Richard D. Gale CompanyFinancial Strategies & SolutionsSecurities offered through KMS Financial Services, Inc. |
|
What in the world is happening to the stock market? When will it stop? You will never get any two economists or financial experts to agree on anything. But let me tell you how I see things. There are a number of things affecting the markets. Let me go over some of them. Between 1995 and 1999 the Standard & Poors 500 Composite grew at an unprecedented pace. The lowest return in that 5-year period was 19.53%. The average return for that index between 1950 and 1994 was 7.63%. The average return between 1995 and 1999 was 26.07%. People began playing the stock market like a lucky streak in Las Vegas, not as a long-term investment in the businesses of America. The feeding frenzy grew until the market collapsed under the weight of all that speculation. At some point, investors began to realize they had not been buying value so much as betting on things being fundamentally different then they had been in the past. It is interesting to note that even with the losses we have seen since the spring of 2000, the S&P 500 has still averaged 8.08% since 1950. The moral of the story seems to be that the we have been giving back the excesses of the late 1990’s but the sky isn’t falling. September 11 created a level of uncertainty that many investors have not seen before. What will the terrorists hit next? What entanglements will our war on terror lead to? The market does not like uncertainty. The escalating hostility between the Palestinians and Israel is unsettling because it has the potential for a war that would involve more nations and the disruption of the flow of oil. Without an adequate supply of oil, economies cease to function, farmers can’t work their land, food & goods can’t be delivered to markets and people lose jobs and can’t pay the rent, buy food or make house payments. I am describing an extreme case, it is true, but these are the kinds of things that make oil something countries are willing to fight for. Sure oil fuels our boats and SUVs but it also keeps us fed and warm in the winter. Remember my first bullet point? The one about the market in the late 1990’s? A lot of things conspired to make that happen (words carefully chosen). It appears that some companies got a little creative with their bookkeeping. The wave of corporate scandals is making investors skittish about guessing whose books are believable and whose are not.The other question was, “When will it stop?” I don’t know. As I write this the Dow has closed up 497 points. Maybe it has stopped. Maybe not. Technical analysts claim that we need to see what is called a wash out, i.e., massive selling in a short period of time. They claim that historically that has created a bottom in the market followed by a new bull (up) market. They may be right. We may have seen the wash out in the last couple days. We may not see one at all. Perhaps, with the Internet and so many amateur investors in the market, all the people who would have panicked in the passed, are waiting for everybody else to panic, hence no panic. The truth is nobody knows when things will get better. Now for the good news. The U.S. economy is resilient. When you invest in the stock market, you are becoming an owner of real live companies. When you invest in a stock mutual fund, you become an owner in a lot of companies. When you invest in several mutual funds, you own even more companies. You are in business. The circumstances that led to the 1929 crash do not exist now, in fact many of the things that led to that crash are impossible to recreate in today’s environment. There are no certainties in life, but there is little doubt the market will come back. When we opened your account, we completed a risk tolerance questionnaire. You told me in that questionnaire how much risk you were willing to take. Based on that questionnaire we built a portfolio of mutual funds that specialize in different asset classes. We selected mutual funds who’s managers had demonstrated their ability to outperform their peers, and we divided your investment up in such a way that historically would have produced the results you told me you wanted. I have been monitoring your accounts and am finding that our investment strategy has worked pretty well. Most of your accounts have stayed within your tolerance level. When they don’t, I am taking the following steps. If your account drops below what your questionnaire indicates to be your maximum tolerance for loss in a 12 month period, and you are fully invested, and I have been given discretion in your account, I am selling off 50% of your investments and will begin dollar cost averaging you back into the market, i.e., buying back a little at a time over the next several months. This will cause slower growth than you would otherwise experience if the market turns back up before we start buying back in. But it will save some of the losses you would have experienced if the market continues down. If you are not fully invested, I will be buying into the market with some of your cash. Remember the old adage, you want to buy low and sell high. We are certainly lower than we were a year ago, so I want to take advantage of that. If I do not have discretion on your account, we need to talk. If we have not talked about this, please call my office. Please feel free to give my office a call if you have any questions or concerns. Sincerely, Richard D. Gale, LUTCF July 24, 2002
|
|
|