Saturday, November 22, 2008

Time Bandit


Little did we know, the US equity markets would return to 2002 levels last week. Although the markets staged a late day rally on Friday, the Dow finished the week down another 5%. This brings the yearly performance to -41%.

Six years of progress has essentially evaporated in a few short months due to our nations credit consumption mentality (individuals and corporations). Thus, confidence in government leadership and corporate America is extremely low.

All is not lost though. A recent quote from Economist Allen Meltzer puts things in perspective:

"Capitalism without failure is like religion without sin - it just doesn't work!"

Let's look at a few statistics courtesy of Ned Davis Research pertaining to market declines in the Dow Jones Industrial Average from 1900 through 2007.

  • "Moderate" Corrections (10%+ loss) have occurred 117x since 1900.

  • "Bear" markets (20%+ loss) have occurred 31x since 1900.

  • The average duration for both of these markets is 106 days and 367 days, respectively.

  • The average duration is 1.1x per year and 0.3x per year respectively.

So, where do we stand now? The current market decline started in October 2007 when the Dow was trading at 14,000. The average bear market duration of 367 days has now been surpassed. Nobody knows when the tide will turn. But, we do know bear markets have occurred before and unfortunately, they are part of the investment process. There has never been an event we didn't survive and the capital markets at some point will turn in anticipation of the economic recovery.








Saturday, November 15, 2008

Shelter From the Storm


Taking shelter from a storm can be advisable. However, the type of shelter you take can make a big difference. Running from a thunderstorm to stand under a lone tree isn't always a good idea. Not only is the tree prone to lightning strikes, but you become somewhat stranded. When do you make the next move to a better location?

The stock market is posing a similar dilemma these these days. Market declines & daily volatility is causing individuals to question their asset allocation and investment strategy. The Dow Jones Industrial average has decreased from 12,000 to 8,500 in a few short months. This translates to losses in real dollars on quarterly financial statements and heightens anxiety levels.

Before going into battle, military leaders will make 'what if' decisions before the potential event ever occurs. This allows for clear & concise thinking ahead of time. Making decisions when your pinned down by enemy fire can be troublesome.

Your investment plans should be the same. Good financial planning starts on day one. Knowing your risk tolerance, time frames and investment objectives should be clearly stated. This allows for good asset allocation and implementation of an all weather portfolio. This doesn't mean your portfolio won't lose value during challenging periods, but the key ingredients to future success are in place.

Changes to your portfolio should be made during the review process. Should life altering events take place (i.e. loss of a spouse, divorce, marriage, etc.), changes are often warranted. So, while it may be raining at the moment, have faith that clearer skies will eventually prevail.


Wednesday, November 12, 2008

Financial Crisis - Historical Perspective










The current financial events in the news are all well documented. In the era of 24/7 news coverage, we can all get our fill of bad news instantaneously. The events taking place in 2008 are unprecedented.... or are they? Every financial event is unique to its time & place. And, there is no doubt this time around there is a simultaneous nature to what is going on. However, many of these same issues have occurred throughout history. So, on one hand, the issues are new - especially to investors who started a mere 10 years ago - but, to old timers, this is more of the same. Let's have a look:

  • Franklin National Bank Collapse (1974)
  • Chrysler Near Bankruptcy (1979)
  • Continental Illinois Bank Collapse (1984)
  • Drexel Burnham Lambert Failure (1986)
  • Market Crash of 1987 (22% decline)
  • Orange County (CA) Bankruptcy (1994)
  • Barings Bank Collapse (1995)
  • Long Term Capital Demise (1998)
  • September 11, 2001
The list is rather extensive, but these are only a few examples. What's old is new again? Perhaps. Let's change a few names and see what changes: Washington Mutual, General Motors, Bear Stearns and Osprey Capital. Any difference? Nope. Been there, done that.

Capital markets have proven time and time again to be very resilient & efficient. The recovery times will always vary. But, companies with clean balance sheets (i.e. no debt) and positive cash flows will always be rewarded. Investor emotions can sway short term valuations, but fundamentals always dictate in the end. There is still a lot of uncertainty in the market place, but have faith, bad news isn't permanent. Once calmer minds prevail and emotions subside, investors (individual and corporate) will return to making rational financial decisions.












Monday, November 10, 2008

Financial Planning 101

Let's Get Started - The purpose of this blog is to educate, inform & help you make smarter financial decisions. The industry can be a confusing array of products & services. Everything from investments to insurance products can appear to be a sea of propaganda. However, it doesn't have to be this way. With an equal dose of time & patience, you can learn all the basics about financial planning and then some.

As a Certified Financial Planner (CFP), I've had the privilege of helping hundreds of people make informed decisions over the last 12 years. My work has included everything from budgeting to retirement planning. I've even managed to get my name in print a few times... TheStreet.com, Gannett News and the Chicago Tribune to name a few.

Each week, I'll post a new topic for discussion. Please feel free to ask questions or propose future subject matter as well.

The more informed you are, the better your decision process... the truth shall set you free.

Please note: My blog is NOT to sell financial products in anyway. It is simply a journalistic way to help individuals & families make better financial decisions.