Merriman, Inc

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Podcast: Play in new window | Download

Podcast: Play in new window | Download

The last several weeks have been trying times for investors.

Since July 22nd, the S&P 500 has fallen sharply including large drops on August 8^th and 10^th. The main catalysts for this sharp decline include a U.S. debt deal that did not address the underlying fundamental issues in a satisfactory way, some weak U.S. economic numbers which may presage a double‐dip recession, the realization that there is little flexibility with regard to either fiscal or monetary stimulus, the S&P downgrade of U.S. debt, and the continuing debt problems in Europe.

There is a long list of troubles, and things may get worse before they get better. There are also many positives, including the following:

• A 28% decline in the price of oil from its recent high, which has reduced inflationary pressure and helped consumers.
• The four‐week average of initial unemployment claims declined to the lowest level since April.
• Continuing low interest rates, on both the short and long end.
• Greatly improved corporate profitability and cash flow, with increasing capital spending.
• Healthy corporate balance sheets and improving consumer balance sheets.
• A depreciating dollar which could enhance exports.

We think that the best course for long‐term investors is not to sell now. While it may be emotionally difficult, we believe it is best to stick with the asset allocation that you (and possibly your financial advisor) calmly chose which was appropriate for your circumstances and risk tolerance.

Stock prices incorporate all available public information, are forward looking and exhibit both risk and return. Selling after a sharp and sudden market decline means suffering through the market’s risk without being able to benefit from any subsequent return.

For example, there was a double‐dip recession in 1980 – 1982, with unemployment reaching a high of 10.8% while mortgage rates went above 18%. Six months after the end of the second dip, the stock market was up almost 20%.

We can’t call the market bottom with any certainty. What we do know with certainty is that institutions, investors and markets react to events. Congress may finally become serious after the S&P downgrade and work together to credibly tackle the long‐term deficit issue. Investors may look at cash‐rich companies with good earnings and lower‐than‐average valuations and eventually decide to buy. The European Central Bank has started large purchases of Italian and Spanish bonds, helping to lower rates and trying to calm the debt markets.

We certainly empathize with any distress you may have experienced due to the recent market drop. It is human nature to panic and consider selling after a steep market decline. If you are considering that, think about those portfolios which were sold at the bottom of the market in March 2009 and did not get the benefit of the subsequent recovery. Stocks have an expected positive return over time, which just became more positive with the steep price drop.

For your own benefit, avoid short‐term panic and maintain a long‐term perspective.

Most people can benefit from the help of a financial advisor, either on an occasional basis or in a lasting relationship. But not all advisors are created equal. In this section of our online workshop, I’ll explain what to look for and how to avoid financial help that may lead you down the wrong path.

Watch Section 5: Finding the right financial advisor now.

In managing investments, making decisions based on feelings of excessive optimism or excessive pessimism rarely ends well. Maintaining a balanced perspective in an ever-changing and often chaotic world is a difficult yet critically important part of achieving long-term investing success.

To be sure, the news lately has been enough to scare many people into believing that things are shaping up for another 2008 debacle. Seemingly at every turn we hear of the debt crisis in the Eurozone, the possibility that the United States might not meet its deadline to raise the debt ceiling and the ramifications that may have, China potentially slowing down, and the U.S. housing and unemployment figures remaining at disappointing levels. And this is just to name a few!

While the United States and the rest of the world are facing many significant obstacles, and while nobody knows for sure how future events will unfold, I offer the following examples of recent positive, noteworthy items that went largely ignored:

• Japanese auto manufacturers and parts suppliers resumed shipments after being forced to essentially shut down because of last winter’s earthquake, tsunami, and nuclear incident.
• Foreign and domestic auto manufacturers established new plants and/or increased hiring in the United States, and sales increased meaningfully. (more…)

Podcast: Play in new window | Download

Podcast: Play in new window | Download

We advocate that investors choose a diversified portfolio of stocks and bonds, with the percentage in each depending, to a large degree, on their overall risk tolerance (the higher the risk tolerance, the higher the allocation to stocks). When the markets move and the actual weights deviate from the target weights, investors should then periodically rebalance by trimming those asset classes which have done best and buying those assets classes which have not done as well. This simple rebalancing technique removes much of the emotion from investing.

Emotions can have a negative impact on investment returns. Many investors respond to short-term market moves by buying assets after they have gone up and selling assets after they have declined in price. This is just the opposite of what we do when rebalancing our client accounts. (more…)