Historic Times

- 2008 3rd Quarter

It is Tuesday, October 14th, and as I sit down to write this commentary, I feel like I have just witnessed a horrific train wreck.  That train wreck is the Stock Market.  If the awful year we were having wasn’t bad enough — last week the Dow Jones completed the worst week in its 112-year history.  In this Market Commentary, I will attempt to make some sense of what has happened and how and where we go from here.

What Happened?

What has unfolded in our economy during recent weeks has really shaken everyone to the core.  From every level, from President Bush on down, the focus has been on the banking system.  The concern was that if the government did not help bail out the banks, many more banks would fail.1 This concern arose directly from several of the large Wall Street firms that either went belly up (Lehman Brothers) or were forced into being acquired by other companies (Merrill Lynch & Wachovia).  For the first time in a long time, people began to seriously question the financial stability of the banking industry, which is the heart of business in our country.   As a result, the market went into a free-fall.  For the 3rd quarter, the S&P 500 Index was -8.37%.  The real loss occurred from October 1st to October 13th where the S&P fell 22.83% and last week was down 18.14%.

We have discussed in previous Market Commentaries the origin of many of today’s economic problems: the large number of sub-prime loans made to spur the economy after 9/11.  While it dramatically helped us in late 2002 and 2003, we are now paying for those mistakes.  First we saw rapidly rising interest rates, then a sluggish housing market, massive foreclosures and then the ‘banking bust’. Next came inflation and increases in oil and gas prices.  In recent months, we have seen the price of oil rise to an all-time high of over $147 a barrel, and then fall by almost 50%, closing on 10/10/08 at $77.70.

While some believe that we could be heading into another Depression, there are significant differences between the market woes of the 1930’s and today:


  • On July 9, 1932, the Dow Jones was at 41.63, down 91% from its level exactly three years earlier.
  • In 1933, unemployment peaked at 25% of the work force.
  • During the 1930s, when Wall Street was failing and the economy was suffering, President Hoover strongly believed that the government had no responsibility to fix Wall Street and, in fact, told Wall Street that it was their problem to deal with.


  • Today the S&P has fallen by 42.5%, compared to 86.2% during the Depression.
  • Today the unemployment rate is 6.1%, compared to 25% during the Depression
  • Today the government has instituted a $700 billion bailout plan to fix the woes of Wall Street. The public sentiment, right or wrong, is that Government intervention is what got us into this mess and they need to get us out of it.

Another great difference between the 1930’s and today is that during the Great Depression the Federal Reserve took a passive role in the economy which didn't stop bank panics and allowed a dramatic drop in the money supply to worsen deflation. Today, our Federal Reserve is anything but passive. It has sharply cut interest rates and, with the Treasury Department, repeatedly bailed out the financial markets (rescuing Bear Stearns and, recently, Fannie Mae and Freddie Mac).2

The market and the overall chaos have been referred to as pandemonium. Despite all that, there is a silver lining. The economy hasn't collapsed. It's merely weakened. Output in the first quarter of 2008 was actually 2.5 percent higher than a year earlier.3

Now What?

So, now we understand how we got into this mess - where do we go from here?  As we all look at our most recent 401(k) quarterly statement, feeling helpless, and sick to our stomachs, we wonder what is the best thing to do in the current market situation.  Below are examples of some actual client questions (we edited a bit so that they are relevant to larger age groups) we have received over the past month and our advice on their best course of action:

  • I am between the ages of 20-55.  I have worked hard for a number of years and my account is going into an investment black hole.  I know anywhere from very little to a lot about investing, but I have picked a strategy.  What should I do?

    What you need to do is to understand that you are not able to touch this money until age 59 ½ and in most instances, you will not start drawing from it until the ages of 65-67.   When you understand this, you realize that you have time.  The market has always been about our economic growth.  We have been a nation with long periods of growth, and short-time periods of corrections called recessions.  We are in a recession, as bad of one that has occurred in any of our lifetimes.  We will recover, and we will get through it.

    If you get out now when things are down, then you bought funds when they were high and sold them when they were low.  This is the exact opposite of our goal as investors.  The basic goal we have for the first 25-30 years of investing is to invest somewhat aggressively and to be in the accumulation of assets mode.   While there will always be fluctuations in the marketplace, in time, things will always move ahead.

  • I am between the ages of 55-70.  I have worked very hard for a very long time and in a matter of weeks, I have seen my account go down from 15-30%.  I do not have the “rebound” time of younger investors.  I am scared.  What should I do?

    My answer to you is similar to the above, but slightly different.  You are correct that your time horizon is not that of someone in their 20-40’s, but it may be greater than you think.  Let’s take a deeper look at your time horizon.  If the day you retire, you pull out your entire account balance, then what you pay in taxes will be far more devastating then what has happened in the market.  We recommend that when people get within three years of retirement, they put two years of living expenses into a cash-type of investment.  This gives security against a volatile market.  With the additional assets, you are “experiencing” the market.  You will gain money in good times, and as we have seen, lose money in bad times.  By having money put aside for living expenses, you are buying yourself more time for the money to recoup on its losses.

    As we don’t know how long we will need to live on our retirement assets, we need to make sure our money outlives us.  By changing the time horizon from the day you retire until age 95, you have more time then you may have realized to recover your losses.

  • Help! My 401(k) account is way down.  Should I just put my money in cash and avoid this craziness?

    Let’s dig deeper into some financial planning.  When people come to see us, we help them design a “Distribution Plan” with all of their assets.  We break assets into three different categories, which should take a person’s entire financial portfolio into consideration.  Category I represents 3-12 months of living expenses.  This should be where all income is deposited and from where all bills are paid.  If income exceeds expenses, this Category will grow, and we recommend 2-4 times a year sweeping the excess into Category II.

    Category II is money invested for the next 12 months – 5 years.  These are your investments outside of retirement or your outside investment portfolio.  Because this is an intermediate time, you should invest in a “middle of the road” approach.  A lot of value funds and bond funds with your goal being to have a safe solid return.  From a liquidity standpoint, you should have the ability to get to this money if you want to.

    Category III is Retirement Investing. This is your 401(k) Plans, Pension Plans, IRA’s, and Roth IRA’s.  In the pecking order of accounts, this is the last one you look at because of the tax implications.  As a result of this, you often invest more aggressively because again you have more time.

Stay The Course!

It is important to understand the above because most Americans do not organize their assets or have a plan.  By having a plan, you will not be overly concerned or excited by market conditions.  The greatest problem among participants is that they are getting too emotional about the market, and it is never a good thing to make an emotional decision involving money.  We have counseled hundreds of participants in the recent weeks and months, with the same message – “Stay The Course”.  Most have listened to us but some could not handle the market volatility and moved some or all of their money into cash.  By going into cash, they may have temporarily stopped the losses, but they also missed the market increases.  On the heels of the worst week in market history, the market responded Monday with the best single day in its history.  The Dow Jones, S&P, and NASDAQ all increased by over 11% in a single day.  For those that went to cash, they effectively locked in their losses and missed a significant day of recovery.  For those who stayed the course, they were rewarded with a day that helped reduce their losses.  As we never know when the good days will come, it’s important to stay in the market so you don’t miss them.

An important note is that the S&P 500 Index was up an average of 11.9% per year from 1988-2007.  This market increase came about during a time when our nation experienced recessions, wars, hurricanes, 9/11, and political changes.  During that same 20-year time period, the average investor gained an annual average return of just 4.5% Why? The average investor invested on emotion and not fundamental investing principles, got into and out of the market on whims, and therefore did not reap the benefit of the market’s growth.  We cannot reiterate this enough: Stay The Course!

What’s Warren Doing?

I always keep a close eye on what Warren Buffet is doing.  Warren Buffet rose to his financial level for a reason: he formulates a plan and sticks with it.  It is interesting to note that in the last few weeks Warren Buffet has purchased major shares of some large publicly trading corporations ($3Billion in GE, $5Billion in Goldman Sachs).  Why would he act now, when things seem so bad? Because he understands that the market will get better, and quickly, and in his estimation, he is buying companies at a significant discount. Remember what the basic principle is when it comes to investing - buy low and sell high.  Warren recently said, “Be fearful when others are greedy, and be greedy when others are fearful”.  For Warren Buffet, he is buying low, because a deal can be had. Keep this in mind for your retirement account, because the silver lining in a down market is that you are buying more shares, sometimes much more shares at a lower price.

Timing Is Everything

Here’s how a $1,000 investment in Standard & Poor’s 500 Composite Index would have done if made on the day these events occurred and held through the periods shown:

The S&P 500 Composite Index is a broad measure of the U.S. stock market and is unmanaged.
Results are calculated with all distributions reinvested but do not reflect sales charges, commissions or expenses

We want you to understand that we are in this with you.  While we are not happy with the current state of the market, we are not overly concerned.  We will get through this upheaval in the market and come out stronger on the other side.  While anyone can be your Advisor when times are good, during the bad market times, we want you to know that we are here for all of you as Plan Participants.

If there is anything that we can do, please do not hesitate to contact us.  We are here for you, and available at anytime either via email, phone or in person to review your account, and make sure you are well positioned for whatever the market may throw at you.  Again, if we can help, please do not hesitate to contact us.

[1] During the Great Depression from 1929 to 1933, 40 percent of U.S. banks failed.
[2] JUDGMENT CALLS Robert J. Samuelson You Call this a Depression? Despite parallels with the early 1930s, to use the D word now would be total overkill.
[3] JUDGMENT CALLS Robert J. Samuelson You Call this a Depression? Despite parallels with the early 1930s, to use the D word now would be total overkill.
[4] The date President Johnson signed the Gulf of Tonkin Resolution.
[5] As measured by the unmanaged Dow Jones Industrial Average.

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