While Congress passed the $700 billion asset purchase plan (bailout plan), the markets barely paused before wiping out the day’s gains and ending lower. What is missing? The legislation is passed, but the money is not flowing yet and the devil is still in the details.
Information should come to light very quickly, and the markets should start to see some of the solutions at work. Confidence is still lacking, and this missing element is crucial to our recovery. Banks lack the confidence to loan to one-another, much less to the public-at-large, so money is still not flowing like it should. Americans lack confidence the Federal Government understands the problems and whether they can respond in time and on target, thus their spending may be slowing. Plus, a change is coming to the White House one way or another.
Will the new team have the ability to get up to speed to support the recovery if underway or to make it happen if not? Rest assured, no one is sitting back waiting to see if the current tools being implemented will solve the problem or not. More items are being discussed, reviewed, considered, and may be implemented when deemed necessary or when they can make the most positive impact.
This year the investment markets have not only become far more volatile, but there have been few places to hide. Quality stocks have seen their values drop significantly. Names that have been around for decades and even centuries have vanished or are no longer independent. Many bond funds have produced negative returns as well as balance funds. There have been quarters where real estate funds have performed okay, while mortgage backed funds have hit the skids. Commodities (aluminum, oil, steel, and others) which for the last several years have provided average to above average returns have also dropped in value. While cash protects against loss, earnings are low and expected to go lower as the Federal Reserve and other worldwide central banks lower interest rates to spur economic recovery. These earnings may not meet the needs of those taking income and will not participate when the markets do rebound.
Most likely, future data will show the U.S. and other nations are in a recession. However, due to this current financial crisis, the management of investments now requires a different strategy compared to how they might be managed during a traditional recession. Traditionally, the allocation between equities, cash, bonds, real estate, and other asset classes are adjusted to mitigate short-term losses, while waiting for signals the economy is starting to recover. At that time, a gradual shift back to equities usually occurs in order to participate in the rally. However, at this time, there is such a high probability of action by the Legislature, Federal Reserve, FDIC, U.S. Treasury, as well as similar agencies in other nations that part of the recent declines may be recovered in a short but rapid move up in the markets. To move to bonds, cash, or other conservative holdings may slow or stop the bleeding but does nothing to restore even part of the lost value.
Even on Monday when the markets had passed 800 points down between monetary policy as well as being oversold, sufficient buyers came back into the market to erase 500 points of previous losses. We are not through seeing significant moves in the markets, but it appears the massive selling may be slowing. The volume of stocks traded on Monday did not approach the earlier high levels when the markets sold off. Thus, a move to quality may slow future losses and yet still participate in any recovery rallies that may occur.
In this case, a move to quality does not mean the funds you are in currently are not good. What it does mean is to move out of types of equities that may still see significant declines to those doing a better job holding their current value. It also means moving into those equity funds in a better position to move up. During most worldwide financial crises, the U.S. dollar generally becomes a safe haven. Thus, it rises in value against other currencies. Therefore, reducing holdings in international funds but adding to value and defensive U.S. equity funds, as an example, can be considered a move to quality. As the actions by the governments around the world are put into place and the markets respond, a shift to the more traditional allocations used during a recession may become appropriate.
Financial and market crises often provide the catalyst for a change in your portfolio. But, all changes need to be thought out and not in response to fear! During these times, you need to act with knowledge and planning, and not to comments made by financial personalities who are on the radio, TV, or in the newspapers. Many of whom do not hold financial licenses, and in some cases never have. They are considered entertainers by the regulators, thus the comments they make during their shows are not subject to compliance oversight.
Here is a case in point. On Monday, I heard a number of comments that Jim Cramer of Mad Money said to sell everything. I made a point to listen to his show that evening to see what he had to say. First, everyone should pay attention to his opening remarks. While I am not sure he says it at the start of every show, I heard it Monday evening. “My job is not only to entertain you, but to educate you.” Jim Cramer is an entertainer. First and foremost, that is what drives his ratings and thus his show.
While I did not hear his early Monday morning interview, during his show he repeatedly commented that he did not say ‘sell everything’. Clearly, he may have been misquoted, and a reaction occurred to something he said earlier in the day. He did comment that if someone had 100% in stocks, then clearly they needed to sell some of their holdings to create cash for those items needed in the next five years. Remember, his entire show is about stocks and being diversified among the stocks an investor may own. Stocks or equity funds are only one piece of a diversified portfolio. And, his focus is clearly only on individual stocks and fails to recognize that most individuals are already diversified into cash, government bonds, corporate bonds, balance funds, and other asset classes that provide a conservative balance to the ownership of individual stocks. Someone holding ten, twenty, or even forty percent of their portfolio in stocks does not necessarily need to sell twenty percent to create cash, if a portion of their remaining portfolio has conservative elements to it. Just be cautious when listening to these personalities. In less than a minute, they cannot make appropriate recommendations without all of the insight and knowledge of your personal holdings, income, objectives, concerns, and goals.
Opportunities are being created today, and this will bear out one or two years into the future. At that time, we will look back to compare stock prices, and I imagine we will discover many companies today are trading at prices significantly below their future and potentially their current value. Does this mean you need to throw out mutual funds for individual stocks? No. But for those of you who have the time to wait for the recovery and can add stocks to your portfolio while still holding a portion in mutual funds including conservative holdings, you may want to consider adding key stocks over the next few days, weeks, and perhaps months. There are many stocks paying dividends equal to money market rates. And when the market moves up, you will already be in the market and most likely participate in the rise.
Be careful though. Stocks can still drop from this point, and you must be willing to ride through a decline and not be in a position where you are forced to sell.
If you already own stocks, and they are now trading at lower prices, it may be appropriate to average down your basis. If you cannot do so for all of your holdings, you may want to evaluate which stocks have the better chance of an early recovery and purchase additional shares of those stocks to bring down your average cost. This will enable you to sell those shares at a lower price in the future and still recover your investment and perhaps make a profit.
Knowing when to do this and which stocks can still be a difficult task. While no financial advisor is perfect, most have the tools to make sound and educated decisions. Diversification is still the key, and your investment portfolio should never be too heavily weighted in a single stock.
Please remember, our economy has seen many crises since the 1900s, and the American people as well as our leadership have always risen to the occasion. In February, I wrote an article entitled Headlines of Our Past - Impact on the Market. I covered many of the major headlines from the 1930s through the 1990s. Our markets are higher now, and I imagine will be higher still when we look back on this first decade of 2000. Investing is long-term. Those taking advantage of difficult times generally have the better performing portfolios. They were not scared out of the market at the bottom, nor did they wait to buy into the markets when the euphoria may imply it is nearing the top. For each seller of stock today, there is a buyer. Take a look at the holdings of the equity mutual funds in your portfolio. While they may not be up to date through this week, they should indicate many of the positions held during the last quarter. In most cases, you should recognize many of those names. And for the most part, you own a significant part of America.
For those needing assistance during this time, find a Certified Financial Planner and sit down with them to discuss your future and your portfolio.
HOW TO REACH THE WRITER
Would you like a response to a financial question? Send your question to Doug Horn, 115 W. Broadway, Maryville, TN 37801. Be sure to mark your envelope Money Matters.
Doug Horn, CFP, is an area financial planner with more than 24 years financial experience and founder of Quality Financial Concepts, located in downtown Maryville on Broadway.
Doug Horn, CFP, Registered Investment Advisor in Tennessee and Texas and Registered Principal, Branch Office of and Securities offered through CUE Financial, Member FINRA, SIPC.