Wednesday, February 28, 2007

Vanguard − Putting market volatility in perspective

Vanguard − Putting market volatility in perspective

I'm just going to post the article here so you don't have to link to it:

Putting market volatility in perspective

Tuesday's stock market decline set off loud alarm bells on Wall Street. But even for investors who don't make a habit of daily market-watching, the biggest one-day point loss since 2001 was certainly an attention-grabber.

However, the sharp drop in stock prices was nowhere near a single-day record. The Standard & Poor's 500 Index fell nearly 3.5%, just over 50 points; the Dow Jones Industrial Average fell 416 points, or 3.3%.

"There's no doubt that a big drop in stocks can be tough on your nerves and your account balance," said Gus Sauter, Vanguard's chief investment officer. "But after a day like Tuesday, it's more important than ever to maintain a long-term perspective."

Tuesday's decline put the stock market's return so far in 2007 into negative territory. But over the past 12 months, the broad stock market has still produced a total return—price appreciation plus dividend income—exceeding 10%. That gain, coincidentally, is roughly the long-term average annual return for U.S. stocks.

"We've had a very nice rebound in stocks since the long bear market that began in early 2000 and stretched into 2002," Mr. Sauter said. "So it's not surprising to see a pullback."

Investors who hold balanced portfolios—some bonds or bond funds along with their stock funds—had gains on bonds on Tuesday, offsetting some of the stock market's decline.

As investors digest the volatility of the market and the flood of commentary that always accompanies such events, it may be helpful to reflect that no one can say whether stocks will continue to decline or whether they'll soon rebound. What is clear is that few, if any, investors have a demonstrated ability to consistently pick the right times to get in—or out—of the markets.

"We've long advised investors not to react much to market movements because we don't think it's a successful way to invest," Mr. Sauter said. Indeed, he offered that view less than a year ago—after a downturn in stocks in May 2006—in this interview.

He also offered a bit of advice for "bargain hunters." Although a market decline undoubtedly makes stocks cheaper, he doesn't recommend that investors "buy on the dips." Rather, Vanguard suggests that investors hold to their asset allocation plans.

"The stock market never goes straight up," Mr. Sauter said. "To be a successful investor over the long term, you need to understand this fact and you need to react rationally when the market doesn't go your way.

"Successful investing is a rational, not an emotional, pursuit. If you've made conscious, deliberate decisions based on your personal financial goals, time horizon, and your tolerance for risk, there's no reason to change your plans."

A historical perspective

Two decades ago, in the stock market crash of October 19, 1987, the Dow industrials and S&P 500 plummeted more than 22%, one-day records for both indicators. Those 1987 declines sliced 58 points off the S&P 500, while the Dow industrials fell 508 points. Both declines were from far lower levels than the indicators are in 2007. The S&P began October 19, 1987, at 283, while the Dow began that day at about 2,250.

Scott Dauenhauer, CFP, MSFP, AIF

Tuesday, February 27, 2007

Dow Drops 416 Points....Is It Time To Panic?

It wasn't a very fun day for the markets! Yesterday former Fed Chief Alan Greenspan undermined current Fed Chief Ben Bernake by predicting a recession before year end and then a revival of the "Asian Flu" hit China today as their stock markets took a bath, dropping 8% and obliterating nearly $100 billion. Oh yes, there were also more sellers than buyers today, thus a drop. Poor technology on behalf of the Dow didn't help things either; they failed to keep up with market orders and when they did we got a 200 immediate point drop.....which scared the hell out of a lot of people!

Let's take a step back for a moment and look at the big picture.

Today's market drop is not unusual, in fact it is normal. The Dow Jones dropped by 3.29%, (incidentally the S & P 500 dropped by only 50 points or 3.47%, yet you don't hear that being reported) a percentage drop that has happened on many, many occasions in the Dow's history. You probably won't even remember it 12 months from now. I know you won't remember it twelve years from now.

This is how markets work, it is not abnormal and you shouldn't panic (I say shouldn't, but most people feel, go ahead, panic for a moment, then stop, everything will be O.K.). I understand how difficult it can be to hold onto a portfolio when it is falling; yet it is the best thing you can do long term (assuming it is diversified and you have a long time frame). None of us know when the market will go up or down and attempting to time it is futile.

The markets have been on an upward march for some time now and perhaps they are about to take a breather, I don't know. What I do know is that the long term march of the markets is up and the only way to take advantage of it is by being invested in it.

You are going to see a lot of news stories today attempting to scare you (Financial Pornography), just ignore it. The number one factor in determining how you will fare over time in the markets is your behaviour during times of panic and crisis. If you panic and sell you will be following the crowd and your returns will be low, if you stay put and duke it out, you'll end up with returns that will easily beat your neighbor and most people who invest. Behaviour matters and this is the time when YOUR behaviour is tested, don't fail this test.

There are always things to be pessimistic about (listen to my last podcast) and there will always be "good" reasons to sell; but history tells us that giving into pessimism leads to bad returns. I encourage you to listen to my latest podcast (ironically recorded for an incident as this, just last week). It is located by clicking here. If you really want to go for a ride and see how out of whack markets can get and how statistically improbable they act, I encourage you to listen to my November 15th podcast titled "Misbehaviour and Risk".

I encourage you to give me a call with any questions or concerns.

Scott Dauenhauer, CFP, MSFP, AIF

Thursday, February 15, 2007

A 40 Year Mortgage?

Another good article by the Mortgage Professor on utilizing a 40 year mortgage. The basic answer is no. Read on as to why!

Scott Dauenhauer, CFP, MSFP, AIF

Wednesday, February 14, 2007

Is Unused Home Equity a "Missed Fortune"?

Is Unused Home Equity a "Missed Fortune"?

A professor at Wharton responds to a question for a "financial advisor" about the "Missed Fortune" concept. This is worth your time.

If you're unfamiliar with the Missed Fortune concept I'll be posting more on it later, probably even a podcast. There is so much misinformation about utilizing your home equity to invest that I think it is important to clearly lay out the facts. In presentations I've seen lately the one thing missing are facts.

Don't be lured by someone who stands to gain a substantial amount of money by selling you products to maxinimize your mortgage. While I don't completely discount the concept, I also don't believe it will work for most people.

Scott Dauenhauer, CFP, MSFP, AIF

Monday, February 12, 2007

Martha M. Hamilton - Downshifting, Not Retiring -

Martha M. Hamilton - Downshifting, Not Retiring -

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Great article about how retirement is changing. Retirees are not completely leaving the workplace anymore. They are "downshifting", meaning they are still working, just not in the traditional sense. They are perhaps doing work that is part time and not in the same industry or they are doing more charitable work.

Sometimes these "downshifters" are doing the same work, but not full time.

One of the advantages of this "phased" retirement is that there is less of a drain on your retirement savings, allowing more money to accumulate for a longer period. This may provide you the additional savings to retire in the manner you prefer. It may also allow you to defer social security benefits.

Separate from finances, a phased retirement allows one to perhaps do things that have value to them.

There are other benefits as well which we'll cover as time passes. The point with this story is that retirement has changed from the concept of retiring completely, it is morphing and providing potential retirees with more options.

Scott Dauenhauer, CFP, MSFP, AIF

Tuesday, February 06, 2007

A Home Truth about Real Estate Investing

A Home Truth about Real Estate Investing : Yahoo! Finance

A good article by Ben Stein on whether it makes sense to invest in real estate.


The Guys' Rules

I couldn't resist, this is so funny.........and true!

The Guys' Rules

At last a guy has taken the time to write this all down. Finally, the guys' side of the story. (I must admit, it's pretty good.) We always hear "the rules" from the female side. Now here are the rules from the male side. These are our rules! Please note... these are all numbered "1" ON PURPOSE!

  1. Learn to work the toilet seat. You're a big girl. If it's up, put it down. We need it up, you need it down. You don't hear us complaining about you leaving it down.
  1. Sunday sports. It's like the full moon or the changing of the tides. Let it be.
  1. Shopping is NOT a sport. And no, we are never going to think of it that way.
  1. Crying is blackmail.
  1. Ask for what you want. Let us be clear on this one: Subtle hints do not work! Strong hints do not work! Obvious hints do not work! Just say it!
  1. Yes and No are perfectly acceptable answers to almost every question.
  1. Come to us with a problem only if you want help solving it. That's what we do. Sympathy is what your girlfriends are for.
  1. A headache that lasts for 17 months is a problem. See a doctor.
  1. Anything we said 6 months ago is inadmissible in an argument. In fact, all comments become null and void after 7 days.
  1. If you won't dress like the Victoria's Secret girls, don't expect us to act like soap opera guys.
  1. If you think you're fat, you probably are. Don't ask us.
  1. If something we said can be interpreted two ways and one of the ways makes you sad or angry, we meant the other one.
  1. You can either ask us to do something or tell us how you want it done. Not both. If you already know best how to do it, just do it yourself.
  1. Whenever possible, please say whatever you have to say during commercials.
  1. Christopher Columbus did not need directions and neither do we.
  1. ALL men see in only 16 colors, like windows default settings. Peach, for example, is a fruit, not a color. Pumpkin is also a fruit. We have no idea what mauve is.
  1. If it itches, it will be scratched. We do that.
  1. If we ask what is wrong and you say "nothing," we will act like nothing's wrong. We know you are lying, but it is just not worth the hassle.
  1. If you ask a question you don't want an answer to, expect an answer you don't want to hear.
  1. When we have to go somewhere, absolutely anything you wear is fine... Really.
  1. Don't ask us what we're thinking about unless you are prepared to discuss such topics as baseball, the shotgun formation, or monster trucks.
  1. You have enough clothes.
  1. You have too many shoes.
  1. I am in shape. Round is a shape.
  1. Thank you for reading this. Yes, I know, I have to sleep on the couch tonight; but did you know men really don't mind that? It's like camping.

Pass this to as many men as you can - to give them a laugh. Pass this to as many women as you can - to give them a bigger laugh!!