Interesting Times for Investors…

29 Sep, 2008

Interesting Times for Investors…

Posted by: earlhines In: Investing| Markets

Earl Hines

A Little Too Interesting

There’s an old Chinese proverb that says: ”May you live in interesting times.” Though this is often meant to be a blessing, investors are living in interesting times right now, and it does not feel like a blessing — at least not yet.

We are no doubt watching history unfold. Congress votes today to pump up a $700B into troubled financial firms, marking the biggest government intervention in our economy since the Great Depression. It is a plan that no one likes, and that clearly interferes with free markets. And as gut churning a decision as this is, it is dramatically better than the option of NOT doing it. Banks globally continue to fail or merge due to exposure to bad mortgage debts (Washington Mutual on Friday, Wachovia today, and several European banks over the weekend).

Everyone from Wall Street to Main Street is feeling the impact of the collapse of housing and the pervasiveness of securities based on mortgage debt. As more and more homes have seen foreclosure, and despite the Federal Reserve’s continual push of new cash into the credit markets, credit has essentially been frozen across the country, and over the last few days, across the globe. Banks do not want to part with any cash given the current uncertainty. Tight lending conditions make it hard and expensive for businesses and consumers to get loans, which can hurt the economy. This creates panic among stock and bondholders, which we have seen yet again today, where the DOW and S&P opened sharply lower, and investors are fleeing into US treasuries as a safe haven, essentially, yielding no interest at all.

Keep in mind, this is not the first time we’ve seen this type of problem. For those of us who remember the stock market crash of 1987 and the S&L crises of the 1990s, both government and private market solutions were brought into play that ultimately righted the US economic ship. We can do that again, but it will take time.

What to do?

For those of us who are invested today for our long term goals, we must do the hardest thing. We wait. We keep to our disciplined investment plan and don’t try to time this market. Diversified portfolios as we always recommend are your best defense.
Maintain a solid cash position for your immediate and short-term spending needs. Having cash in hand can give you peace of mind during extreme market volatility.
Finally, for your long term money, such as 401K plans, IRAs, etc, do not stop investing now. Gradual monthly insertions into the market (known as dollar-cost averaging) is the most effective way to achieve long term growth. This along with the tax-advantages of such investing make dollar-cost averaging a very sound strategy in almost all markets.

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Tags: Investing, Markets

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