The Ego, The Market, and The Mania

Wow! 2008 was a rough year for many investors. Once again we learned the painful lesson that risk and rewards are always intertwined. ( Nullum prandium gratuitum for those of you who are students of Latin.)

#1 Diversify your risk:

Asset allocation, investing in a well-constructed, broadly diversified portfolio of stocks, bonds, and cash equivalents is really critical during bear markets, especially if you’re concentrated in a sector that really got hammered, for example, the financial sector in 2008 . “Keep your nest eggs in many baskets, so they can’t all get broken at once.”  Attribute quote?

#2 Think long term, past the Recession:

Most of the recessions we’ve experienced over the last 60 years have lasted less than a year. Though your portfolio will likely move down in concert with the rest of the markets during a recession, the long term trend for equities has always been positive. Remember that most of the bad news has already been absorbed by the markets and is reflected in the stock prices;  the stock market is a forward indicator and tends to track about 6-12 months ahead of the economy  so that the market often recovers before the economy itself does.

#3 Act conservatively:

Don’t go climbing out on long and slippery financial limbs, especially when the winds and storms of recession are blowing hard.  .Make cautious, conservative financial decisions, but be ready to act when the time is right. For example:

• Don’t bite off more real estate than you can comfortably handle. If you’ve been saving up for a home, wait until you feel that the property market has bottomed.  Crystal ball statement
• If you’re buying a house now, consider applying for a fixed rate mortgage.
• Don’t take on additional debt unless you know you can handle it now and into the future.
• Sock away an emergency fund rather than spending for big items or making  investments.
• Live well within your means. Keep a lot of cash equivalent reserves available. You’ll sleep better at night, and when a great buying opportunity presents itself (real estate, business, or investment) you’ll have the ‘fiscal ammunition “to ‘pull the trigger “on the deal.
• Keep your income flowing .If you are working, be the most valuable, indispensable, well- trained employee you can be. Layoffs can be very painful emotionally and fiscally. If you have a reasonable concern that you could lose  your job, be proactive and flexible and start searching the job market for your next position.
• Continue to save as much as possible. Get a full employer-match through retirement fund contributions.

#4 Be patient and stay the course:

Lots of people are tempted to bail out on their poorly performing investments, especially when the market is reaching historic lows, but they may be missing the boat by unloading assets that could recover nicely once the markets improve. Remember the ultimate goal is to buy lower and sell higher. Many investors will miss the largest percentage of the upswing when it comes because they chose to get out of the market. The recession has given us lower stock prices and cheaper purchases everywhere! Avoid acting out of panic. The patient investor is usually rewarded for his equanimity.

#5 Look at future trends:

Realize that the markets and the global economy have political support and a long-term positive trend.  Whether or not you agree that the Fed should step in and “bail out” failing institutions and other financial channels, the Fed’s strategies and American ingenuity have worked in the past to ultimately turn things around. Over the past 80 years, the domestic stock market has averaged an annual return of about 10%. Also the global economy is expanding, especially in the developing countries. Brazil, India, and China especially, are predicted to grow  over the next several decades.

#6 Above all, learn to live a life of balance and equanimity:

Remember that there’s a whole lot more to your life than your financial net worth and your stock portfolios. Don’t get obsessed over the daily fluctuations in the stock market; that’s a formula for driving yourself crazy. Put your paper losses in perspective: many of your gains were only on paper too.  The fact that you are living in America in the 21st century, and that you even have the ability to have a portfolio of investments puts you in the top echelon of wealthy human beings from a global perspective. Stop and think a minute about all those poor souls living in refugee camps all over the globe, or living under ruthless dictatorships like Zimbabwe and Burma, or wracked by war like Afghanistan, the Congo, and the Sudan.

It’s definitely a good time to count your blessings, hug your family, and celebrate the start of a new year!