The Current Financial Crisis (Frequently Asked Questions)
The following link takes you to report published by Protiviti, a global business consulting and internal audit firm, that does a pretty good job of laying out questions and answers to what's been going on.
I think you will find it very useful.
http://www.protiviti.com/downloads/PRO/pro-us/Global_Financial_Crisis.pdf
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Important Client Communication on the Financial Markets From Kevin
September 25, 2008
To all Deckert Leahy Clients,
"These are the times that try men's souls."
The last 9 months have been tumultuous to say the least. The stock market has affirmed that the economy has slowed. The news we are being bombarded with refers mostly to the credit markets involving banks, mortgage companies, and investment bankers. There is NO question that the credit markets are a mess. The Federal Reserve Chairman, (Bernanke) and the Treasury Secretary (Paulson) are working on getting a plan through Congress to stabilize the credit markets and provide an outlet for these kinds of companies to get rid of their bad debt. Whether we approve of our government bailing out private business or not, at the end of the day it becomes the responsibility of our government to make sure our country's financial and lending systems do not fail. The result would be catastrophic. I believe the financial men in charge realize how serious this scenario is and will not fail us. It will take some time for our financial systems to heal, but in the end they will do so. They did after the tech bubble burst, the savings and loan crisis, the junk bond crisis, and even after the "crash" of September 1987.
Many of you are uncertain of the course of action to take in this environment. Allow me to offer some perspective. The answer lies more in the field of psychology than economics.
After all, in most economic activities, people buy more when prices are lowered and less when prices are raised. For example, retailers often announce lower prices in the form of a sale as a way of getting more customers to come into their stores. With stocks, however, the opposite is true. As prices rise, people tend to invest more. When prices fall, they want out. Reviewing the fund inflow/outflow charts of the past decade show us some important information. Money has POURED into the markets after periods of good returns when prices were high, with inflows reaching a record level just before the crash in 2000. Then as prices came down, money flows slowed dramatically as fearful investors became more cautious close to the bottom in 2002, just before the markets dramatic rise in 2003.
The cost of this self-inflicted wound is enormous. Investors consistently invested more after prices went up and got out after prices fell. The result is that over the last 20 years the average stock fund returned almost 12%, but the average stock fund investor earned only 4.5%. **
One way for investors to do better is to identify the forces that lead to this costly behavior and then try to avoid them. Chief among these forces is the media. When prices rise, the media rarely warns of a bubble and when the prices fall, they rarely declare a bargain. On the contrary, the media tends to amplify whatever is happening. Just as 2005 when real estate prices neared their peak, a Time magazine cover in June 2005 showed a man hugging his house next to the headline "Home $weet Home."
As the earlier information shows, in this battle between head and stomach, the stomach often wins out. As investors rush for the exit, prices fall, creating bargains for those who can keep their head and resist going with their gut. While avoiding the timing penalty does not mean that you will achieve the goal of buying low and selling high, at least it ensures that you will avoid the opposite.
Please realize the next 12 months are going to be rocky to say the least. The good news about capitalism is that one company does business with another because it wants to, not because it has to. In order for companies to do business with one another, they are going to HAVE to clean up their assets, or nobody will do business with them. It won't happen overnight, but eventually it will begin to improve.
Remember that asset allocation is diversifying your investments so that you are not hurt (or helped) by just one category of investment. The different categories will slow down some of the impact and volatility of the markets on your portfolio, i.e. the more conservative you are, and the less volatile your portfolio will be. A more conservative portfolio will, of course, also affect a rate of return. How you design will be the determiner of how return goes either up or down.
If you positively cannot sleep at night or have ANY questions of us, please talk to us, and we'll help guide you through these days.
A quote from Shelby Davis, a tremendously skilled investment manager who died in 1998:
"To sail across the ocean, you must balance making progress in fair weather with the ability to withstand the inevitable storms. Those who think only of the storms will never leave the shore. Those who think only of fair weather will never reach the other side."
Kevin Deckert CFP
President
*Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc (July 2008) and Lipper.
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What does all of this market turmoil mean to me?
Below are several common client concerns and associated articles that should provide some additional perspective on the topic. We hope you will find these helpful. As always, please call us anytime if you have concerns or questions. We are here for you - especially in these uncertain times.
"How Did We Get Into This Mess?"
"Should I Buy, Sell, or Stay Put?"
"Playing It Safe In A Down Market"
"Confidence in the Financial System"
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