Financial Wisdom

“Opportunities multiply as they are seized.”
~Sun Tzu, Chinese General, author of “The Art of War
No Downturn Lasts Forever

The financial markets have had their own problems over the years. A study by the International Monetary Fund detailed 125 separate financial crises worldwide since 1970. In the U.S., we’ve seen a stock market downturn an average of once every eight years since 1970. Before that, in a period dating back to 1800, the average time period between market crashes was 14 years, according to research conduced by Stanford University professor James Van Horne. Some experts, including Van Horne, blame financial and corporate deregulation for the increased tempo of market disruptions.

In any event, we know from history that periodic market panics and crashes are common occurances. We know that with careful planning and the right strategy, we can actually profit from the market’s bad news. All of this is not to imply the market’s plunges are harmless- to the contrary, those unfortunates who wind up on the wrong side of a market correction often see their net worth wiped out in a devastatingly short period.

Speculative bubbles have almost always been caused by excessive lending on farmland and real estate, which inflates prices until the inevitable adjustment that leads to bank failures. That’s been the root cause of crises and panics dating back to time immemorial. Following each successive market crash, the public has become as pessimistic as it had been optimistic before the downturn.

For whatever reason, people don’t tend to think long-term when making financial decisions. Perhaps it is human nature to want to get as much as you can as soon as possible, for immediate gratification. People often want to get it all when it’s available, and worry about the future later. That hasn’t changed for thousands of years, and it’s not likely to change soon.

Be Skeptical of ‘Experts’
The investing world has no shortage of experts who promised to “crash-proof” investors’ portfolios. In the recent past, they urged individual investors and institutions to diversify and buy into emerging markets such as China, Russia, and Brazil, and into commodities and leveraged hedge funds.

Far from protecting investors, this advice led to a bloodbath on Wall Street. When the panic of 2008 came along, emerging markets, commodities and leveraged hedge funds were among the hardest-hit investment sectors.

I would argue that planning your investment portfolio based on a doomsday scenario is extremely speculative and risky. Many of the forecasters who wrote books about how to crash-proof your portfolio against the coming cataclysm turned out to be wrong, and the investments they recommended fell far more than the broader market.

Commodities collapsed, with oil dropping from $150 per barrel to a low around $35 per barrel. As a sector, commodities lost twice as much as the stock market. The dollar, which was supposed to collapse got stronger and foreign currencies weakened. Even gold and silver, the much-heralded safe havens, declined.
If you want your money to work hard so you don’t have to, you need to look beyond the current tempest to build a lasting, sustainable portfolio.

This Week’s Stock to Watch:

Vanguard High Dividend Yield ETF (exchange traded fund) VYM: $24.60*

The Vanguard High Dividend ETF (VYM) invests in a basket of high yielding U.S. equities. Top holdings included beaten down bluechips like AT&T, Johnson and Johnson and Procter and Gamble Co. The fund currently yields approximately 5.7% and pays distributions to shareholders on a quarterly basis. With brand name stocks trading at extremely depressed prices, we view VYM as a solid way to own a diversified basket of these companies at bargain prices.

*Price as of3/10/09

This entry was posted on Tuesday, May 19th, 2009 at 2:42 pm and is filed under Fallen Angels Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.