WHAT TO EXPECT WHEN YOU'RE  EXPECTING... A FINANCIAL DISASTER
 
As any parent will tell you, no matter how much preparation you do in advance of bringing a new person into this world, you will still be surprised and amazed at what you could not possibly prepare for.  So too it is with wealth management and investment portfolio management, as the past several months have shown us very clearly. 
 
So, you may be wondering why the stock market (as measured by the S&P 500 Index) launched over 10% higher last week, and nearly 4% more in the first four days this week. No doubt the media and market pundits will try to attribute this event to some piece of news - banks talking about returning to profitability, drug deals, er, mergers in the pharmaceutical industry, a sense of greater international cooperation on the economic crisis, etc.  There are two things we do know about what happened last week:
 

1. For those participating in the market, there was more buying pressure than selling pressure.  That is what makes stock prices go up.
   
2. The market rallied just at the point at which pessimism had reached overwhelmingly negative levels, and this is something that has happened over and over again throughout history.  Call it the "it's always darkest before dawn" theory of investing, and it has been quite reliable over time, in our assessment.
   

 
So the point of this issue of GreenThought$ is deceptively simple: be very careful about drawing all-or-nothing expectations about the future direction of the financial markets, and also understand that the markets are not simply a reflection of today's economic headlines. 
 
I have commented to some people recently that what has happened in the stock market since the summer was, at its core, the identical emotion that drove the dot-com stock bubble in the late 1990s.  The emotion was the same, but the direction was the exact opposite.  Back in the 1970s, investors referred to a set of leading companies as "one-decision stocks" - you bought them and never had to think about selling them, as they were so solid and enduring.  The list included American Express, Eastman Kodak, GE, J.C. Penney, Polaroid, and my wife's late grandfather's favorite, Joe Schlitz Brewing.
 
You may have a laugh at the expense of these now fallen or forgotten franchises, but in many ways, we are now experiencing the Nifty-Fifty phenomenon in reverse.  While no one knows how much worse the economy will get, and how poorly the stock market will react, that does not mean it's a given that prices will fall continuously.  What seems far more likely to us from the hours of research and contemplation we've spent over the years is this: you will see bigger swings in the value of your all-stock portfolio (up and down) in the coming months and years than you have seen in your prior investment experience.  It follows that simply rooting for the market to go up, or waiting to "jump back in with both feet" is a risky strategy.  So is sitting around in cash waiting "until it looks good to invest again."  The market is up over 14% in less than two weeks - does it look good now?  If it goes up another 10% soon, will it look good then? 
 
You cannot afford to make absolute, resolute decisions in an investment world that cries out for strategies that emphasize moderation.  We have spent our years at Emerald finding ways to "invest with one foot in the door, never two."  In other words, one needs to know in advance of taking action what one will do if one is wrong.  Use of alternative asset classes alongside traditional ones, use of liquid hedging techniques, and stop orders are all possible ingredients of this approach.  Because at a time when the mainstream media is full of attention-grabbing comparisons to past recessions and bear markets, it may be helpful to know that during the only market decline worse than the current one, 1929-1932, the Dow Jones Industrial Average (S&P 500 did not exist then - but Schlitz did!) had several up moves of at least 20%...and several down moves of at least 20%. 
 
There is growing evidence in our opinion that we are transitioning to that kind of bouncy market.  If so, investors and their advisors had better figure out what they want, and how to pursue it in ways that avoid the emotional byproduct of all-or-nothing investment approaches.  In other words, have a well thought out investment process, instead of trying to figure out when to, as the old Schlitz slogan said, "Go For the Gusto." 
 
The information herein has been obtained from sources believed to be reliable, but Emerald Asset Advisors, LLC ("Emerald") does not warrant its completeness or accuracy. Prices, opinions and estimates reflect Emerald's judgment on the date hereof and are subject to change at any time without notice. Any statements nonfactual in nature constitute current opinions, which are subject to change. Projections are not guaranteed and may vary significantly. Further information on the firm and its advisory fees may be obtained from the firm's Form ADV Part II, which is available without charge upon request. Complete descriptions of all Emerald's products and benchmarks are available upon request.

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