By Jerry Lynch
Founder, JFL Consulting
Y
ou are probably aware that there are three major issues right now in the market. Lehman Brothers has filed for Chapter 11 bankruptcy protection, Bank of America bought out Merrill Lynch, and AIG is in for a major cash infusion.
So what should you do?
· Make sure if you have cash in bank accounts, make sure that there is less the $100,000 in order to qualify for FDIC insurance. By structuring ownership differently, you can increase that number substantially (i.e. an account in my name, my wife’s name, and a joint account would qualify me up to $300,000)
· Don’t panic- we have never supported market or sector timing, but rather an appropriate asset allocation strategy with a diversified portfolio. While we have market exposure, we are not overly concentrated in the financial services sector.
· Still think long term. The most important thing in investing is having a long term approach. Don’t let short-term situations effect long term strategies.
Here is a sample of what I'm sending to my clients:
As you have witnessed over the last couple of months, the stock market continues to be extremely volatile. It would certainly be nice to know when the stock market has reached a new height and it is time to sell all of your positions and when it is best to invest your money back into the stock market because it has reached a new low. It would be ideal if we could predict these situations with 100% accuracy.
Unfortunately, this is much easier said than done. Nobody knows exactly when the stock market reaches a top or bottom. In many cases, when the stock market begins to recover, it can increase in quick bursts. Often by the time people realize the stock market has started its rebound they have missed the opportunity to participate. Unfortunately, even if you only miss one day, this is often critical and your returns may be compromised.
For example, the S&P 500 gained 11.8% per year between 1982 and 2001. However, only an investor who stayed invested for the entire period managed to earn that large rate of return.
Let us example the specific statistics.
If you invested $10,000 in 1982 and stayed invested the entire time, you would have $93,075.
However, if you missed the 10 best days during that time period, the value of your investment would only be $56,044.
If you missed the 30 best days, you would only have $28,144.
However, if you missed the 50 best days out of all of those 19 years, you would have only $15,780.
The source of this information is from a study done by the University of Wisconsin – LaCrosse. The lesson we can learn from this story is one of the best ways to successfully invest is to determine your goals and risk tolerance and then invest and stick with your financial goals rather than time the market!
If you observe the wealth building techniques of two very successful investors, Warren Buffet and Sir John Templeton (who passed away earlier this year), you will notice that both of these legendary investors often reaped great rewards at times when others may have panicked. Their disciplined and non-emotional approach to owning and staying invested even during difficult times certainly paid off for both of these billionaires.
Our goal is to understand your needs and goals and invest your capital toward meeting these needs and goals. We are not here to guess or time the market. While we are concerned as well over the recent market volatility, please remember some of the ideas we covered in our last quarterly newsletter:
* First, please remember we have been through this before.
* Next, think about the fact that it is time in the market, not timing the market that has built wealth.
* Also consider that even in difficult times it is prudent to stay with a diversified combination of investments and a long-term strategy.
Having said all this, there are two things we would like to remind you of at this point:
- What is my advisor doing?
We are continuing to monitor your portfolios, the stock market and various situations that can affect your financial health. We take a non-emotional, intelligent and pragmatic approach toward doing what is best for you and our other clients at all times. In simple terms, we are very concerned about the market volatility and are monitoring this situation very closely!
- What should you as an investor do?
As always, we are available to discuss your individual situation and how this uncertain environment affects you. We will be meeting with you during our regular quarterly meetings to discuss what, if any, changes should be made to your individual portfolio to try to take advantage of opportunities to best meet your goals. Should you need to talk sooner, please call us.
It’s times like these where financial professionals like myself need to thank investors like you for allowing us the opportunity to assist you in meeting your long-term financial goals. As we continue to be tested by this stock market, please be somewhat comforted in knowing that we are here to help you navigate through these confusing times.
- Jerry