| Commentary - January, 2008
It perhaps is an understatement to say that times in the economy and the marketplace are interesting. As of this writing, the stock market has suffered its worse start to a year in history. Small cap stocks are down over 20% from their highs, thus qualifying for bear market status. Heck, times are so bad that even Congress and the President are considering working together.
It should come as no surprise that 2008 followed lockstep with 2007. Just because the calendar turns does not mean that the world turns. The year 2007 reminded the investing world that even the supposed smartest of the smart sometimes get it wrong. The word “subprime” suddenly became a symbol for all things wrong on Wall Street. Institutions that represent America’s financial might suffered staggering financial losses; several of these top-tier financial institutions required capital injections from foreign governments and entities. CEOs of the largest financial houses found themselves without a job. Innocent employees are losing their jobs.
Meanwhile, our Federal Reserve is busy lowering interest rates in a feverish attempt to jumpstart a certainly-slowing economy. Our government wants to send us $600 per single-member household; $1,200 for us married couples so that we may spend it and help the economy. Oil and gas prices are choking the American consumer. Prices for household goods continue rising, taking a bigger bite out of our already-fragile budgets.
Yes folks, times are apparently quite dark right now. It is these dark times that require us to remember Economics 101. What we are experiencing is simply part of a natural business cycle. Times get good, the market celebrates, then the party ends and times get bad; then things pick up and the cycle begins again.
If the party was especially wild, the resulting hangover subsequently can be especially bad. And this party was especially wild: lenders handed out money to anyone who could sign their name on loan documents, individuals took loans that they never could afford, and the financial institutions made it all possible. So it should come as no surprise that this party had to end.
We at FFA scratch our heads when we hear people say “this time is different; times are really, really bad.” Well, let us assume that is true. The important question to then ask is, “do I need to worry about it in regards to my/our investment portfolio?” Our answer is a resounding, “No, you do not need to worry about your portfolio.” Why?
Perhaps a quick review of our investment process is in order. All of our portfolios are spread across multiple industries, multiple size companies, multiple geographic regions, and multiple portfolio managers. Further, all of our portfolios own bonds and money markets which have performed superbly of late. Each investment holding in our portfolios is tried and true; the mutual funds that we own are run by incredibly-talented and smart individuals. The vast majority of the decision-makers at our fund companies have the majority, if not all of their wealth invested in the same funds we are invested in.
Our portfolios have been overweighted in large company stocks and have been underweighted in small company stocks; this decision has helped us avoid the dramatic drops that make the headlines. None of our portfolios were exposed to the subprime debacle – that marketplace was far too risky for our tastes.
Wall Street often tells us that a rising tide lifts all ships. This means that when times are good, even bad investments tend to rise with the market. What is happening now is just the opposite: a waning tide lowers all ships. Some of our great holdings have dropped along with the market – this is part of the price of the ticket to be in the equity markets. For those who are contributing to retirement plans, this lowering tide is advantageous: lower share prices mean more shares purchased with your contributions. This process, technically known as dollar-cost averaging, is the bedrock of sound investing strategies.
Another factor to remember as we are barraged with negative news by the media: all of our portfolios are custom-tailored to each client’s investment time horizon and risk appetite. Those whose goals are short-term have no money exposed to the market; those whose goals are years away have years for the market and economy to recover.
We recently saw a quote that seems very appropriate in these times. “If you want to reduce the volatility in your portfolio, check the values less often.” Many of us can remember the days when our retirement plan statements came once a year; when the statement came, we checked the value and moved on. Today, we can check the values at any hour of the day. The news is fed to us from multiple sources and the media is on a feeding frenzy with bad economic reports daily.
We counsel you if you are at all concerned, to take a deep breath and know that this too shall pass. Your portfolios are invested in a tried-and-true manner that has survived much worse times than now. If you see “losses” on your statements, know that these are just paper losses (just as when you see “gains” on your statements, these are just paper gains.) No losses happen unless you direct us to sell – and with our goals being years down the line, selling at a loss is a surefire guarantee of not achieving our goals.
If you believe that capitalism has not died, that the health of the economy today has no bearing on your goals years in the future, then you believe in the marketplace. Buy and hold works; reacting to the media fails, every time.
As always, we thank you for your continued trust and confidence and encourage you to contact us with any questions or concerns.
Best Regards,
Berthann & Craig
www.finfreeadvisors.com
(c) Financial Freedome Advisors
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