Wednesday, April 2, 2008

Could Chicken Little Be Right? (March 2008)

To: Cambridge Connection Clients
Could Chicken Little Be Right?
Being a long-term investor is like being on a roller-coaster: The ride up is exhilarating, but the ride down is scary! Here are the answers to some of the questions you may be thinking:
1. Is my portfolio safe? Yes, because you have a substantial amount of your portfolio in US Treasuries. They are very strong, and increasing in value, because there is a world-wide flight to safety. Treasuries are the ‘high ground’ in the investment world…actually more like the top of Mt. Everest.
2. What should I do about the falling dollar? Your portfolio includes a significant allocation of foreign stocks, which are not hedged. All other things being equal, the value of these increases when the dollar falls. This protects you some degree against the falling dollar, but not against a world-wide recession.
3. Almost all my money is at Schwab: is it safe? Your accounts at Schwab are protected by SIPC insurance of $500,000, plus additional insurance on $150,000,000 ($600,000,000 in aggregate) provided by Lloyds of London. They are not government guaranteed, but the only way you could lose anything is if a) Schwab become insolvent, and b) your securities were missing, and c) your accounts exceed the insured amounts. This is highly unlikely = you have a better chance of winning the Big Lottery.
4. What is the most important thing I should do right now? Don’t panic. This is a normal market cycle. The worst thing to do is to jump out. The stock market is volatile, and we will be advising some clients to start ‘Dollar Cost Averaging’ into the market since prices are so low. But of course we don’t know how low they could go.
5. Should I buy gold now? Many of our clients do own gold, but it’s not the right investment for all clients. Give your Cambridge Advisor a call if you would like to consider it.
Rest assured that we are watching this situation continually. We are concerned about the safety of municipal bonds, but we moved those out of client’s account a couple of years ago. Call us if you have any questions.
PS Schwab has lowered the minimum grant for Donor Advised Funds to $100 from $250. The minimum to set up an account has also been lowered to $5,000 from $10,000.

Bert Whitehead, MBA,JD

No comments: