Friday, March 06, 2009

Market Conditions: Is It Time To Panic?

Its now official, no matter how you calculate returns we are now experiencing the worst stock market decline since the great depression.

Rob Arnott states:

"Expressed in real terms, the all-time-high was 2000, not 2007. We're down 60%, in real terms, from that high. This has happened only three times in US market history. 1929-32 (-83%), 1852-57 (-66%) and 1905-21 (-65%). Another 15% drop (i.e., another 6% from peak levels) and we've got the second worst overall decline ever."

So what do we do now?

It seems rather out of touch to say "don't panic" as anytime a developed nation's stock market crashes IT IS cause for panic. People are not wrong to feel panicked, they should - the economy is falling down around them and everything we thought we knew just a year ago, isn't so. So now its time to sell your stocks, right? Put everything under the mattress and buy guns and food and clothes.......right?

Its tough to do, but most people should hang on to their stocks. They may go lower, but over the next decade there is more upside potential at this point than downside.

On November 15, 2006 I recorded a podcast titled "Misbehaviour & Risk" and pointed out the risks of stocks. After reading several great books on risk I found that stock returns are not adequately described by our current models and that stocks are much riskier than we think. I wish I had even listened to myself more. We did everything right with client portfolios, we diversified them, kept costs low, measured how much return is needed in order to meet goals......but none of that saves us from a market that drops by 61%. People who had a conservative allocation of 40% stocks are seeing 20%+ losses, something most planners would have heavily discounted just a few years ago.

I think its important to look back and see where we made our mistakes, its the only way to ensure we don't make them again and to be sure of what those mistakes actually were. Having said that, we still must figure out what to do NOW.

What to do now is to hold on. To utilize a few cliche's - "It's always darkest before the dawn" and "Invest at height of pessimism and sell at the height of optimism."

I don't know when this will end, but end it will, it always does. For those in retirement, this will make things tougher for you, for those who have 10 years or more till retirement, this could end up being the event that allows you to retire more comfortably if you take advantage of it.

I am going to reiterate that I don't know where the market is going, never have, but I do believe that there is more upside than downside.

The real risk going forward is going to be inflation. I know everyone is talking about deflation, but with the deficits we are about to run, the operative word eventually (may take several years) will be inflation.

As always, I am available to take your calls and hold your hand through this very tough process.

Scott Dauenhauer CFP, MSFP, AIF