The stock market has been wild lately. Recently, there was a 600 point swing on the
Dow Jones Industrial Average in a single day. It was down 300 points and then
recovered to close up 300 points. Investors saw their portfolios take a significant hit
during the month of January and February has started out in similar fashion.
The TV nightly news and newspapers are full of talk about a possible recession. Gas
prices remain high. Real estate foreclosures continue at an extraordinarily high rate.
The unemployment rate is increasing and banks are taking big losses. Jobs are going
overseas and the dollar is weak.
It’s understandable to worry at times like this but you need to take care not to over-
react. No matter how bad things seem, this is not the time to sell all your investments
and put the money into CDs and money market accounts. Yet conditions such as this
cause many people to do just that. In fact, in times like this people should consider
buying equities (a.k.a. stocks or stock mutual funds) while prices are low.
If you have recently been thinking about getting out of the market completely, it may be
that your portfolio contains too high a percentage of equities. You may have too high a
percentage because you may have been over-buying equities when the market was
booming. This is not uncommon and may indicate that you are letting your emotions
drive your investment decisions.
When we help clients develop their investment strategy, we spend considerable time
educating them on the risks of investing and help them choose a target portfolio that
they can stick with no matter what the market is doing. Using statistics, we show them
what their probable returns and losses may be over time. If they are uncomfortable with
the possible projected losses, we encourage them to choose a portfolio with a lower
percentage of equities. Projected returns are based on the assumption that long-run
returns in the future will be similar to the past. Of course, that may or may not be true
The typical investor tends to buy high (chase the winners) and sell low (panic during
market downturns). You want to do just the opposite: buy assets when they are low in
price and sell when they are high. If you have a portfolio mix of equities and bonds that
you are comfortable with during all types of good and bad markets, you can avoid
panicking during volatile market periods like we are currently experiencing. And, you
can rationally employ a strategy of buying low and selling high by periodically trimming
over-allocated asset classes and buying under-allocated asset classes.
We don’t recommend trying to time the market. However, if it’s been some time since
you’ve rebalanced your portfolio and your equities are significantly under-allocated
during the time of a significant market downturn, we encourage you to consider bringing
your under-allocated asset classes up to their targeted level.
If you worry about a market crash due to a recession, a disaster or another terrorist
attack, consider this: A study of past market drops due to major crises by Ned Davis
Research showed that in most cases the market rallied within weeks or months following
the crisis. And, if you are a long-term investor, ten years down the road you will look at
today’s prices and say to yourself: “Why didn’t I buy more?” It takes discipline, however,
to buy when the market appears to be in a tailspin. You need to view these periods as
an opportunity to buy at low prices.
After all, the United States has always been resilient. We always seem to find ways to
solve our serious problems. Efforts are already under way to address current
problems. The Federal Reserve has already lowered interest rates and it appears
certain, at the time of this writing, that Congress will pass an economic stimulus plan.
The International Monetary Fund, on January 30, predicted that the U.S. economy will
skirt a recession. So, regardless of whether your glass is half full or half empty, there’s
good reason to believe that the sky is not falling. Whatever your view, now is not the
time to liquidate your portfolio!
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, February, 2008,
Despite the Hype, Sky is Not Falling
By David and Erin Patterson