The 800 pound gorilla is definitely in the room.
I have kept pretty quiet about the latest troubles on Wall Street and for good reason. To start with, as a registered professional I cannot just publish my thoughts without a compliance review. With the unavoidable delay between the time I write something and the time you read it, this blog could hardly be source of news. Of even greater importance, as an investor you cannot bury your head in the stand and pretend nothing is happening but you need to resist the temptation to react to media reports which are often sensationalized. As I have said before, ACT instead of REACT.
I have been in the business now for nearly 20 years. I have seen incredible highs and lows. I remember debating with colleagues about if the Dow was capable of exceeding 4000. But I have never seen a market which caused such strong emotional response. I am writing this after the market close on Thursday September 18th. Here is what the Dow has done this week:
- Monday: -504.48
- Tuesday: +141.51
- Wednesday: -449.36
- Thursday: +410.03
A four day, triple digit yo-yo and the real questions are What is happening? and What should you do?
On September 16th Russell Investments hosted a conference call featuring Ernie Ankrim, their Chief Investment Strategist and Mark Eibel, Director, Multi-Strategy Solutions. Here (Download russell_commentary.doc ) is a two page summary of the call which does a great job of explaining the situation. There are two points I believe are worth highlighting.
First, I am glad to see the Federal authorities actively managing the situation. As the document explains, they are stepping in when the thing they have to (like Freddie, Fannie, and AIG) but are staying out when they feel they can (Lehman). They have a fine line to walk. Allowing failure puts our economy at risk. Bail outs give CEO's too much latitude to take on risk.
Second, I am going to quote the last paragraph:
"… we believe this period of crisis highlights the need for a long-term investment perspective. While the last year has been difficult and Monday's sell off was substantial, there have been worse days in the market. For those patient investors with a long term perspective, this too shall pass. Broadly speaking, our advice to our clients is to stay diversified, stay invested, and to match their level of risk with their long-term objectives. We believe this is a rational strategy for consistently building wealth over time."
I could not have answered the question of What should you do? any better.
I'll close today with this. If you have not seen it in a while, read The Cycle of Market Emotions. It really applies right now.
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