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“What do you think? Will the markets go down another 20%?” I asked the question a dozen times recently at an educational conference for over 1,000 wealth management advisors. Many stated “20% seems high – maybe 10-15% is more likely,” This response made me reference the chart from page 184 in the AMA Physician’s Guide to Financial Planning.
If you would like a complimentary copy of the AMA Physician’s Guide to Financial Planning by Paul Sutherland please call Sara at 231.929.4500 or email.
Historically, if you’re fully invested in stocks when the bear market ends, the 12-month return is on average 47%. If you waited just one month after the bear market ends then the average return was 33% and three months saw only an 18% average return. So I told my colleagues at the conference, “if you think the markets have less than a 20% downside then get invested.”
According to wikipedia:
Herd behavior describes how individuals in a group can act together without planned direction. The term pertains to the behavior of animals in herds, flocks, and schools, and to human conduct during activities such as stock market bubbles and crashes, street demonstrations, sporting events, episodes of mob violence and even everyday decision making, judgment and opinion forming.
Of course there are always 100 reasons to say ” I think I will sit this out in money markets,” and often if the markets are speculative that is the best place to be. But sitting in cash needs to be rational, thoughtful, appropriate and meet the common sense test. It should not be done because of fear.
Today there is lots of fear. Fear of global jihad, Pakistan’s nuclear arsenal, rising oil prices, recessions, health care costs, unemployment, economic collapse, dollar devaluations, higher taxes, lower taxes, global warming, our teenagers and many others. But our lives go on, and in the investing world those that think long term and invest with common sense tend to profit more than those that let fear guide them. As we all know, life and business continues to march on, despite all the fear.
Nothing today that I could show to a potential investor illustrates the opportunity of increasing exposure to stocks better than the ‘Be Early’ chart. Naturally, the benefits of being early, to a significant degree, dependent upon finding global investment opportunities at true bargains. With fear of the U.S. dollar collapsing, we are buying European companies, which are paying just over 5% or better in Euro dividends. New Zealand real estate securities are generating 8% yields in New Zealand dollars (NZD), and Switzerland, Singapore, Thailand and other countries around the world are sporting incredible opportunities.
Today we can pick any fear and invest to profit from that fear. Worried about inflation? We are adding to portfolios preferred stocks, bonds and closed-end securities that have their dividends payout based upon inflation, prime rate or LIBOR interbank rates. Many of these securities are selling for 30% less than they were just a year ago.
Oil and energy prices worry you? Embrace energy company investments. Today our client portfolios own high-yielding natural gas, oil, wind power and bio-fuel companies, such as Canadian West Energy (www.westenergy.ca) and Australian-based Babcock and Brown (www.babcockbrown.com).
In the past few days we have begun to buy what are commonly called prime rate trusts, which are generically named closed-end loan funds. These investments were created to simplify investing in loans made to corporations that pay interest based upon the Treasury bills, LIBOR or prime rate. They often have senior security status or are collateralized by assets pledged by the issuing company. The trust pools investor assets to create well-diversified portfolios of prime rate investments. Today, many of these pools pay over 10% current yields, which are expected to drop to the 7% or 8% range in the event that a recession brings short-term rates down.
We all drive cars and understand the risk associated with driving. We know that if we drive 100 mph our risk of an accident is higher than if we drive at 20 mph. The price we pay for investments like the trusts noted above is similar to this risk of speed relationship. If we paid $20 for “trust A” last June it was like driving 100 mph whereas today “trust A” is feeling much safer selling for $14, down 30% from its year high.
Past FED Chairman Alan Greenspan chatted about irrational exuberance in the last credit cycle bubble. Now it seems like investors have a big dose of irrational depression. Prime rate trusts were bought and sold to unsuspecting investors as conservative income investments. The repricing of investments to more reasonable levels is good, healthy and rational. Investment markets, like economies or cars, can’t run long at 100 mph without a crash. The current “crash” has opportunity at its core and is good for all investors, conservative or aggressive. But not so good for speculators who like to drive 100 mph.
Bottom line, this is a time to invest. This is a time for all long-term investors to lock in today’s bargain-priced investments. Markets go from irrational exuberance to irrational depression; investors just need to be rational in their actions to prosper in today’s market.
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