By an unlucky chance a Fox fell into a deep well from which he could not get out.  A Goat passed by shortly after and asked the Fox what he was doing down there.

“Oh, have you not heard?”said the Fox, “there is going to be a great drought, so I jumped down here in order to be sure to have water by me.  Why don’t you come down too?”

The Goat thought well of this advice, and jumped down into the well.  But the Fox immediately jumped on her back, and by putting his foot on her long horns managed to jump up to the edge of the well.

“Good-bye, friend,” said the Fox, “Remember next time,
Never trust the advice of a man in difficulties.” Aesop

Whose guidance are you following?

Surrounding yourself with people who all spout the same financial jargon, from newscasters, brokers and so called journalists, is dangerous to your wealth. Look for the advisor who has a fiduciary duty to watch out for your best interests. Someone who isn’t afraid to take a stand. Look for the contrarian and listen with an open mind. Get a second, unbiased, opinion. What do the experts say?

Economist Nouriel Roubini, refered to as Dr. Doom by the naysayers, predicted this financial meltdown in his February, 2008 12 Steps to Financial Disaster. Today he posted an updated version of this insightful paper, The Risk of a Systematic Meltdown, suggesting policy recommendations to avoid the pending collapse of our global economy. He says:

… this is the worst housing recession in US history and there is no sign it will bottom out any time soon…
…radical action can be taken and should be taken to control the damage and prevent this meltdown from occurring. At this point the US, the advanced economies (and now most likely even some emerging market economies) will experience an ugly recession and an ugly financial and banking crisis regardless of what we do from now on… The financial and economic conditions are extreme; thus extreme policy action is needed now to save the global economy from an ugly depression.

Buy and hold?  No matter what?  I don’t think so.

Many advisors will eagerly show you what can happen if you miss just the top 5 days in the market by succumbing to fear and moving assets out of the market. Why does no one show you the benefit of missing the 5 worst performing days in the market? Neither can be predicted.

Here is a bit of stock market perspective

The Dow Jones Industrial Average hit a high of 11,722.98 on January 14, 2000 before starting it’s decline. It’s important to note, the decline began before the 9-11 World Trade Center attack. The DOW hit a five-year low of 7286.27 on October 9, 2002 (a short 6 years ago) and didn’t climb back over 10,000 until a year later on December 11, 2003.

In the 694 days between January 11, 1973 and December 6, 1974, the Dow Jones Industrial Average benchmark lost over 45% of its value.

The Roaring Twenties, which was a precursor to the Great Depression was a time of prosperity and excess in the city. Despite warnings against speculation, many believed that the market could sustain high price levels.

You can’t predict the market, but you can prepare. History always repeats itself. As the Bible states, “there is nothing new under the sun.”  Eclesiastes

• Never put all of your 401k money in one company stock. Think Enron, Tyco, Arthur Anderson, Worldcom, Lehman, Bear Stearns. Your circumstances are not the exception.
• Diversify. Not just with the mutual funds or stocks you choose, but also consider the tax treatment on your investments, including cash. Never be 100% invested.
• Don’t get greedy. As you age and circumstances change, it is not prudent to have all your money tied up in investments, regardless of their returns.
• Pay off your home. Don’t be lulled into thinking because you have a sizable retirement account you are well off. Not if your mortgage and credit card balance exceeds your investments. At the end of the day, it’s your net worth and debt-free assets that create the bottom line.
• Be a Girl Scout. Their motto? Be prepared. Always plan for the unexpected. Prepare, don’t predict. The only thing constant about life is change.
• Cash is always king. It provides you with the power of choice. This is a key Buffett strategy. Buffett’s Berkshire Hathaway was sitting on over $30 billion in cash during this crisis ready to take advantage of opportunity that always accompanies crisis.

Tax strategies give you options. Read our Traditional and ROTH IRA Comparison article. (opens in new window)  If you own a ROTH IRA and have the need for cash, your principal contributions can be withdrawn without the typical 10% penalty and tax consequences.  In times like this, that may become an option you need.  Please remember, however, that retirement funds are protected from bankruptcy proceedings so really think this through before taking withdrawals or using a 401k debit card.

If you see a bear market on the horizon, and believe me, we’re in one, when do you move to preservation rather than growth?

I don’t like to use labels when discussing investment options, but in this case it’s important you understand that variable annuities will offer you both downside protection, income guarantees, and the ability to transfer one subaccount to another without tax consequences. This may allow you (depending on your contract) to move to a money market as a safe haven and provide yourself with some peace of mind. Please talk with your advisor. This can be more complicated than it sounds.

Stay Tuned, Coming Up Next: Don’t Drink the Koolaide

Reference: Dow Jones Indexes