Am I OK?

One thing that we have learned from this market is that we all want certainty. We want answers. But we live in a world that is, at times, too complex to be predictable. The one certainty is that there will be uncertainty, and we have to prepare carefully and thoughtfully.

So that is a big part of my job: to be strong and steady, thoughtful and rational. I feel a deep obligation to you and am working hard to deserve your respect and trust.

You are most certainly asking: “Am I OK?” Is there anything we should do now? Should we have done something different? Here are my thoughts:

“Am I OK”?

In the big picture of things: you are all going to be OK. We live in the wealthiest society in the history of the world and in times like this I try to remind myself to be grateful for what I do have rather than focusing on what I may have lost.

I think most of you are going to better off than what it may feel like right now. There should be no need to sell any of the investments that have the largest losses any time soon (unless we can utilize those losses for future tax advantage), so what matters is not what happened this month or this year, but what happens over many years.

And I will be here to help.

Is there anything we should do now?

The prevailing emotion is fear of losing more money. This is not a time to make decisions based on emotion.

The rational side of my brain says that we are nearer to the bottom than to the top. Everything that I have ever read says these are the times to be investing: at the time when everyone else is selling, when emotions are running high, “when blood is running in the streets”. It is kind of bloody out there. Even though nobody knows what will happen next, especially in the short term, my recommendation is to stick with your existing strategy.

Should we have done something different?

Here are some of the things that I feel we did right:

In the past year or two, I have moved almost all of my clients into some more conservative investment portfolios positions than what we had prior. While they are down in value, I feel very good that these investments have held up better than the stock market averages.

We have income reserves of more safe, secure funds set aside for clients who are taking money out of their investments, and moved more funds to conservative positions for clients who are nearing retirement.

Here are some of things that we can improve on:

Determining how much risk to assume for each individual client involves hypothetical situations and is an art rather than a science. We can use this current experience to better determine a balance between your need for investment growth and your tolerance for volatility.

We can have a greater respect for the severity of uncertain events, rather than just the likelihood. Even if something is very unlikely to occur, if the impact is large, we will try to be better prepared.

As always, please give me a call toll-free at 1-866-786-2521 if you have any questions or simply want to talk about your investments.

Dollar Cost Averaging In a Down Market

The central idea: buy low, and sell high. It’s the oldest stock market adage, and in the wake of the recent selloff, dollar cost averaging may give you a method to capture lower prices today and come out ahead tomorrow.

How it works. Dollar cost averaging is a long-term investment strategy. It means investing in small increments. Through scheduled investments of as little as $50 or $100 per month, you buy investment shares over time, as opposed to pouring a big lump sum into the market. The method is often recommended to younger investors with longer time horizons, and investors who don’t yet have great wealth.

Why it is worthwhile in a bear market. First of all, when the market drops, the investor practicing dollar cost averaging isn’t hurt as much as the lump sum investor – as the lump sum investor holds many more shares of the declining fund or stock.

Second, a stock market downturn produces a kind of “clearance sale” environment. Picture Wall Street as a department store, with signs everywhere announcing 20% or 30% off. You have a chance to buy into some top-quality companies “on sale”. As a consequence of dollar cost averaging, you can now buy in at a lower price – and buy more shares for your money.

So what happens when the market recovers? As the market rebounds, you can pat yourself on the back. You were able to buy big at the bottom of the market, and as the market rises, you will have a lower cost basis and you can enjoy the associated gains. All the while, you continue contributing to a winning fund or stock. (Of course, the fact is that a lump sum investor may profit even more from a market rebound, as he or she may hold comparatively more shares than you.)

Perhaps most importantly, you stay invested. Dollar cost averaging gives you a regular, passive investment strategy as opposed to market timing. In a volatile market, the active investor can quickly become a frustrated casualty of his or her impulses – and foolishly “abandon ship”.

You might call this a tortoise-and-the-hare analogy. The active investor sprinting all over the place for spectacular gains is the hare; you, through dollar cost averaging, emulate the tortoise. It may not be the “sexiest” way to invest, but in a down market, it is a long-term approach well worth considering.

Learn more. We have witnessed a huge downturn in stocks. The question is … how are you positioning yourself to take advantage of the markets when things rebound? This is a good time to meet with a financial advisor – to review or rebalance your portfolio, to look past the headlines of the moment and toward your long-term objectives. As always, if you have any questions, please call me toll free at 1-866-786-2521.

What Does Warren Buffet Think?

Did you see Charlie Rose’s interview with Warren Buffett? On October 1, they met in San Diego for a brief chat about the economy and the financial markets. Earlier that day Buffett had announced that his holding company, Berkshire Hathaway, would invest $3 billion in General Electric. The great investor was realistic about today’s economy – and also optimistic.

“It’s like a great athlete that’s had a cardiac arrest.” That’s Buffett’s view of the U.S. economy right now. What led to the heart attack? He puts it as simply as he can: “300 million Americans, their lending institutions, their government, their media, all believed that house prices were going to go up consistently. And that got billed into a $20 trillion residential home market.”

Everyone leveraged up, and when “you have a 20% fall in value of a $20 trillion asset, that’s $4 trillion. And when $4 trillion [in] losses lands in the wrong part of this economy, it can gum up the whole place.” Now, with major financial institutions deleveraging, “only one institution in the world that can leverage up in [a] countervailing force to that, and that’s the United States Treasury.”

“An economic Pearl Harbor.” Dire words? Well, in Buffett’s view, that was what the last month or so on Wall Street had meant for the country. “In my adult lifetime, I don’t think I’ve ever seen people as fearful economically as they are right now. They are not wrong to be worried.” When something like this hits, he added, “You better spring into action with the best people you have.” He praised the initiative and vision of Treasury Secretary Henry Paulson – and FDIC Chairman Sheila Bair, in his view the unsung hero of the crisis. For the next administration, “it’s more important who the Treasury Secretary is than who the Vice President is.”

Will taxpayers get their money back? “I would bet on it.” Buffett feels that the Treasury Department’s plan to purchase hundreds of billions of mortgage-related assets will turn a profit given that they will buy them at market, and also “because the United States government has staying power and it has a low cost of borrowing.” The Bush administration’s plan is, in short, “the kind of stuff I love to do.” He noted that “if I could take 1% of that $700 billion pot and take the gain or loss from it and be their partner, and they would buy the stuff at market, I’d make a lot of money.”

“Financial weapons of mass destruction.” Buffett is no fan of derivatives. “They destroyed AIG. They certainly contributed to the destruction of Bear Stearns and Lehman.” He feels that if AIG had resisted the temptation of derivatives, it “would be doing fine today.” He later added that the Federal Reserve structured its $85 billion loan to AIG “very, very well … they have put themselves in a position where they are very likely to get their money back, maybe more … I mean I want to hire the guy that made that deal. He’d fit in well at Berkshire.”

The “choice” America is making. In Buffett’s assessment, the U.S. is “to some extent, making a choice between future inflation and getting off the floor. And we’re likely to have more inflation in the future as a consequence of the things we do to fight the present situation.” He cautions that “unemployment’s going to go up under any circumstances.”

“You want to be greedy when others are fearful.” Personally, Buffett sees many attractive opportunities right now. Cash reserves are important, “but when people talk about cash being king, it’s not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of [them].” In addition, Buffett reminds us of the inverse of his principle: “You want to be fearful when others are greedy. It’s that simple.”

“Oh, I think confidence will come back.” When Rose asked him what might “never be the same” about Wall Street or the American economy, Buffett replied optimistically. “We’ve got all the ingredients for a sensational future. It’s just that right now the athlete’s on the floor. But this is a super athlete.”

“I don’t want any viewer to [think] a magic wand exists in Congress,” he stated. “So they’re going to see some more bad news. But if we do this, we’re doing the right thing. And if [we do], the system will work over time.”

As always, if I can help you in any way, please call me toll-free at 1-866-786-2521.