As the credit crisis takes a new turn, investors have to cope with a fresh round of shocking headlines and a crisis of confidence among large financial institutions. It is now well known and documented that the current economic debacle has been caused by an excess of undisciplined lending to unqualified borrowers. Subprime loans to borrowers and related financial instruments were bought and sold by intermediaries and eventually ended up on the balance sheets of major U.S. banks and investment banks as well as being part of the investment portfolios of domestic and international investors.
The air continues to be thick with anxiety here in Central Oregon as well as around the globe as investors have been turning their backs on risk. It is hard not to as the latest local news has not been settling. The Federal Housing Financing Agency stated that the Bend area (actually defined as all of Deschutes County) showed the largest average home price drop, year over year, for the first quarter of 2010 of all 301 areas which were ranked. That’s number 301 out of 301! All three Central Oregon counties lost jobs in July according to the Oregon Employment Department. Deschutes County’s unemployment rate climbed to 14.8 percent – well above the U.S. Unemployment rate of 9.5 percent.
Will our economy ever get better? Will our retirement accounts ever rebound? I believe this is a period of time that will require patience on the part of long-term investors as we work through these challenges. You may find yourself extremely unsettled by the undulations of the stock market. It has become increasingly difficult to make educated decisions on what you should do with your money.
During these challenging times I look to the gurus of the markets. Warren Buffet, known as the greatest investor of our times, has actually been purchasing billions of dollars of American stocks with his personal funds where he previously owned nothing but United States government bonds. He predicts that he will soon be invested in 100 percent U.S. Equities if prices continue to look attractive. He has a quote that I use every day in my practice: “Be fearful when others are greedy, and be greedy when others are fearful.”
His mantra may be counter intuitive but let’s reflect upon it. When many were purchasing Bend real estate a few years ago when it was increasing in value on a daily basis, Mr. Buffet would have probably passed. Now that so many are facing short sales and foreclosures, he would see this extremely challenging real estate markets as an amazing opportunity! Mr. Buffet wrote a provocative editorial to the NY Times stating- “A simple rule dictates my buying: And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now. Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month – or a year – from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
Chuck Widger, CEO, Brinker Capital states “To reap the rewards of prudent investing, you’ll have to follow the time-tested approach of staying invested for the long term—even though it’s usually accompanied by a time-tested case of anxiety. The flow of individual investors’ money shows that in the battle between emotions and sound strategy, emotion has taken the upper hand. Many investors abandon long-term strategies for the perceived safety of cash.
It’s human nature: in challenging times, our emotions tell us to pull out of the markets and run for the hills. However, this creates two big problems. First, it’s hard to see opportunities from far up in the hills. And second, when markets turn around, it can take too long to climb back down and get invested again. Selling during periods of market stress may cause you to feel the pain of loss twice: first, you lock in your losses; then you risk missing out on the market’s eventual recovery. This can leave a hole in your savings that never really gets repaired—you’ll always have less savings to build on than if you stayed the course. Instead of fighting an exhausting battle with your emotions, develop a diversified long-term strategy and stick to it. After all, your long-term goals don’t change overnight—so why should your portfolio?”
It has certainly been a very emotional period of time for investors and exponentially greater for those at or near retirement. How does one try to remove some of this emotion, especially when we were previously accustomed to record economic growth? I believe it is imperative to have a historical perspective. It is all too common to focus on our current dilemmas and challenges without learning from the past. I have always asked my clients to visualize a boy walking up the access road to Pilot Butte with a yoyo in hand. The undulating yoyo is symbolism for the economy, real estate, or stock market. As the yoyo goes up everyone is elated. As it falls everyone feels scared and depressed. As the yoyo starts its next ascent we are celebrating with exuberance and then before we know it gravity takes over and the yoyo faces a downward spiral; our stomachs begin to feel queasy with apprehension. It is up to us individually to choose to focus on the rising and falling yoyo or the boy. You see, they both reach the top of the butte with its majestic views of Bend at the exact same time.
Are there any positives in all of this? When the economy recovers, stronger firms everywhere will benefit. And right now, indiscriminate selling has left stocks and real estate at attractive valuations. Nervous markets create opportunities, but you’ll have to battle your emotions to keep your portfolio on course and stay committed to your long-term strategy. History shows that investments made in these moments of distress, when potential is much higher than normal, are usually the most rewarding. Earlier this month, Bloomberg Businessweek predicted that Bend, OR will have the 2nd strongest real estate market in the county of 384 places surveyed, where prices are expected to jump 33.6 percent by 2014. Wayne Gretzky’s advice says it all: “I skate to where the puck is going to be, not to where it has been.”
David Rosell is President of the Rosell Financial Group in Bend. He is the Past Chairman of the Bend Chamber of Commerce and the incoming President of the City Club of Central Oregon. David can be reached at (541)385-8831 or www.RosellFinancialGroup.com
Investment advisory services offered through Rosell Financial Group, a State Registered Investment Advisor. Securities offered through ValMark Securities, Inc. Member FINRA, SIPC 130 Springside Drive, Ste 300 Akron, Ohio 44333-2431. 800 765-5201. Rosell Financial Group is a separate entity from ValMark Securities, Inc.