Dion Money Management Blog   Money Management for Retirees and Their Families

Light trading surrounding the Christmas holiday has the indexes treading water this week. The S&P 500 Index opens today with a 2.22 percent loss since last Friday, while the Dow Jones Industrials Average trades 1.79 percent below the previous Friday’s close.

Economic news was mixed on Tuesday, when GDP and consumer confidence figures were released. The U.S. economy contracted at annualized rate of 0.5 percent in the third quarter?a mild decline overall, but economic indicators imply the contraction accelerated in the month of September. Consumer confidence was more encouraging; the survey reported a nearly 5 point increase from November?s reading of 55.3 to December?s reading of 60.1.

The rise in consumer confidence is a good sign that the economy is making its way through the recession. Consumers initially pull back from spending due to fear and lower wages, but as prices fall faster, confidence is slowly restored. Confidence may climb higher into the New Year, as retailers liquidate inventory and send prices lower. The best deals may come from the automakers because various bailouts around the globe have maintained production levels above their natural rate, given economic conditions. Cars are piling up at ports and manufacturers will face increasing pressure to move their inventory.
Falling prices make consumption more attractive, but it?s important to remember that one of the biggest markdowns in history has already taken place in the stock market. Competition for scarce dollars will be intense, but investors who take the opportunity to purchase depreciated assets will be rewarded in future.

Bond prices have also been marked down substantially. For example, Fidelity Investment Grade Bond (FBNDX) currently yields over 6.5 percent and Fidelity High Income Fund (SPHIX) is yielding over 10 percent. The chances of price appreciation in these areas over the next year are very good, especially when investors in government bonds and money market funds decide that 0 percent is an unacceptable return. Also, Federal Reserve policy will now target long term interest rates, and capital will eventually spill into these sectors.

With the approach of the New Year, I would like to remind eligible clients to put their 2009 IRA contributions to work as early as possible. The best time to invest is when prices are low.

Disclaimer

By Bill Schmick

I’ve fielded a number of calls lately from clients over 70 ½ who are required to take a minimum required distribution (MRD) from their tax-deferred accounts before the end of the year. The rules state that everyone who owns a traditional IRA (and certain other types of defined contribution retirement accounts) must begin to liquidate these savings after they reach 70 ½ years of age. This is to insure that no one escapes taxation and that the money one accumulates through retirement savings is actually distributed during retirement. The yearly sum is calculated on a formula table that liquidates the entire account over the remaining estimated lifetime of the taxpayer.

There has been a degree of confusion lately over whether that distribution has been waived for this year. That is because some members of Congress have joined forces with AARP in lobbying for a moratorium on taking a MRD this year. I understand their motivation.

Most savers’ IRAs are invested in stocks and mutual funds as a matter of course and since global stock markets only peaked in October of 2007 most IRAs were still sporting hefty gains by the end of the year. Why is that important? Because the MRD payout percentage is based on the worth of one’s IRA on December 31 of each preceding year, in this case, 2007.

Since then, as most readers know, those same portfolios have taken a huge hit. In 2008 the markets and most IRA portfolios are down between 30-50%. As a result, the percentage of each portfolio required to be liquidated today is far larger than if we were to use the current value instead. In addition, once the IRA holder who must take a distribution cashes out of his stock or fund at a loss, he eliminates any chance to participate in a potential market rebound in 2009.

Unfortunately, although there has been a lot of talk, no action has been taken to alleviate this problem for this year. Instead, the House and Senate have passed the Worker, Retiree and Employer Recovery Act of 2008. It addresses a whole bunch of issues including a provision that would suspend the MRD for 2009 but not 2008. It is another case of closing the barn door after the horse has escaped. Sill, I guess something is better than nothing. [Editor’s Note: President Bush signed the act on December 23, 2008, thereby allowing investors to suspend their MRDs for 2009].

“I simply won’t take a distribution,” said an angry client on hearing the news, “I’m 75, what are they gonna do, lock me up?”

Well, no, I said, the IRS doesn’t need to do that. Instead the government levies a 50% penalty tax against any short fall in your required distribution. Talk about adding insult to injury, I suggest anyone who has been delaying taking their MRD do so before the end of they year.
One final note to all my readers: over this last year of tumult and pain, I feel all of you have become part of my family through your comments and inquiries. As you know, both Christmas and Hanukkah are celebrated this week. I can’t think of anything that fulfills me more than being with family at this time of year. So I wish a very merry holiday season to you and yours. As for me, my daughter will be visiting and sharing both holidays with me and my wife. Life can’t get much better than that!

Berkshire-based Dion Money Management, managing over $500 million for middle class Americans from coast to coast. Bill Schmick is a licensed investment advisor representative and portfolio strategist as well as a registered financial planner. Direct your inquiries to Bill at 1-877-850-7942 ext. 146 (toll-free) or e-mail him at wschmick@dionmm.com.

What a week! Equity traders celebrated the Federal Reserve’s decision to lower interest rates to a range of 0.00 to 0.25 percent, while oil traders panned OPEC’s decision to cut oil production by 2.2 million barrels per day. Earlier today, the Bank of Japan cut interest rates to 0.1 percent and President Bush announced the automakers could tap $13.4 billion from the remaining funds in the TARP program, and potentially another $4 billion.

The term “quantitative easing” swirled through the financial press, but in simple terms, the Federal Reserve will purchase mortgages, commercial paper, and other assets to push down interest rates across the board. This policy started earlier this fall, as this morning’s Washington Post headline will attest: “30-Year Mortgage Rates Sink to Lowest on Record”. Expect to see rates move lower as the Fed focuses more attention on these assets.

Meanwhile, OPEC announced it will reduce output by 2.2 million barrels per day, and the traders responded this week by cutting the price of oil almost $10 per barrel, or about 20 percent, from the mid-$40 range to the mid-$30 range. A weak economy reduces demand, and June’s high prices still have consumers and industry thinking of energy conservation. On the supply side, countries such as Iran and Venezuela cannot meet their budgets without higher prices and higher volume. OPEC cartel members have a strong incentive to cheat, and traders know it.

Low interest rates will relieve the housing market, especially homeowners facing ARM resets in 2009. With the financial sector apparently saved as well, there’s room for increased investor optimism and higher equity prices, even if the problems have only shifted from these sectors to the Federal Reserve and Treasury’s balance sheets. The S&P 500 Index was 0.6 percent higher than last Friday’s close and opened higher this morning. Investors cheered the auto bailout, which removes the largest cloud over the market and sets the stage for a rally into the New Year.

Disclaimer

For most investors, the next most important goal is to save for retirement. Dedicated retirement accounts such as 401(k)s and IRAs are the clear favorites when investing for retirement, because they offer tax benefits that no other account can match. The major types of retirement plans include the following:

401(k)s and other employer-sponsored accounts. These plans come in two flavors: traditional and Roth. Contributions to traditional plans come out of pretax income. As a result, any money you deposit in the plan will reduce your taxable income for the year in which you make the contribution—lowering your tax bill for that year. What’s more, investment earnings in the account won’t be taxed until you withdraw the money. That tax deferral can help your investments grow much faster than they would in a brokerage account.

Even better, most workplace plans will match your contributions, up to a certain percentage of your salary—for example, a typical plan might contribute 50 cents for every dollar you contribute, up to 6% of your salary. Some generous plans will match 100% of your contributions up to the predetermined level.

You also may be eligible for a Roth version of your employer’s plan, although this new type of account is just starting to catch on. If you go with the Roth plan, your contributions won’t reduce your taxable income for the year in which you make them—but you won’t have to pay any tax on withdrawals in retirement. Essentially, choosing a Roth over a traditional plan means trading an immediate tax break for a future tax break. Contributions to Roth accounts may trigger matching contributions, but the employer match will be deposited in a traditional, tax-deferred plan.

Your investment options in a 401(k) or similar plan are limited to a predetermined menu of funds. (Fidelity Independent Adviser’s quarterly publication, 401(k) Accelerator, can help workers with some of the most common plans select investments.) On the bright side, you can arrange with your employer to have a set percentage of your salary deposited directly from your paycheck into the plan so your saving happens automatically.

Individual Retirement Accounts (IRAs) are self-directed plans that you can set up with a brokerage firm, mutual fund company or other financial institution. They offer at least one significant advantage over workplace plans: You may invest in virtually any publicly traded security. Like 401(k)s, IRAs come in both traditional and Roth varieties.

Like traditional 401(k)s, traditional IRAs offer pretax contributions and tax-deferred growth. However, if you qualify for an employer’s plan, you can’t make tax-deductible contributions to a traditional IRA, unless you fall below certain income limits. Roth IRAs, which are available to any taxpayer with earned income below certain thresholds, offer tax-free investment growth.

Between Roth and traditional 401(k)s and IRAs, you may have multiple options for where to hold retirement savings. The following guide can help most investors make the most of their retirement assets.

Step 1: Contribute enough to your workplace plan to generate the maximum company matching contribution. The prospect of an immediate, guaranteed 50% or 100% return on your investment is far too good to pass up.

You may have to choose between traditional and Roth versions of the plan. In general, Roth plans are better for younger investors, who have more time to benefit from tax-free investment growth. They also may be preferable for relatively wealthy investors who expect to pass on significant sums to future generations, because the heirs won’t have to pay income tax on their withdrawals. Traditional plans may be better for investors who are closer to retirement and expect to be in a lower bracket when they withdraw the money.

Step 2: Invest through a Roth IRA, if you’re eligible to do so. Funding a Roth IRA will give you greater control over your retirement investments than your 401(k) provides, and the Roth’s tax-free growth may provide superior investment growth to that of a traditional plan over long periods. What’s more, a Roth account can help you hedge against the very real possibility that tax rates will rise between now and the time you retire.

You may contribute up to $5,000 to a Roth IRA in 2008 ($6,000 if you’re 50 or older), provided your income is $101,000 or less (singles) or $159,000 or less (married couples). Contribution limits decrease for investors with higher incomes, phasing out completely at $116,000 and $169,000, respectively.

Step 3: Return to your workplace plan. Most 401(k)s allow contributions of up to $15,500 in 2008, as well as an additional $5,000 in catch-up contributions if you’re age 50 or older.

Of course, some workers may not qualify for a workplace retirement plan. If you are self-employed, look into opening a SEP-IRA, which in most cases allows higher contributions than do other types of IRAs. (SEP-IRAs offer pretax contributions and tax-deferred growth, like traditional IRAs and 401(k)s.) If you’re not self-employed, you don’t qualify for an employer’s plan, and you exceed the Roth IRA’s income limits, you might opt for a traditional IRA.

Keep in mind that retirement accounts generally carry severe penalties for withdrawals before you reach age 59 1/2 (although workplace plans may allow you to make withdrawals penalty-free beginning at age 55). So while it’s wise to save as much as possible for retirement, you’ll want to make sure not to contribute money to the plan that you might need before then.

The stock markets struggled to retain their momentum this week, but the broader indices once again did move above their 30-day moving averages, a small feat that most bourses had not achieved since early September. Even after a slight decline on Thursday, stock indices were steadily 15 percent higher since their November lows.

The strength comes even in the face of weaker economic data and deteriorating financial news. Overall, the market has shrugged off recent bad news and finally started the post-election rally that historically follows a presidential election. This is typical within the context of a bear market: short-term rallies can ensue in spite of downbeat headlines, even if the market needs more time to heal itself. We still need additional buyers to enter on the demand side, which will improve volume and breadth indicators, two elements that generally accompany a sustainable bull-market run.

But the headlines were not all bad this week. The biggest stimulus, in fact, stemmed from last weekend when President-elect Obama announced his plan to spend hundreds of billions of dollars on infrastructure development, spurring widespread optimism. Government will spend directly on roads, bridges, schools and the internet, among other projects. There is no doubt that is deficit spending, but it will boost the overall economy depending on the final substance of these projects. Although the final payoff for citizens will take years to assess, the more aggressive that world governments become to stave off further crises and corporate downturns, the more confident market participants will become.

I continue to assess other news and economic results that will likely indicate we have reached the bottom of this economic cycle. One such indicator is the Institute for Supply Management’s manufacturing index, which often has signaled market turning points. It’s most recent reading of 36.2 represents a sharp fall—one that was exceeded only four other times— to the lowest reading since the early 1980s. Such lows have often coincided with stock market bottoms, but the drop off in consumer and business demand in recent months may very well push this index lower. Nevertheless, readings below 40 improve the prospects for stock prices over the next six months because shares tend to gain even as corporate earnings deteriorate.

Given the severity of the current crisis, however, other indicators such as improving credit conditions, reduced stock volatility, stabilizing house prices, and additional fiscal stimulus will be just as important to put a firm floor under equity prices. I was encouraged this week by news that a well-known hedge fund manager was closing his short-only fund in operation since 1996, stating that opportunities to bet on falling prices have been reduced considerably in recent months.

Disclaimer

by Bill Schmick

The time has come to consider income investments. Yes, those boring bond and stock funds that provide interest and income in a market that I believe will at best do nothing throughout most of next year. Granted, you won’t be the center of attention at your holiday office party but you will be way ahead of the game when it comes to preserving your wealth and earning a decent rate of return.

Before you skip to the next article hear me out. If you had invested $1,000 in a group of high yielding dividend stocks in 1957, by 2007 you would have garnered $640,877, according to Jeremy Siegel in his book, “Stocks for the Long Run”. If instead you had bought low-paying dividend stocks with that same money and held them during the same timeframe you would still be ahead but your $1,000 would have only netted you $96,591. That’s right; the high dividend group outperformed the low yielding stocks by $544,286.

Now that I have your attention consider this: last year, according to Standard & Poor’s, dividend paying stocks returned over 18% compared to non-dividend paying returns of 13.7% while high-flying NASDAQ stocks only returned 8%. Overall, between 1926 and 2007, dividends contributed a whopping 42.12% of the total return of the benchmark S&P 500.

From a tax perspective, dividends are also attractive. There was a time when dividends were taxed at your individual income tax rate. Today that rate has dropped to 15%, and if you are in a low income bracket, as little as 5%. Of course, the new administration under Barak Obama may decide to increase that rate, but he could just as easily keep it the same while raising the capital gains rate instead.

You also have a choice on whether to reinvest your dividends or take them in cash. That will largely depend on your age and circumstances. Those who are retired or close to it may want or need the income while those with 30 years of investing ahead of them may opt for dividend reinvestment. In declining markets like we have had this year, taking the cash has also proven to be a good strategy at least in the short term.

Reinvesting dividends is as easy as checking a box on your portfolio account form and there are no commission fees for that service. There is also a Dividend Re-Investment Plan (DRIP) which many companies offer. It allows you to purchase additional shares of their stock directly at no extra cost.

Reinvesting dividends can also make a difference in your overall returns. Over a 10-year period a $10,000 investment in the S&P 500 Index with all dividends reinvested would have netted you $17,753 (versus $15,131 without the dividends). Over thirty years the difference is staggering: an investor would have earned $154,401 (without dividend reinvesting) but $386,252 with all dividends reinvested as of the end of 2007.

In today’s markets an investor has a large number of dividend bearing stocks to choose from. But buyers beware. Next year is going to be hard on companies and many dividends will be cut. What looks like a fabulous yield now may end up in smoke. Take financial companies for example. The banking sector traditionally pays a healthy dividend but the prospects for continued tough times ahead thanks to the credit crisis makes that industry’s ability to maintain dividends a gamble at best.

One rule of thumb that works fairly well is to pick companies for which earnings are at least twice the dividend payout. Another tip is to avoid certain cyclical stocks; those companies that do better in high growth economies but perform poorly in slow or recessionary environments. These companies tend to cut their dividends when times get hard. Finally, firms that have a track record of constantly raising their dividends are strong bets for long term investors, but even they can falter so be careful and do your homework.

I have found that investing in income mutual funds is an easier and safer way to invest than trying my luck with individual stocks especially in highly volatile environments like we face today. It is easier to let the mutual fund manager and his analysts pick 50 to 100 companies based on earnings and industries. That way if one or two companies end up cutting their dividends there will be plenty more that can continue to provide a stream of income. Of course, income funds will go down with the stock market but at a lesser rate. Since the stock market has already had a substantial correction and no one can really call the bottom, income funds make sense for the conservative investor who is invested in cash and wants to put a toe back in the markets.

Today I have found almost a dozen income funds that are yielding north of 7% and in some cases 12% or more. Given that your typical money market fund is yielding around 2% while long-term Government Treasury bonds are offering less than three, that’s not a bad deal for those who are willing to take on some additional risk.

Berkshire-based Dion Money Management, managing over $500 million for middle class Americans from coast to coast. Bill Schmick is a licensed investment advisor representative and portfolio strategist as well as a registered financial planner. Direct your inquiries to Bill at 1-877-850-7942 ext. 146 (toll-free) or e-mail him at wschmick@dionmm.com.

by Bill Schmick

In my 28 years on Wall Street I’ve lived through over thirty stock market corrections worldwide. Not once have I been able to call a market bottom. I gave up trying long ago, and it has not hurt my performance at all. Here’s why.

The truly deep market declines (like the one we are experiencing now) make calling a market bottom unnecessary. In my experience, whenever any stock market has dropped by more than 50%, I begin to invest. I figure I can’t go wrong with a “half-off sale” even if prices decline by another couple of percentage points. To my way of thinking, I’m still getting a deal especially if I plan to hold my investment for the next few years.

That’s not to say you should put all your cash to work immediately. Instead, I suggest you use a time-tested method of investing called dollar cost averaging. It works this way: let’s say you have $12,000 to invest, take the first third of that sum ($4,000) and buy your stock or mutual fund this month. Add another third in January and the final third in February. This type of investing works well especially in volatile markets and usually produces the best entry-level prices. If you are super cautious, invest one third every three months.

Stock valuation is also a better way of buying stocks then trying to pick a bottom. I use the price/earnings ratio (among others) as a measure of determining how cheap stocks really are. Last month the S&P 500 benchmark index traded at roughly 10.4 times earnings, which is the lowest it’s been in more than 50 years. Could stocks go even lower? Sure, they could but they are cheaper now then at any time since I came into the business.

Another factor that has always been present in severe market corrections is an overwhelming mood of pessimism and fear among investors. Over the last two months, I could practically scrape anxiety off my office walls. I have experienced an unrelenting torrent of sell orders with practically no client willing to add money to the market. I witnessed the same thing dozens of times and learned to buy when others sell.

As for the market pundits and talking heads you watch on television, ignore them. I have lost count of the number of market pros this year who have called a bottom on this market; not once, not twice, but three times! I’m sure even more will jump into the act every time stocks make another move higher. If they keep proclaiming a bottom, they are bound to be right at some point.

At their lows in November, the S&P 500 was down 52%, and the Dow lost 47%. They can go lower if history is any guide. I remember the Japanese market in the aftermath of the bursting of their real estate bubble back in the 1990s. The Nikkei fell much further than 50% as did our own tech-laden NASDAQ market in 2003. Then there was the crash of 1929-1930 when the Dow fell by about 48%, retraced 50% of the decline and then fell almost 90% in 1930. Yes, that was an exceptional period but it certainly could happen again. So don’t put all your chips in the market at once. Dollar cost average and have patience. Over time you will be rewarded.

Berkshire-based Dion Money Management, managing over $500 million for middle class Americans from coast to coast. Bill Schmick is a licensed investment advisor representative and portfolio strategist as well as a registered financial planner. Direct your inquiries to Bill at 1-877-850-7942 ext. 146 (toll-free) or e-mail him at wschmick@dionmm.com.

Stocks ended a five-day rally on Monday with a decline that set the tone for much of the week as investors struggled with poor economic news. Nevertheless, stocks did gain ground on Wednesday and Thursday as bullish technical evidence continues to mount, creating a stronger floor under equities and greater odds of a year-end rally. The three-month slide that we have endured to date ranks in the top 20 for severity dating back to 1896, and it has set several daily records for volatility along the way.

The economic news did worsen this week. Retailers reported large sales declines in November, with many losing more than 10 percent of their sales from last year. Once again, Wal-Mart was a notable exception, but the company’s recent success underlines the economic story unfolding before us. The Big Three automakers are headed back to Washington to beg for taxpayer dollars, while factory orders had their biggest drop in eight years. Employers slashed more than 500,000 jobs in November, the most in 34 years, in an effort to adjust to the changing economic picture.

The National Bureau of Economic Research officially announced the US recession this week, dating the beginning back to December 2007, which only means this recession could last 18 months or longer, virtually guaranteeing that it will be the worst slump since the early 80s, with odds that it will surpass the 16-month recession of the early 70s.

Everyday we come closer to reaching a stock market and an economic bottom, but the date is unknowable. Economic activity will slow further next year, and headlines will become increasingly negative. Unemployment will rise, perhaps back to or even above the 10 percent levels seen in the early 1980s. Stocks are already selling at low valuations, so now is the time for patient and disciplined investing. A recession is a process, and every painful step must be taken in turn or we risk an unsustainable recovery. Furthermore, the stock market recovery will already be underway even as the headlines declare more economic pain is in store. Unemployment will continue rising after the economy begins to recover. For this reason, headline watching can be hazardous to one’s financial health.

The financial shocks from earlier this year led to widespread fear and pessimism that caused severe reactions to perceived risk. The affects on the stock market were, so far, overdone. As I review a 2002 speech from current Fed Chairman Ben Bernanke, I am reminded that the best defense we have against persistent deflation is the US economy. He noted that over the years, the US economy has absorbed financial shocks of all kinds, only to recover and grow anew with increased vigor. We have flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to adapt and embrace technological change, giving us one of the most resilient economies anywhere.

Disclaimer

by Bill Schmick

Last night the U.S. Treasury Department leaked the rough details of a plan designed to boost home sales. The scheme would use the weight of government-owned mortgage giants Fannie Mae and Freddie Mac to ‘encourage’ banks to lend money a full point below existing 30-year, fixed-rate mortgages. Okay, I admit, that got my attention.

No, it isn’t a total solution to the housing mess because it does nothing to solve the foreclosure problem, which continues to worsen.  Nor does it allow homeowners struggling with high adjustable rate payments to refinance at the lower rate. What it could do, however, is allow as many as 2.5 million Americans to make a hefty dent in the growing inventory of unsold homes.

To me, the plan would make more sense if they permit re-financings. Otherwise, we would end up with a two-tier interest rate scheme: one rate for new buyers and a higher rate for everyone else. If history is any guide, it would take less than a nano- second before some enterprising mortgage company figures a way to arbitrage the two rates while circumventing the intent of the plan.

Some critics rightfully argue that it would help those least in need of a bail-out. It would allow the wealthy or those with jobs with financial assets to buy up real estate at bargain basement prices with the lowest interest rate in fifty years. True enough but riddle me this, dear reader: how else are we going to get those buyers sitting on the fence to actually plunk money down on a home? Prices have already dropped 20-30% and still the inventory of houses for sale continues to rise. Without an incentive will housing prices have to fall by 20%, 40% or even more?

There will also be a salutatory ripple effect on overall mortgage rates as well as home equity loans. As more and more houses are sold at the lower rate, I believe it will pressure other lenders to lower their rates in order to attract some of that new business.  That would benefit those most in need.

Take my situation for example. Fortunately, I’m one of those writers who follow my own advice. Over the last few years I’ve managed to pay down debt. At the same time my wife lost her job this summer and prospects for employment seem dismal. I vacillate between wanting to buy a home closer to work and enjoying my debt-free security. I’ve been looking and waiting for home prices to decline further. If this 4.5% fixed rate plan actually happens, I would be sorely tempted to take the plunge.

Detractors of the plan argue that the last thing the country needs right now is for another couple million of us to go into debt. Since hundreds of thousands of workers are projected to lose their jobs next year saddling oneself with a 30-year mortgage could be financial suicide. Others say that lowering interest rates is what created the housing bubble in the first place, and this plan is simply an attempt to revive that process.

Clearly, it would do nothing for those who are unemployed or who will be losing their jobs shortly. Banks lend or re-finance on the customer’s ability to re-pay not on what collateral the borrower can put up. Recent forecasts point to a doubling of this year’s 2.25 million foreclosures by the end of 2009 because of job losses and the recession. The government has already begun to address those issues through a variety or programs.

However, Federal Reserve Chairman Ben Bernanke told Congress Thursday that “more needed to be done” to stem foreclosures in the country. He outlined several new avenues lawmakers should consider. No doubt, the new administration will do just that. And yes, it would be nice if someone could come up with one simple solution for the myriad of problems that seem to pop on a daily basis in this economic maelstrom. But wishing gets us no where. This plan actually addresses part of the demand side of this housing problem and because it does it deserves our attention.

Berkshire-based Dion Money Management, managing over $500 million for middle class Americans from coast to coast. Bill Schmick is a licensed investment advisor representative and portfolio strategist as well as a registered financial planner. Direct your inquires to Bill at 1-877-850-7942 ext. 146 (toll-free) or e-mail him at wschmick@dionmm.com.

Disclaimer

Patience is a virtue, and it is one of the traits necessary for success in financial markets. Perusing today’s headlines reminds us why patience is so important. This morning alone offered several grim news items.

AT&T will cut 12,000 jobs, DuPont 2,500. The European Central Bank cut interest rates 0.75 percent and the Swedish bankers slashed a whopping 2 percent. Retailers reported large sales declines in November, with many losing more than 10 percent of their sales from last year. Once again, Wal-Mart was a notable exception, but the company’s recent success underlines the economic story unfolding before us. The Big Three automakers are headed back to Washington to beg for taxpayer dollars, while factory orders had their biggest drop in eight years.

Everyday we come closer to reaching a stock market and an economic bottom, but the date is unknowable. Economic activity will slow further next year, and headlines will become increasingly negative. Unemployment will rise, perhaps back to or even above the 10 percent levels seen in the early 1980s. Stocks are already selling at low valuations, but now is the time for patient dollar cost averaging, not a bottom-fishing expedition. The best approach for passive investors, especially in this holiday season, is to turn off the news and focus on friends and family. But if you must keep abreast of developments, do so with the understanding that the worse the headlines get, the closer the bottom will be. A recession is a process, and every painful step must be taken in turn or we risk another unsustainable recovery.

Furthermore, the stock market recovery will already be underway even as the headlines declare more economic pain is in store. Unemployment will continue rising after the economy begins to recover. For this reason, headline watching can be hazardous to one’s financial health. By watching daily changes, an investor may train himself to expect the economy to deteriorate ad infinitum, or conversely, the optimist may regard every major negative item as a sign of the bottom.

The best approach is to be the hedgehog, not the fox, as described in Isaiah Berlin’s famous essay. The fox, the astute headline watcher, knows many things. The hedgehog, on the other hand, knows one big thing. The hedgehogs are the passive investors, such as Warren Buffett, for whom daily news doesn’t offer much news. November 2008 retail sales, after all, are just 1 of 120 monthly sales figures to be released in the next decade, and who didn’t expect they would be bad? For a trader who buys today and sells next month, the number could be vital, but for someone investing for the long-term, it is one data point that makes up a much larger trend.

Don’t substitute short-term panic for long-term planning. If you find yourself unable to avoid emotional investing decisions, please call Dion Money Management at 1-877-850-7942, ext. 191 to either speak to me or one of our portfolio strategists, and we can devise a disciplined strategy for recovery.

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