that were particularly panicked that morning.  Clearly the intent was to throw gas on the proverbial fire, not provide objective analysis.

The local station I was watching reaches hundreds of thousands of viewers (I would presume).  If the actions of these reporters and new anchors resulted in a even a few hundred more people pulling their money out of the bank immediately, ultimately this makes the failure of IndyMac more expensive and that tab, you guessed it, is borne by you, the taxpayers.  Instead of playing up the impending Great Depression crap, these people should have been discussing the exact opposite that, unlike the Depression, we now have have protections in place like the FDIC, that economic theory and governmental oversight skill have improved substantially in the last 75 years and that we haven’t even technically entered recession, let alone Depression.

I’m all for freedom of the press as it’s one of the cornerstones of our society.  What I’m against, however, is irresponsible newscasters, who have no real business making commentary on this situation in the first places, causing additional stress to people and ultimately costing me money.

Oh, by the way, shares of financial companies had their biggest day in 40 years yesterday.

From Ben Bernanke’s Mouth to God’s Ear

In his testimony before Congress, Fed Chairman Ben Bernanke admitted that the economy is slowing and that it could actually contract in the first half of the year, even conceding that a recession was “possible.”

That’s the bad news.

The good news is that he, and many other economists, feel that with the recent stimulus package (i.e. rebates to taxpayers), plus the moves the Fed has made to help alleviate the credit crisis, will grow in the second half of 2008, stating “Much necessary economic and financial adjustment has already taken place, and monetary and fiscal policies are in train that should support a return to growth in the second half of this year and next year.”

Although not directly stating it, Mr. Bernanke also hinted that the Fed might not act as quickly to cut interest rates again, instead opting to see how the stimuli in the “pipeline” will play out.

Let’s hope Mr. Bernanke and the economists at the Fed get it right so that if we are in “recession” it ends up being a relatively mild and short one.

It’s Official

Well, it’s finally official. According to a Wall Street Journal economic-forecasting survey, conducted from March 7 to 11, a majority of the economists polled said that the U.S. has finally slipped into recession. This marks a huge change from the last poll conducted only 5 weeks before.

To add to the evidence, new data shows that retail sales dropped .6% in February, the result of the sub-prime credit crisis, falling housing prices and increased prices for staples such as food and gasoline.

According to Ned Davis Research and their study, 10 post-war recessions have lasted an average of 10 months. At the same time, during these recessions, the S&P 500 has seen the following returns:

Year Leading to Recession: -4.3%

Six Months After Recession Begins -4.8 %

One Year After Recession Begins +3.2%

Year After Recession Ends +14.4%

As you can see, the pain in the markets is short-lived and the recoveries are usually robust. Remember these are just averages and each recession has its own characteristics. Let’s hope this is a mild one with an ever better rebound!!!

Federal Reserve Trying to Hold Off Recession

The Federal Reserve today, in an attempt to improve conditions in the credit markets and, hopefully, help the economy avoid recession, opened its coffers and made $200 Billion (with a ‘B’) of highly-liquid U.S. Treasuries available to primary dealers, secured for 28 days. It also significantly expanded the types of securities that can be used as collateral for loans, allowing them to swap mortgage notes it can’t sell for government securities that can easily be sold to raise cash.

The hope from the Fed is that this action will bring some normalcy to a credit market that has all but dried up in recent months and that this cash infusion will allow banks to lend money to keep the economy moving.

The financial markets have responded well to this latest move, with the Dow, NASDAQ and S&P all up more than 3.5% today.

The other positive aspect of this move is that, unlike a broad interest rate cut, this strategic bump helps a specific portion of the market without stoking the fear of increased inflation.

Finally, to its credit, the Fed is being pro-active in addressing issues caused by the sub-prime meltdown and is using every tool in its arsenal to both (hopefully) contain and minimize the long-term impact.

Stay tuned to see how this plays out.