Client Letter – Q3 2008

I want to begin this quarterly letter by acknowledging how wise you have been to “stay the course” during the most severe stock market decline since the Great Depression.  I am very inspired by your courage and commitment to keep a long term perspective.

The turbulence that rocked the financial markets over the last several weeks has terrified most investors and left them wondering what, if anything, to do. Major investment and insurance companies are in trouble or bankrupt and each day has brought a new headline warning of a spreading crisis of confidence. Extraordinary interventions by the U.S. government have reduced, but not ended, the uncertainty. As these events occurred, the stock markets swung from sharp losses to sharp gains, at times within the span of 24 hours. So, what should you do in times like these?

First, do nothing. Any decision taken during periods of high volatility is likely to be wrong. An investor who bases their decision on today’s market decline or rise is likely to get whipsawed the very next day when the market turns the other way.

Next, address your fears. While it is normal to feel anxiety during a financial crisis, do not let fear overcome you!  Remember that headlines at such times are designed to get your attention, that dire and rosy predictions are usually worthless, and that the worst case rarely comes to pass. Does the fast-talking television commentator have you worried that the entire system will go down? Look back at what happened during other crises. The system did not collapse in 1929 when the market crashed, it didn’t collapse in 1987 when the U.S. stock market fell an unprecedented 22 percent in one day, and it did not collapse in 2001 when Wall Street traders had to run for their lives to escape the carnage at the World Trade Center and U.S. markets were unable to open for trading for several days.

Third, take some time to assess your long-term plan and reasons for investing. You didn’t get into the market in order to make a killing on certain days or avoid losses on others. You sought to take reasonable risk in exchange for long-term returns in excess of inflation. Your plan likely extends over many years. If you are working, you may have 10 or 20 years until retirement. If you are retired, you will need income for years to come. “We don’t invest to retirement.  We invest through retirement,” said John J. Brennan, chairman of the Vanguard Group.  Even if you are in advanced old age, your investments will last over not only your lifetime, but that of your children or other heirs.

Fourth, look at how much money you have invested in bonds. That money is available to you at any time with little risk of falling value. You can use it to provide income and spending cash, allowing you five to ten years for the stock markets to recover and restore the value of your stock holdings.

Finally, think about rebalancing your portfolio, as needed. Stocks are down, and that is the best time to buy for investors who have the patience to wait out the recovery.  Rebalancing ensures that you continue to buy low and sell high, and it allows you to benefit over the long term from the worst of bear markets.

Now, let me take a moment to explain the “big picture.”  Yesterday, stocks rebounded over 10% globally after last week’s historic crash.  Notice how quickly things can change, up or down, in a volatile market!  This is why equity investing is risky in the “short term,” but very profitable over the long term.  You earn higher returns (10% versus 3%) over the long term for a reason – because you are taking more risk in the short term!  Yes, it is very painful when it goes down, but that is the “price” you pay in order to earn higher returns over the next 10-20 years. The successful investor’s motto is that RISK = RETURN.  The one thing to remember is that you should NEVER put money at risk (in stocks) that you need in the short term (the next 5-10 years).

From my discussions with each of you during the last week, I feel that we have all learned a few lessons from this brutal bear market, despite how well prepared we thought we were.  One of the lessons that I learned is that my business has a “risk tolerance,” so to speak.  I now have a better understanding of how much equity exposure, as a company, I am comfortable accepting.  I hope that each of you will think about what you have learned from this experience.  To help you, I am including three excellent articles that I hope you’ll read.

As I’ve said many times, I feel very fortunate to have such supportive and loyal clients.  It would have been much more difficult to get through this crisis without your encouragement.  Thank you so much!  Please feel free to call or email Debbie or me if you need anything.


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About Christopher Jones

Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.