Keeping up when the market is down

Doug Horn

When years like 2008 or the first quarter of 2009 occur, investors are reminded that average returns can include quarters or years with very large losses, as well as very large gains as occurred in the balance of 2009. During every economic downturn, there are always opportunities that arise and investors who are properly positioned can act upon those opportunities.

The financial crisis of 2008 and first quarter 2009 actually provided more opportunities than most. While there were companies that went out of business and whose shareholders lost everything, most were able to survive the downturn.

While each investor has their own unique needs, and as such a rule-of-thumb or standard plan cannot work for everyone, there are some things that can be done. Every investor should have an emergency fund that will meet their cash flow needs for at least six months if they are working and approximately two years if they are retired. Those still in the workforce generally are too young to start drawing Social Security or to tap their retirement accounts without severe penalties. Thus, the amount set aside must be able to meet all spending needs for each month and be able to last until a new job is found.

The retirees’ reserve must last longer since in most cases they are relying upon their investments for a portion of their retirement income. Since a portion of each month’s expenses are met with pensions, rental income, or Social Security income, the income from investments generally fills the gap. The emergency fund should be managed more conservatively than the balance of the investments. For some, it may be easier to have a separate account rather than a conservative allocation within the same portfolio. Having these resources should enable the investor to draw down the emergency fund when needed, and the fund should avoid significant losses during economic downturns. This will allow the investor to avoid selling other holdings at a loss.

The balance of the investments should be managed based upon current market conditions and future expectations. This past crisis clearly showed everyone that even mutual funds can lose significant dollars, and rapidly so. Allocating a portion of a portfolio to individual stocks may increase the volatility but provide more control over the investments. During market corrections, fund managers often face the need to raise cash to meet withdrawal requests from shareholders resulting in added fund expenses, selling holdings they may prefer to retain, and potential missed opportunities. Warren Buffett, one of the most respected investors in the world, took the opportunity during this past crisis to purchase additional companies that were on ‘sale’ knowing their value in the future could be significantly higher. To take advantage of these opportunities, you do not have to be Warren Buffett.

The S&P 500® index remains well below its past high. Thus, there are many quality companies who stock price may still reflect a discount based upon past levels and provide an opportunity for long term gains.

For assistance with this or insurance, estate planning, and investment management contact me at Quality Financial Concepts or one of the other certified financial planners in our area. To continue a personal quest for education, you can also view our learning center on our website, There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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