2008 posed a difficult market for investors. A significant sell off in the fourth quarter added to losses in equities for the year. The returns for most categories of the bond market were also disappointing as the crisis in the credit markets impaired liquidity and put downward pressure on prices. Combining stocks and bonds usually serves as a good diversifier—meaning a tough time incurred by one will be offset by the other—but this was not the case in 2008, as investors sold stocks and bonds indiscriminately in a search for liquidity with the goal of protecting assets. This correlation likely led to sub-optimal returns in your account. Even if your account beat its benchmark, the absolute return may not have met your expectations. We can agree that 2008 was a very difficult year. However, I would like to take this opportunity to think about positive takeaways from last year and, even more importantly, formulate a plan for applying them to investing in 2009.
First, we believe that stocks and bonds, with the exception of Treasuries, are presenting investors with the opportunity to buy at significantly discounted prices. The widespread impact of the market downturns made a variety of assets relatively cheap. As you know, the goal of any investment strategy is to buy when the market has pushed prices down and sell when market forces have pushed prices higher. As the axiom goes, “Buy low and Sell high” While the timing of a recovery is difficult to predict, we believe that this is a great opportunity to buy low.
This market also gave us all of us an opportunity to gain a better understanding of our risk tolerance and financial goals, which is, unfortunately, a lesson many of us learn best in difficult markets. If you have adjusted your own view of your risk tolerance, we may want to fine-tune your portfolio with that in mind, if you would like to do so.
Finally, we learned that managers and asset classes with a long track record of expected behavior can act in unexpected ways in extreme markets. While this provided challenges for investment managers, it also reinforced the importance of diversification and elevated the importance of alternative investment mutual fund strategies. Such alternative strategies can work when market volatility is at extremes.
2008 felt like a year of many “firsts” in the markets. And while in many ways it was, the reality is that we have seen many of these situations before—just not all together and not to such extremes. As always, if you have any questions in the face of these difficult markets and want to discuss your portfolio, I encourage you to contact me. I continue to urge you to stay invested and focused on meeting your investment goals.
LPL Financial
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance tracking #511184
Posted by Christopher S. Laws, CFP 
Posted by Christopher S. Laws, CFP 
Financial Stability Plan: Not Clear Yet
February 19, 2009Financial markets remain choppy and distressed as markets apparently view Treasury Secretary Geithner’s rollout of the “Financial Stability Plan” as a disappointment. I certainly was underwhelmed by the plan and its lack of details.
As it stands, the plan outlines six big steps. The first is to “stress test” major banks, increase disclosure, and if needed inject more capital and encourage private investment. For me, despite my view that of some big banks deserve a lot of the blame for the mess we’re in, this idea falls in the “if I wasn’t laughing so hard, I would cry” category. These banks are already totally stressed out and struggling to stay afloat. Another round of major regulatory reviews and disclosure requirements may not be the best use of anybody’s time or money in the midst of this financial crisis.
Step 2 is to create a “Public-Private Investment Fund” to allow banks to sell troubled assets to others in the private sector. In my opinion, the misstep here is that the new plan wants the assets sold at market prices. Heck, the banks can do that already, but they think the bids are too low.
Step 3 is to have the Federal Reserve (the Fed) to fire up the Term Asset-Backed Securities Loan Facility (TALF), start buying consumer and business securitized loans, and then expand the program to commercial mortgage-backed securities and consider purchasing other assets as well. The plan calls for up to one trillion dollars in Fed lending. My concern here is that the size and flow of credit could become politicized. In any case, the Fed has been slow to get this program rolling.
Step 4 is a “Transparency and Accountability Agenda” which goes after banks requiring assistance; limiting dividends, compensation, lobbying and other restrictions. Some of the restrictions make sense; others, despite my anger over some of these institutions’ behavior, seem draconian.
Step 5 is to spend money helping folks avoid foreclosure and support housing. My heart is okay with this, but my head says it is not likely to be very successful. It is hard to help out homeowners that are in way over their heads. Sometimes it is just best to move on and live in something you can afford. I guess it is worth a try, but I also wish I wasn’t paying for it.
Finally there is a “small business and community lending initiative” that allows the Small Business Administration (SBA) to make more loans and increase their guarantees on loans. This program seems okay, but I worry about defaults.
As I said earlier, there are no details yet, and given the decidedly tepid response from the stock and bond markets, I suspect there may be some significant changes in the plan over coming weeks. We will just have to wait and see. I hope they go back and reconsider the model used to lift a lot of risk out of Citigroup and Bank of America late last year. That model was simple and uncomplicated. Although it seems to me that the government charged too high a price to guarantee the troubled assets, given those banks’ languishing stock prices, it would be pretty easy to change the two-page term sheet used in those transactions to fine-tune the outcomes.
A lot of big numbers are being thrown around in all these discussions, and it is easy to lose perspective. Bear in mind that while total U.S. debt outstanding was about $52 trillion at the end of Q3 2008, total financial assets, after substantial write-downs and losses, were about $146 trillion. And remember that there are still a lot of companies in good financial shape. As always, please call me with questions or concerns.
LPL Financial
100 North Point Center East
Suite 530
Alpharetta, GA 30022
(770) 995-7101
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Compliance tracking #514979.