In February, our Oakland Insider Article was titled “The Sky is Not Falling”. As bad as
things may seem, it is still not falling. You can read our February article by visiting our
website (see link below) and clicking on our “In the News” web page.
It has been a very tough year all around. We have had the credit and housing crises,
soaring oil prices, fears of recession and extreme stock market volatility. Banks have
declared bankruptcy and Bear Sterns, Fannie Mae and Freddie Mac all have been
rescued by the Federal Reserve. Next came Lehman’s bankruptcy, Merrill Lynch’s sale
to Bank of America, AIG’s troubles and who knows what else by the time this article is
printed.
Yes, things are bad and could get worse. But one thing is very sure - we will recover.
The United States economy is very resilient. We have had crises like this before and we
will have them again, but we will recover.
If you watch the evening news it is all doom and gloom. We must remind ourselves that
the worse the networks paint the picture, the more people will watch it and the higher the
network ratings will be. That is not to say that things are not bad. It is just that we need
to filter out some of the hype to get at the real story.
It is very tempting to get caught up in the bad news and rush to move all your
investments into cash. Unfortunately, that is exactly the opposite of what the successful
investors do at such times. A quote by Warren Buffet, the financial guru, tells us exactly
what we should be doing: “I will tell you the secret of getting rich on Wall Street. You try
to be greedy when others are fearful, and you try to be very fearful when others are
greedy.” In other words, buy low and sell high.
It sounds easy, but how do you go about buying low and selling high? How do you know
what investments to pick and when to buy them? How do you know when we are at the
bottom? The answer is: we do not know. No one knows.
Rather than buy stocks, which requires significant knowledge to effectively evaluate
companies, we recommend that you invest in low cost, no-load mutual funds, index funds
and exchange traded funds (ETFs). This eliminates the company specific risk
associated with individual stocks. If the mutual funds are broadly diversified and spread
across broad asset classes that have low correlation to each other, the risk of investing
in specific market sectors can also be minimized.
If you couple broad diversification with a portfolio mix of stocks and bonds that exhibits a
level of volatility that is in tune with your personal risk tolerance, you will have much less
worry about the ups and downs of the market. Always keep in mind that the more
equities in your portfolio, the more volatile it will be.
Finally, if you rebalance periodically (say once or twice a year at the same time) by
buying the asset classes that are below target (i.e., low priced) and selling those asset
classes that are above target (i.e. high priced), you may not buy at the lowest and sell at
the highest prices, but over time you should do very well.
The bottom-line is to utilize an investment strategy that takes the emotion out of your
investing and forces you to do what is right. That takes discipline, but if you can do it
you will not have to worry about whether or not the sky is falling. You’ll be able to look
back some day in the future and be thankful that you did not panic in times like these!
David C. Patterson, CFP® and Erin Preston, 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, September, 2008
The Sky is Still Not Falling
By David Patterson and Erin Preston (formerly Patterson)