Thursday, March 27, 2008

Market Watch (January 2008)

Market Watch

For those of you who are watching the financial markets, this is a must read. For those who have learned to be comfortable tuning out the markets, you can disregard this…

Recently the world markets have been very volatile, trending downward in stocks with unusually wide swings almost every day. Politicians and the news media have turned their attention from the war situation to the economic arena. Clients may be bombarded with advice from all quarters urging them to take action now: Buy! No, Sell! Get into Asia! Get out of all stocks! Don’t buy bonds now, the yield is too low!

We have used the principles of Functional Asset Allocation through the ups and downs of market cycles (see ch. 8 in “Why Smart People Do Stupid Things With Money”). Understanding how to apply the principles during times of market turmoil strips decisions of emotional content and relieves the tendency to believe whoever we talked to last. Here are some pointers:

Your portfolio has been structured by your Cambridge Advisor to achieve balance. Your bond portfolio, especially a treasury ladder where you have sufficient assets, protects you from deflationary times like these.
Your real estate, especially if you have a fixed rate mortgage, protects you against inflation (which is still increasing!).
Your stocks and equity mutual funds propel your portfolio during times of prosperity.
The balance of these three asset categories is based on an assessment of your personal risk profile, not exogenous changes in interest rates, stock market moves, the value of the dollar, etc.

Don’t even think of jumping out of the stock market. Generally the right thing to do is to continue ‘dollar cost averaging’ (adding a set amount each month) into the stock market, keeping large cap US, small cap domestic, and international stocks in proportion. If the stock market continues to drop, know it will eventually turn around and the stocks you buy now will be among the best investments you make in your lifetime.

Even though interest rates seem low, continue building your bond ladder. This is especially important if you are past the accumulation stages of the financial life cycle.

If you have a vacant house, stop ‘trying to sell it.’ Cut the price and get it sold. Your carrying costs will bury any additional money you think you might get by holding onto it.

That having been said, if you are losing sleep over your financial situation, now is the time to call your Cambridge Advisor for a consultation. We have found that often when clients get upset about the ‘market,’ they are actually concerned about changes in their personal situation (e.g. getting laid off, unforeseen medical expenses, etc.) which warrant an update of their risk assessment. In these cases, a shift in your portfolio may be advisable.

We hope this Market Update will calm your concerns: we are watching your investments on an ongoing basis. Nonetheless, please call your Cambridge Advisor if you have concerns because of changes in your personal situation which may need to be reflected in your portfolio.

Bert Whitehead, MBA, JD