Monday, July 7, 2008

The Bear has arrived

It’s official now: we are in a bear market, i.e. the Dow closed down more than 20% from it’s peak in October 2007. Interestingly, it was at this level in Oct. 2006.

As your financial advisors, we’re keeping a close eye on what’s going on. After a comparison of the market in general to the funds we recommend, we would not suggest changes at this time.

Stocks are down across the globe, with most indexes down in the double digits. The worst hit, as usual, are those that were the ‘hot’ markets in the past couple of years, e.g. emerging markets. This is why we don’t try to chase performance, or ‘shoot where the rabbit was,’ in structuring your portfolios. Our investment selection are performing as well as or better than their corresponding indexes.

Often clients who once thought they had a ‘high risk tolerance’ suddenly want to dump all their stocks in a bear market (which is officially where we are now). This is a principle reason we don’t base your asset allocation on ‘risk tolerance.’ Rather we try to structure your portfolio so that it is congruent with other risks in your life, and advise you on how much risk is appropriate in your portfolio.

For clients in retirement, who have followed our recommendations, you will see that there has not been much change in the total value of your portfolio over the past year, even if you are taking distributions from your investments. This is because 40%-50% of your portfolio is in Treasury bonds, and the increase in their value is largely offsetting losses in the stock portions of your portfolio.

For clients who are in the “accumulation” stages, this is the time when you are in the best position to significantly strengthen your portfolio. Not only should you stay in the market, the best move you can make in these times is to continue to add money to your stock portfolio. “Dollar-cost-averaging” (i.e. investing some money each month automatically on a monthly basis) is the best way to take advantage of a bear market.

Five years from now, you will look back and see that the investments you made during this period are among the best investments you will ever make in your lifetime.

However, if your personal circumstances have changed it may be appropriate to re-evaluate your asset allocation. If you feel ‘stock market anxiety’ right now, give your Cambridge advisor a call to review your personal situation.

Warm regards,
Bert Whitehead, M.B.A., J.D.

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