Thursday, June 26, 2008

It Ain't All Roses, But It Ain't All Bad

I know all my english professor clients are cringing over my use of "Ain't" in the title of this piece, but it just felt appropriate.

A few weeks ago I wrote that the pain in the financial services sector is far from over, June has proven me right. The dow is down 300 points today and the reason is bank downgrades.

The problem is two-fold, the banks have on their books a bunch of loans that are worth a lot less than they say they are, if they recognize this problem they face a possible capital crunch. Thus they are unwilling to face the problem. Secondly, they may be on the hook for many more loans that they failed to properly vet and these loans may come back onto the books (see the article I posted the other day - mortgage crisis Act II). Our Financial system will survive, it will end up stronger, but it will be painful in the short term.

I don't expect stocks to do great for the rest of the year, but then again I have no idea and no real outlook, except that five or ten years from now it won't really matter.

Our economy is not doing great, but it has been exceptionally resilient to a number of massive shocks that would have cratered most nations. We survived 9/11, Katrina, the tech bubble and now we are trying to survive midwest floods, oil spikes, and inflation. Keep in mind that interest rates are still low (but they need to rise), unemployment is still very low and we are having a boom in exports due to the weak dollar.

My confidence in our long term prospects has not dimmed, everyday I am amazed at what free people living in a capitalist society are able to come up with. The ingenuity that we possess is astounding and we are on the brink of technological advances that will make the last 100 years seem like the stone age (like bugs that eat agricultural waste and excrete oil- see my other story on oil). This will of course cause disruption and pain, but in the long run we will be better off.

Looking at the markets and paying nearly $5 a gallon for gas is tough. It is easy to fall in with the doom and gloom crowd, I urge you to resist. This is not to say that things are rosy, our economy has structural problems that need to be addressed sooner than later - oil being the most recent.

I've spoken to many people this year who are discouraged to see that all the money they put into their 401(k) or 403(b) accounts appears to have evaporated. I understand their frustration and while the truth is that they are buying more and more shares at lower prices (which will help them immensely when the market inevitably recovers) it still doesn't make them feel good.

My advice today is no different than it was six months ago or six years ago (when the market was much, much worse) - diversify, don't take too much risk and hold on during these difficult downturns - you will be rewarded. Remember that stocks wouldn't provide higher returns if they didn't have correspondingly higher risk. The downs of the market are the price you pay for the ups in the market and fretting about if the Dow will fall to 10,000 is short sighted - it might, but ten years from now you'll be kicking yourself for not staying invested.

I posted an article the other day on "Investors behaving badly", it details how an investors behaviour is the number one determinant of your returns. Don't give into the doom and gloom, hold steady.

The stock market is down, you've lost money, this is par for the course and too be expected. Keep your head up, don't worry, the cycle will come back at some point.

For my clients - if you feel like you need to talk about anything happening in the market, I am alway available for you.

Scott Dauenhauer, CFP, MSFP, AIF