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San Clemente Journal

Financial News - Wealth Trends

Nov 01, 2009 10:54PM ● By Don Kindred

by Michael Vandenburg, CFP®

This has not been an easy market to navigate lately. In fact, I would say this has been the most difficult market I’ve seen in my lifetime. I’ve seen worse downturns, but we haven’t had broad declines affecting every major asset class like we are in today. Even the traditional safe havens are not safe anymore. For a short period, treasuries were actually priced to have a negative yield. Real estate and other alternative asset classes have also been declining and show no signs of getting better any time soon. The credit markets lack of liquidity has caused bonds to decline almost as much as equities. Gold and other commodities have seen dramatic volatility and have increased in risk to the point that they are not safe either. The only safe haven from this current mess is cash; and by cash I mean savings accounts at well financed banks, or money markets at brokerage firms that have solid balance sheets and do not hold inventories of bonds and stocks to sell to their clients (ex. Fidelity, Vanguard, Schwab). 

We did not get into this crisis overnight and it will take some time for the dust to clear. Even with the government coming to the rescue it will take a long time to unwind this mess we’ve gotten ourselves into.

Let me try to shed some light on our current situation. 

The credit crisis was not a Wall Street mess that needs to be bailed out, the blame belongs on all of us, from the people that over-borrowed on houses to the people that allowed this to occur in the first place. Part of this mess comes from the fact that leverage is a normal part of the credit process; you borrow money from a bank for a house, which the bank did not have, they borrowed it from someone else. That other bank also borrowed it from someone else, which is to be eventually bundled together with other loans and packaged on Wall Street and sold to investors. This is the first layer of leverage. These bundled loan pools are also leveraged so that for every dollar invested, there can be anywhere from ten to thirty dollars worth of loans. This adds another layer of leverage. The investors also purchase these pools of mortgages using leverage of up to thirty times what their actual assets are. This gives us yet another layer of leverage. Are you starting to see why we are in so much trouble? Unfortunately this is just the tip of the iceberg, but you get the picture. We are currently in the process of de-leveraging these assets and nobody wants to buy them, which freezes up the credit markets for everyone. So what are investors to do in a market like this besides putting all of their cash in their mattress? Here are a couple suggestions to help guide you through this mess.

I know I have said this before but it is worth repeating over and over again. You need to have a plan for your money. This includes risk tolerance, asset allocation, retirement needs, estate planning, college planning, and anything else that will require major funding from your nest egg. Having a plan will always give you something to refer back to so that you can see where you are in relation to where you need to be. Having the proper asset allocation mix for your goals will help you decide where your new money needs to go or how to rebalance to the proper mix. Underperforming asset classes will be purchased, forcing you to buy low, and over-performing asset classes will either be left alone or taken away from to add to the under-performing asset classes forcing you to sell high. 

Don’t act out of fear or emotion. This is one of the worst mistakes investors can make. If you do panic and sell because of the downturn it is possible that you could save yourself a little money and get some peace of mind in the short-run. But what happens when the market does come back and you are left with another very difficult decision of when to get back in. Trying to time the market is nearly impossible for even the best managers. Most likely you will lose at least some of the upside trying to figure this out, which will offset anything that you may have saved by getting out. If this sounds like you, then you need to put your investments into autopilot mode, making regular investments into a diversified portfolio automatically every month or quarter the same way most people invest in their 401k. If you do make adjustments to your portfolio, use your plan as a guideline and only do so occasionally. Rebalancing more often than annually can be counter-productive and may incur unnecessary taxes or expenses. 

If all else fails to calm you then let history be your guide. We have been through many tough times before and we have always come back swinging. If you are indeed investing for long-term success, then you should know that declines like this happen and are something that investors occasionally need to live through. b

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