You Ain’t Seen Nothing Yet…
While politicians on Capital Hill take group photo’s, play electoral games and contemplate their proposed bail out of our plagued financial system, the stock market continues to grind lower. The rescue plan would involve the U.S. government spending $700 billion on questionable assets from the growing number of distressed financial institutions – nationalizing the money losing part of the financial sector. As President Bush try’s to bully Congress into “rising to the occasion” and approving the legislaton, leading lawmakers resume difficult negotiations that will be debated for years to come whether the bail out plan gets approval or not.
Let the reality check record show that neither portfolio managers, economists or government leaders know for certain if the stimulus plan under consideration will help stop the bleeding or even stabilize markets at all.
What we do know..? The subprime mortgage crisis, credit crunch and weakening dollar have crippled capital markets sending financial giants crashing to their knees and pushing our economy to the brink of collapse. Making matters worse, the housing market continues to plummet, there’s no credit for anyone with anything less than perfect credit history and the consumer is dying. People on fixed incomes, who thought they were on cruise control, are now feeling the inflationary wrath of raging fuel, food and healthcare costs.
Bail Out Plan or no Bail Out Plan – the economy is in horrific shape and about to get worse… a lot worse. As the current economic downturn gains momentum and we drift deeper into recession, it’s time to start thinking defensively about protecting your assets. Americans could soon be in for a devastating awakening.
For those of you with large portions of your net worth invested in the stock market, it’s time to take a good look around. More likely than not your money managers, mutual funds and stock brokers will encourage you to keep your money “working for you” in the stock market during these challenging times. They’ll have impressive charts, valid data points and proven statistics demonstrating why it makes so much sense to keep your funds in the market. If… after reviewing current conditions, your investing prowess, risk tolerance and market savviness should steer you down that path without endangering your lifestyle or plans for retirement then good luck to you. However, do keep in mind and realize that most of these “keep your money in the market” statements are biased. All these financial gurus you see on television and quoted in the newspapers that manage money – can only make money when they have money to run (your money). As our country evolves and times change, our economy, financial system and political system evolve with it becoming more and more complex… giving way to future events and crisis’s that aren’t fare to judge against the past events of a simpler time.
Picture this… You’re on a weekend trip to Atlantic City where you sneak a thousand dollars past the little woman and head off to the black jack tables with your buddies. After only 2 hours of getting there, your sitting at the table rubbing your burning eyes from cigarette smoke, sipping on Jack Daniels and you’re getting your ass handed to you… Would you: (A) leave it up to the dealer to decide if you keep playing because she thinks the shoe is warming up? Or (B) make the decision for yourself? …I hope for your sake you said (B) choose for yourself! The dealer works for the house, you’ve got all weekend to play and you’re not going to let somebody else put you out of the game when you’ve still got so much time left to play.
As the economy weakens, the general investor’s tolerance for risk lessens with it. We’re headed deep into a recession where money will be increasingly tight, harder to come by and can’t be borrowed. Without the consumer, companies will have a tough time turning profits and be forced to downsize. Thousands of people are already losing their homes, assets and are in severe financial stress. Mass layoffs are around the corner and will lead the way to levels of unemployment, bankruptcies and foreclosures like Generation X never thought fathomable. I can promise you that the money you made yesterday will be significantly harder to make tomorrow, so protect what you have. Choose your investments wisely.
Forget about fundamentals, intrinsic values and stock market trends for a minute. When it comes down to brass tacks, two things drive the market… Fear and greed. The Dow Jones Industrial average is currently down roughly 22% from it’s high in 2007. Who says its can’t go even lower? If your financial advisors have you thinking these depressed levels are showing signs of a bottom… then take a look at Japan’s Nikkei Index. In 1990 the Nikkei 225 Index was trading at 40,000. By the end of 1991 the index had fallen 25% to 30,000. Do you know where the Nikkei is trading today? After being down 25% in 1991, eighteen painful years of enormous life changing losses, the Nikkei 225 is currently trading down an additional 60% from 1991 and 70.5% lower than it’s high. I’m not saying this is what we should expect. But what I am saying is that… It’s not impossible.
Here’s what scares me: Shortly Mr and Mrs Average America will be receiving their 3rd quarter brokerage account, IRA and 401k statements. Two minutes after opening the envelope they’re going to realize these giant banks and financial institutions, that have been blowing up one after the other, isn’t just a “Wall Street problem” like they had thought and they just lost 25% of their life savings, children’s college funds or even worse… their retirement. Now they turn the TV back on and every channel they turn to has government officials and market professionals frantically trying to strategize plans that may or may not help stabilize the financial markets, loosen the credit crunch and tips on how to survive in a recessionary economy. You know what happens next? Panic sets in and out of fear they pick up the phone, get online or drive over to their brokerage house and sell everything.
Generation X has never been exposed to such unsettling economic and financial uncertainty. The sell-off we’ve seen over the past few weeks could soon pale in comparison to the mass-redemption landslide we could potentially endure when Tom, Dick and Jane get a taste of what’s about to be served for dinner. Up until now the bulk of the market pressure has come from mutual funds, hedge funds and other money managers. It’s not going to be pretty when the average investor, who can no longer sustain such losses, fear the unknown and start panic selling like rats scurrying to the surface of a sinking ship. I’m not calling Armageddon just yet. But when you take into account the severe headwinds the economy faces, the stock market’s decline with no end in sight and unemployment going through the roof… you wouldn’t want to be the last one to the life boats.
Investing is not just about setting financial goals. Smart investing requires you to continuously reevaluate and adjust your portfolio according to your age, current income and risk tolerance. If you think the world’s going to hell in a hand basket, you can’t sleep at night or reading this blog has gotten you even half as nervous as I am… then act now, make the appropriate changes and protect your assets. Since I can’t predict the future, I’ll have to rely on current economic data, bankruptcy filings, foreclosure fillings and historical comparisons chillingly similar to the times leading up to the Great Depression.
I hope I’m wrong. In the meantime, it wouldn’t hurt to fasten your seat-belts and hold on.
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