These may not be the times that try men’s souls, to paraphrase Thomas Paine, but they are certainly times that can stimulate our fear instincts.  All the headline news can be taken as bad – war without foreseeable conclusion, climbing oil prices, climbing wheat prices, Chinese financial shadowing, outsourcing of jobs to India, widening mortgage crisis – and significant, substantial, mounting banking losses.

How’s your heart rate when you pause to think about the effect of these nuggets of joy?  How much longer will you have to stay in that house?  Or in that job before you can retire?  How will things get turned around in time for your children to thrive?

Bear Stearns, one of the largest wirehouses (i.e. stock brokers) in the country tanked a while back.  Factually, what happened is that its stock ended up being worth a little more than a penny on a dollar, dropping from ~ $170 to $2 per share.  Shareholders, 1/3 of whom were employees, basically lost the entire value of their holdings, as JP Morgan bought up the pieces for the equivalent of peanuts. 

This sort of business failure is apt to focus our thinking in exciting new ways:

·      Is the United States’ financial structure about to fold like a house of cards?  No. None of Bear Stearns’ clients lost any money in their brokerage or money market accounts (unless, of course, they owned Bear Stearns stock).  Customers’ accounts were transferred intact to JP Morgan.  Federal regulations require that clients’ accounts be segregated from the firm’s assets, and are protected against creditors.  Brokerages generally have insurance to insulate account holders from the risks of business failure.  It is large financial institutions that incur the losses with these failures; retail customers, such as you, do not lose their holdings through the failure of large brokerages.

·      Where should I be investing now?  Interest rates have been falling, real estate values went kaflooey in many areas, the stock market trends down and gold appears to be in a speculative bubble.  Cash looks pretty good right now, even as money market rates are just over 3%.  I think dollar-cost-averaging into the stock market will pay off long term – it almost always does.  Avoid making any illiquid investments (e.g. real estate, business ventures, etc.) thinking that you will be a successful market-timer. 

·      Are the days of a comfortable retirement gone for good?  No = the key is balance.  A portfolio properly balanced with bonds and cash, real estate, and a diversified stock portfolio will endure.  You are protected against deflation, inflation, rising OR falling interest rates - and you remain poised to participate in times of prosperity.

·      How long will this excitement last?  I am not now nor will I ever be a market timer.  I am concerned that my clients be able to survive the downside, so we focus on things that we can control and prepare for those things we cannot control.  Economic circumstances could worsen, if the municipal bond market collapses, and there are indications it may.  So balance is more important than ever, and trying to guess which way to jump not only produces insomnia, but has been shown to be an almost certain road to lower investment returns.  Over the past 20 years, as the market has risen 12%+ per year on average, the average investor has only earned 8% on their stock portfolios.  The lower returns are contributed to by higher investment costs (commissions) and higher taxes, but most of all are due to investors – you -  jumping in an out of the market inefficiently.  The real costs are in the angst and anxiety of focusing on ‘the market’ rather than ‘the future’.

Remember, if you decide to get out of a dropping market, you have to make two decisions right:  when to get out, and then when to get back in.  Clients who just stay put don’t have to agonize about either, and ten years from now will be farther ahead.