Wednesday, October 8, 2008

Shouldn’t we be doing something?

Human nature is almost always wrong when it comes to investing. Many times, the most value a Financial Advisor can provide to a client is to help them GO AGAINST their human nature.

Our nature tells us to avoid injury by taking action in response to pain. In investing that means we want to sell that investment that has caused us pain and worry by going down in value. Investing is all about selling after prices go up and buying after prices go down.

The S&P just closed at 996. That is down nearly 22% in the last thirty days. It is down 36% from 1565 since one year ago. It is usually unwise to sell after a 36% decline!

“But I just don’t want to lose ALL my money”. A well diversified portfolio of quality investments usually does better than the market. So let’s look at some really bad markets: 2000-2002= 40% down to 833; 1972-1974=43% down to 65.

The worst market in my lifetime was 1972-74 and we are now UP 15 times from that point! ($100,000 in 1974 invested in the S&P500 might have grown to $1,500,000!!) The "price paid" to earn $1,400,000 in 30 years was to "suffer" two storms with declines of more than 30%. (This ignores dividends. With dividends reinvested, some mutual funds like American Funds Income Fund of America grew much more over the 30 year period: $100,000 growing to over $4 million-see July Blog)

Nobody knows where the bottom is exactly, however, this decline is now exhibiting most of the signals consistent with the normal historical pattern of maximum fear. It is probably near the ultimate CAPITULATION point. After capitulation comes APATHY for awhile, until some event causes a change in sentiment and GREED starts replacing FEAR.

If there were no hedge funds, it is possible that CAPITULATION occurred on October 7, but hedge funds cause irregular and unpredictable behavior. The rich and foolish folks in hedge funds have suffered huge declines from GAMBLING and want out… and the volume is big—it may take awhile for the market to accommodate their exit. Market action on October 8 seems to confirm this.

My best advice is to think of what you are experiencing as a sea voyage. We are in the middle of the ocean and a big storm has come up-with big waves. We are not going to turn the ship around nor are we going to abandon ship in the middle of the storm—we wait till the storm is over, make the necessary course corrections and continue toward our destination of financial freedom.

If you are a client of this firm, your investments were designed to survive storms like this. Your captain and crew have “many years at sea” and unlike the Titanic, you have not been sailing at maximum speed at night. The storm will end and the sun will shine again—be patient, stay the course and look for opportunities.

Please review the August Blog that discusses the Panic of 1907: