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February 6th, 2008
Dear
Mr. & Mrs. Client:
As I’m
sure you’re aware, the volatility in the financial
markets that began in the third quarter of 2007 has
continued into the new year. As of the week ending
January 25, 2008, the Standard and Poor’s 500 Index has
declined nearly 12% year-to-date, and has fallen nearly
15% from its October 9, 2007 peak. Keep in mind that
while such a decline may be painful to investors, we
are still not in a true “bear” market, which is
generally understood as a 20% decline from a previous
high.
Below,
I’ve identified factors occurring in the economy right
now that can help put the current market volatility in
perspective. I would also like to offer three investment
truisms that I believe are relevant to our present
situation.
·
Attractive valuations for stocks and buying
opportunities:
Stocks are as cheap as they've
been since the late 1970s relative to bonds, according
to Bloomberg, which could result in a buying opportunity
for long-term investors.
Although the jury is still
out on whether we are truly in a recession, there is
encouraging data on what happens to the market after
hitting bottom. Ned Davis
Research looked at the last 10 recessions and found that
stocks rose 24%, on average, in the six months after
hitting a recession, thus creating a buying opportunity.
·
The
Federal Reserve and government stimulus:
The Fed started lowering interest rates last fall, and
continued with an “emergency” 75 basis point cut on
Tuesday, January 22, which may have helped prevent a
more serious decline. You should know that it normally
takes up to a year for lower interest rates to cycle
through the economy so it will still take some time for
the effect of the rate cuts to take hold. Look for
additional Fed stimulus and other potential government
action (i.e., proposed tax incentives by both houses of
Congress) to benefit the economy going forward.
·
Consumer spending and housing debt:
The consumer has been credited with propping up the
economy in the past, but has recently faced some
headwinds in the form of higher oil prices. However, if
oil prices stay below $100 per barrel – which they have
recently, hovering around the $90 mark – this relative
price drop may give consumers more discretionary income.
Furthermore, lower interest rates could benefit
homeowners, particularly those with adjustable rate
mortgages. And the unemployment rate is still low by
historical standards, which bears on consumer confidence
as well.
So, in
light of these macroeconomic events, I am urging my
clients to resist the temptation to make wholesale
changes to their investment strategy. Consider these
three investment truisms that have served my clients
well over the long term.
1.
Tune out the noise:
During difficult times, investors’ behavior is often
influenced by what they perceive may be occurring in
capital markets, as reported by the financial press,
which can have little bearing on their personal
situation. Since most investors are not trained
economists, and may be hearing just the negative aspects
of the story, which are deemed “newsworthy,” basing an
investment plan on media conjecture may produce
disappointing results. As your advisor, my job is to
help you see the bigger picture and stay focused on your
overall investment plan.
2.
Stop investing for the worst-case scenario:
Over time, history has shown that markets are cyclical;
when they are performing well, investors may suffer from
overconfidence and, as a result, take unwarranted risk.
When markets are lagging, however, many investors choose
a flight to safety. Investors may gravitate to what they
perceive as “safe” investments, decide to allocate
outsized portions of their portfolio to cash, or even
pull out of the market completely. These investors often
look smart in the short term – until they see what they
missed while waiting for the “right time” to get back
in. As your advisor, my goal is to help you avoid this
potentially irrational behavior, by regularly meeting
with you to assess changes to your risk tolerance or
time horizon.
3.
Separate emotion from market performance:
Risk is always present, even though it often takes a
significant dip in performance to make investors
painfully aware of this fact. Throughout history there
have been seemingly insurmountable events – wars, acts
of terrorism, corporate malfeasance – that created
panicked selling. While these events may loom large in
investors’ psyches at the time they occur, they do not
always have to negatively impact one’s chance of success
over the long term. Over time, the stock market has
shown a positive upward trend, which may benefit patient
investors.
It is
nearly impossible to predict what lies ahead for the
markets in the remainder of 2008. But, even though
recent events may be concerning to you – as they are to
me – I believe that the current market malaise will not
persist indefinitely. I continue to encourage my clients
to focus on the long term, and remain committed to a
diversified asset allocation plan based on personal risk
tolerance, time horizon, and savings objectives.
As
always, I am available to discuss your portfolio and
answer any questions or address any concerns you may
have.
Best
regards,
Jeff A
Campbell
Financial Advisor
Sources: The Wall Street Journal, Ned Davis Research,
The New York Times, Yahoo! Finance, Bloomberg.com
The statements
contained herein are based on the data available at
the time of publication and are subject to change at
any time without notice.
The
summary/prices/statistics contained herein have been
obtained from sources believed to be reliable, but
we cannot guarantee their accuracy.
Past performance is
not a guarantee of future results.
The information on
indices is presented for illustrative purposes only
and is not intended to imply the potential
performance of any fund or investment. Indices are
not available for direct investment.
It is important to
remember that risks are inherent in any investment.
Diversification and
strategic asset allocation do not guarantee a profit
or protect against a loss in declining markets.
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