Dear Friends,
Today is Saturday and we have a blessed three days of NO stock market as the market is closed on Monday in observance of Columbus Day. I pray that everyone takes a deep breath and just calms down for the next three days. I plan on going for long walks, doing yoga, attending a wedding for the son of some dear friends and going to the Charger game on Sunday. It has been an incredible week—we are truly living in unprecedented times. My mom (who was a young girl during the depression) called yesterday to see how her portfolio is doing. When I gave her the news, she said that she would gladly lose all her money if she could have my Dad back with her. My Dad died three years ago and three months before my late husband, Lee. That really hit home with me. And it kind of put everything in perspective.
I really want to share from my heart with you because you are all dear friends and I so appreciate the fact that you have entrusted me with your financial well being. It is a responsibility that I willingly accept. This week, I have been in agony as I have watched and seen everyone’s hard earned savings lose so much in value. The weight of the responsibility has been crushing. However, I do believe with every fiber of my being that this will pass—it may take a few years—but we will recover and learn from this. While there is no way to determine where the bottom of this market is—the issue is not how far it falls but how high it will bounce thereafter.
There are serious forces at work in the economy that are causing this turmoil and some are temporary and some are permanent: I am quoting from a newsletter that was sent to me by Bill Losey, a CFP. The following 5 paragraphs with the bold headings are written by Bill.
The credit markets have seized up. This is real and it is temporary. Almost all large public and private companies issue commercial paper - short- term debt instruments that mature in less than 270 days to help meet their short-term liabilities. This debt in the past has been very liquid and quite secure. It is what has been owned by most money market funds to help them give savers better returns than they would get from owning Treasuries. Since concern has dramatically increased about corporate balance sheets and their ability to meet even the shortest of obligations, two things have happened. People have fled money market funds, which means that those funds must sell their paper and there is no market for the new paper that is being issued. When you hear about the "need" for a rescue package, this is the main reason why. The Fed and the Treasury are trying to create an avenue of liquidity for these instruments. This part of the plan is what will eventually hit Main Street. The reason that this is temporary is because it is too significant to not be worked out. Everything from hospital payrolls to inventory purchases is dependent upon this mechanism, so it will be fixed.
Wall Street is broken. This is real and it is permanent. Some of the largest investment banks were using a tremendous amount of leverage on exotic instruments that created even more leverage. This industry will continue to change and change dramatically. Access to money will not be as easy, which means profits for these companies will be compromised. Eventually they will come up with new and different ways to make money, but regulation will inevitably make it harder to make as much as they did for contributing as little as they had. This will inevitably change what types of investments will make sense going forward. Less exotic will be back in vogue
Fear and greed own the day. This is real and it is permanent. Every day, stock prices are determined by sellers - who either need to raise money or are convinced their stocks are going down, and buyers - who believe that they are getting bargains on investments that will go up. In periods of turmoil, there are far more sellers than buyers. People get scared that their investments are going to fall forever and sell (often at the worst possible times). When markets are going up, people think that they have all the answers and end up buying at the worst possible times. No one is ever completely rational, but successful investors tend to be less scared and less greedy than unsuccessful ones.
Diversification doesn't work. This is real and it is temporary. When we have a global melt-down, all investments, other than the very safest, fall. This means that asset classes initially fall together. And this is usually the case for around three to six months. After that, the most mispriced asset classes come back more strongly than others. Everything has been a sinking ship this past month.
People are hurting. This is real and it is temporary. Jobs have been lost and more jobs will be lost. People who piled on debt will have tremendous problems working their way out of the hole that they dug for themselves. The stress of seeing investments drop can add to the stress that each of us feel in raising a family, or work, or tending to our aging parents. People are scared right now and are not making rational decisions.
The one universal truth is that nothing lasts forever and things will change. It may take awhile but we will dig ourselves out of this mess. Regardless of whether you are a republican or democrat or which candidate you endorse for president—I do believe that a new administration will bring some much needed leadership and confidence to this country. I really think we will see a more positive spirit in this country after November 5th.
I want to let you know (again) what I think you should be doing right now and what my husband and I are doing:
1. If you are working, keep your jobs. Work harder and smarter than your co-workers. Layoffs could be coming and you want to be the LAST one considered. If you fear a layoff, be proactive and get out there and start looking for a job. Don’t sit around and wait for the axe to fall. High unemployment is inevitable in the next few years due to the domino effect of what is going on.
2. If you are retired and in a position where you are drawing down on your portfolio and not adding to it, then consider part time work in the next few years so that you can slow down the withdrawals.
3. Control your spending. Go through your spending categories and cut out most of the discretionary stuff like eating out, expensive vacations, clothes shopping etc… Now is the time to take that money and stick it into your emergency savings account. This gives you peace of mind and lets you sleep at night.
4. Save, save, save.
5. Do what it takes to keep your good credit history and reputation. Credit will be tight from now on and your credit reputation is of paramount importance. The days of buying houses and cars with mediocre credit are OVER.
6. Turn off the TV and the talking heads and go for a walk or take up a hobby. Do not sit around and listen to this stuff. They all sensationalize it and make it seem worse than ever. Fall is a beautiful time of the year, regardless of where you live, so go out and enjoy it.
7. Be more frugal with Christmas and holiday presents this year. Your family and close friends would love to have the gift of your time and love rather than expensive gifts.
8. Do not make any BIG purchases right now, especially real estate. Always call first and let’s discuss it first.
9. Home equity lines are being frozen, so if you really think that you will need to use in the future, I suggest that you draw on it NOW and put the money into a savings account.
10. And finally, if you really cannot sleep at night and are so distressed by the current situation, then please call me and we will discuss making some changes to your portfolio. I know this is contrary to what I have been preaching for the past two weeks (and I have no intention of selling anything in my portfolio) but physical and mental and emotional health, in my opinion, are more important than the size of your portfolio.
Please let us know how we can help you or discuss any concerns or questions. I am leaving for Nashville on Friday, Oct 17th and returning Tues, October 21st. I am attending the annual Cambridge Financial Advisor conference. Trust me; I need this conference and some R&R! Bill is going with me but Cheryl and Marcie will be here and minding the store. Again, I take my job and your financial well being with the utmost seriousness. It is a sacred trust. Thank you for letting me be your guide during these difficult days.
Warmly,
Judy Stewart, CFP, MBA, E.A.
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