Recovering from a Market Drop

We all remember that time… the 2008 and 2009 market drop.  What a scary time that was for investors and even advisors, nationwide.  Now a few years later, we are hearing mutual fund investors ask, ”Have I recovered from those drops?”  Well here are some things we are seeing as we review client accounts.

Many investors are near a complete recovery, if the following happened:

  • Investors stayed in the market and did not try to “time out”
  • Investors maintained their investment allocation in equities at the same level of risk.  For example, a 75% stock investor prior to the drop stayed invested in practically the same equity allocation throughout this time.  Yes, changes could be made, but overall equity allocations remained about the same (No reduction in risk level, such as moving from Moderate to Conservative)
  • Investors did not redeem any sizeable amounts from their investments.  It was very important to maintain at least the same amount of shares as prices recovered.  In fact, as dividends and capital gains were paid out, investors who reinvested these amounts actually accumulated additional shares which proved to be very helpful in regaining lost ground as share prices recovered

We have also seen added benefits for investors who continued to invest (buy additional shares) during any significant market drops.  This is typically done best through “periodic investment plans” or automatic bank drafts, which takes advantage of an investment strategy called “dollar-cost-averaging”.

We hope this helps as you consider your situation.  Yes, some of the suggestions that advisors gave to their clients back during that ugly drop are proving true as time goes on, especially if investors stick to their game plan.

Understanding Dividends

On the heels of Apple announcing they plan to start paying dividends, I hope you find this information helpful and enlightening to your situation.

Most people understand “interest” from savings accounts and CD’s. But few truly understand dividends, how they work, and the benefits long-term. So let’s try to explain.

Simply speaking dividends are payments from corporations to their shareholders (investors of the company). Prior to each dividend, the board of directors declares the amount to be paid to shareholders. Dividends are usually paid quarterly and can be distributed in cash or reinvested to accumulate additional shares. Today you may find companies or stock mutual funds that pay reasonable dividends in the range of 2% to 4% each year.

Many investors prefer stocks or mutual funds that pay reasonable and predictable dividends. These dividends can supply a stream of income compensating the investor with some form of return, while they wait for a potential longer-term overall return.

Stocks that pay dividends can generally be less volatile than companies that pay no dividends. One reason for this is that the investor is compensated for their investment risks each quarter, through the dividend, rather than waiting long-term to receive any potential benefits of growth. Keep in mind this is a general principle and is not always the case for all stocks and mutual funds. Also, savings accounts and CD’s are typically guaranteed (FDIC insured) and stocks are not. This means that the investor can see fluctuations in the value of their stocks or mutual funds. Remember, past performance doesn’t guarantee future investment returns. That said, also remember that dividends can provide some benefit in the meantime while investors wait for longer-term potential growth.

What’s causing all the volatility?

Europe. But before we try to explain, let’s remember all the problems when we turned the corner into September. The markets were burdened with the possibilities of entering another U.S. recession, Europe had debt issues, there was a recent downgrade of U.S. debt, and it appeared our politicians in Washington were adding on more issues. Not to mention we were still dealing with supply disruptions and Japan’s economic fears caused by the Japanese earthquake.

Now it appears most of these fears, except Europe, have dissipated for the time being. Moreover the U.S. economy is showing some signs of growth, corporate earnings have held up fairly well, and the S&P 500 has regained 8.5% since the bottom on October 3rd according to Morningstar data.

So what is Europe’s problem? It seems the culprit could be the four letter word: Debt. More specifically, as the fallout from the U.S. sub-prime mortgage problems spread and economies around the world slowed, the so-called “PIGS” of Europe (Portugal, Italy, Greece, and Spain) showed signs of defaulting on their debt. Many believe the reckless, socialistic government spending of the past, as well as weak economies may have brought some other small countries into risk. And not being under one government rule, both the citizens and politicians in the stronger European countries (France, Germany, etc.) may not be willing to provide the necessary aid these countries require.

Yes, we have serious government debt issues in the U.S. As of recent we have seen our politicians “kick the can” down the road. The most recent occurrence of this was the Super Committee failure last week to provide significant helpful solutions.

Sure we could eventually be exactly where Europe is today, and with serious ramifications. However as for now, and excluding our government debt, our banks, consumers, and corporations have made significant progress since 2008 in improving their financial position and building larger amounts of cash to possibly weather another storm if it comes.

What could the European problems mean to our economy? On Monday’s CNBC broadcast, the discussion mentioned that the possibility Europe’s “pain” could actually be our “gain”. In other words, more foreign capital could find its way to the U.S. (via investments into the U.S. dollar and treasuries) and eventually make its way into our stock market. But more serious pains could rise up, according to Miles Betro of Fidelity Investments, should there be a major bank failure in Europe. He suggests that we could see another “Lehman-type” event that could trim as much as 1.5% off our economy (GDP). If this happens we could move right back into a new recession.

So when will this volatility end? The consensus among investment experts is no time soon. It appears it’s going to take more time and pain before days become a little more predictable for the markets. Please know we realize this may be a scary and even tiring time for investors to see markets drop 200 to 300 points in the matter of just a few minutes. If we may suggest a helpful “tip” remember that volatility can also work to the upside. Just yesterday we saw the DJIA up 291 points.

And finally, try to focus on what things will be like a year or two from now rather than the next day or even month. In other words, could the deals today be the catalyst for better performance down the road? We believe so, and look forward to that day! Is this not the true definition of an investor?

Another Melancholy September?

Wondering what might happen in the stock markets this month? Many think October (and some think August) is typically the weakest month for the Dow Jones Industrial Average. However, reading from the data, the chart above (Source: dshort.com) shows that September has historically been the weakest month since 1928. Additionally, according to dshort.com, September has averaged -1.3% in the DJIA since 1929.

Keep in mind history is not always a foreteller of the future. Consider last September in 2010 when the DJIA actually increased 7.7% (Source: Bloomberg). However that move could have been event-driven by the Federal Reserve “leaking out” in late August their intention to “flood” the markets with fresh money through QE2.

Only time will tell what will happen this September.

How We Are Seeing Things

Considering the most recent and possible trends, we want to update you on our position and how we see things going forward.

With the recent downgrade of U.S. debt, the political gridlock in Washington, continued deleveraging of global debt, particularly in Europe, and heightened consumer fears – it is possible that our economy could experience increased headwinds for some time. This could translate into slow to possibly even no growth, and continued volatile stock and bond markets. Therefore generally speaking we are tending to think a little more defensive going forward.

At this point in time we are hearing that the markets are “very oversold” meaning that we could see market rallies. If these happen, it is possible that they could be short-lived. So during any better times in the market, windows of opportunity could prove optimum times to make defensive adjustments, if needed.

Please understand we aren’t suggesting investors “run for the door,” so to speak. This reactive, fear-driven type of strategy often proves futile in the long run. Diversification studies show us that there will be asset classes that trend better for investors over others during specific periods of time.Also, we are hearing there are “pockets” of increased economic growth in certain “developing” areas of the world that is contrary to what we are seeing in the U.S. This being the case we will do our best to help clients sort through these facts to make wise investment decisions for their situation.

What you can do in the meantime…

  1. Stay calm and don’t panic. Remember, panic is not a strategy. It is a reaction. Be very careful how you are reading things, and try to be objective in order that you can make better decisions for your situation. It’s sad, but in times like these we hear and see new prognosticators that will try to predict “exactly” how things will turn out. No one can do this accurately every time! Also, friends and others will tell you what they are doing. Remember everyone’s situation is different (income, debt, goals, risk tolerances, background, family, etc.). So try not to “follow the leader” – it’s best to review your situation independently.
  2. Don’t do something emotional and stupid. In times like these advisors see clients do irrational things. You should already have a plan in place, and it’s important to remember that the plan is there for a reason – to help you stay on course. Making knee-jerk reactions can lock in losses (sometimes at significantly lower prices), and even have other consequences such as tax penalties, income or capital gains tax, and increased trading costs. In volatile situations people can feel overwhelmed, so it’s usually best to seek “wise, professional counsel”.
  3. Continue your 401-k and other retirement savings. Believe it or not, in times like these some people stop contributing to their retirement plan with the excuse that they don’t want to “throw good money away”.Remember these times – the market lows – are often the best times to continue buying. You could be getting more shares at lower prices while also continuing to reap the tax benefits associated with qualified retirement plans. It’s often what seems contrary or even wrong today that may benefit you the most in the longer-term.
  4. Re-assess your debt situation. It’s a good thing to pay down debt, especially higher interest rate debt. A good way to do this is to look for expenses you can reduce or cut out. Control emotional, impulsive buying decisions as you manage your spending plan. Also, consider the costs and benefits of driving your vehicles longer. Then take these savings and plow them right back into reducing your debt on a monthly basis.

It could also benefit you to refinance at today’s lower mortgage rates. We have recently heard rates are as low as 3.25% on a traditional 15-year loan, and 4.25% a 30-year fixed mortgage. Sometimes moving quickly and refinancing at reduced rates can allow you to use these savings to pay off your mortgage sooner. Also consider the advantages of reducing the term on your mortgage, such as reducing a 30-year to a 15-year period for more significant interest cost savings.

We will frequently review our “view of things” going forward and willperiodically note pertinent issues through our emails and blog – so please “like” us on Facebook or sign up for our Blog to receive ongoing updates.

In closing, during these more difficult times we will work hard to help sort through all the “noise” out there in order to help you make the right decisions for your situation.

 

The August 2nd Deadline

We all have learned it’s much better to make an “objective” rather than “emotional” decision. And with the national debt deadline less than a week away you may be wondering how the U.S. debt decision in Washington may affect you, your investments, etc. To hopefully help keep our thoughts rational and to try to “filter out” all the clutter (Fox News, CNBC, The Wall Street Journal, another Presidential speech, Congressman “political” posturing interviews, etc.), we are assembling questions to consider. Hopefully thinking through these questions will help you in your planning and to possibly help reduce some “hysterical” thoughts and knee-jerk tendencies to “fix it”.

1) Do our politicians and President have the guts and political muster to not compromise and place our Country in default? Would it be political suicide for some?

2) How long could a default last and what might it look like? (One Day, 1 Week, 1 Month, 6 Months, Longer)

3) Which is worse, a default or just a downgrade?

4) When could the markets begin to adjust for a default, what could it look like, and how long might it last?

5) What assets could be affected the least in a default? Which assets the most?

6) How could the S&P 500 Index behave (fluctuate like) in the following scenarios over the 1st day, over a month or more, or over a year or two:
— If a default is avoided…
— If a default and U.S. downgrade is avoided…
— If a default and U.S. downgrade happens, but is cured within a short period of time…
— If just a downgrade happens…

7) What might be the costs or benefits for an investor trying to “time” the outcome?
— If a default was prevented?
— If a default actually happens?

Posted by Randy Mascagni, CFP®

Mascagni Wealth Management — A Registered Investment Advisory Firm
205 E. Main Street, Clinton, MS 39056 — Phone (601) 925-8099 — Toll Free (888) 925-8099

Securities by Licensed Individuals Offered Through Investacorp, Inc.
A Registered Broker/Dealer, Member FINRASIPC.

Past performance is no guarantee of future investment returns.

Market Update 7/5/2011

Since our last Blog on June 7, the market has moved positively in spite of many predictors. This is while news headlines have reported repeatedly on Greece possibly defaulting on their debt, a possible slowdown in the US economy, as well as the U.S. debt ceiling problems in Washington. In fact, just last week the market was up 4%. And since our last post (June 7), see the changes below…

DOW Jones +1.1%
S&P 500 +0.3%
Nasdaq +1.8%
Note: June 7 close through July 1 close; Source: Yahoo! Finance

There is a saying that many times proves itself true… ”The stock market climbs a wall of worry”. What this means is that the stock market can go up in spite of lots of bad news. Since June 7 this appears to be the case.

Going forward on a short-term basis it’s impossible to predict the stock market. However, as far as the economy we could see some slow improvements caused by increased supply shipments from Japan since the earthquake (helping manufacturers such as auto, technology, etc.), and declining gas prices. Just this morning we have seen that Factory Orders released today for May showed a +0.8% improvement over April. We will keep our fingers-crossed hoping this slow-down is just a temporary “soft patch”.