|
 Quarterly Newsletter: October 2008
Click here to view the Index Returns for 3rd Quarter 2008
(PDF, 93kb)
Changes in Financial Landscape Rock Markets
Third quarter investment returns were negative across the board due to continued disruptions in the credit markets and unprecedented changes in the US and global financial corporate structure. Financial markets detest uncertainty and surprises. Over the last three months, a fire-hose of unanticipated events has shaken investor confidence.
These changes are history now, but it's worthwhile to tic off these amazing developments: Fannie Mae and Freddie Mac were taken over by the government; Lehman Brothers filed for bankruptcy. Merrill Lynch was acquired. AIG gave the government control of the company in return for an $85 billion loan. Washington Mutual was seized by federal regulators. Wachovia was sold to Citigroup under federal supervision; this may be upset in favor of a deal with Wells Fargo. As of this writing, the final outcome is in dispute. Meanwhile, Goldman Sachs and Morgan Stanley survived only as a result of large infusions of cash and by turning themselves into commercial banks. Whew!
The S&P 500 stock index was off (8.4%) for the quarter and (19.3%) year to date. In view of the corporate changes, together with uncertainty over the upcoming presidential election, many observers say that it's actually surprising that losses weren't greater.
The economy and investment markets are facing difficult times ahead. Corporate borrowing costs have soared and credit is extremely tight. Consumers are frozen with fear resulting in lower projected corporate earnings. The federal $700 billion bailout/rescue plan was finally passed on October 3rd to take over troubled assets from financial institutions but details need to be worked out.
No one knows how all this will play out. Many observers are predicting the most likely economic scenario to be a one-to-two year recession, followed by a slow and gradual recovery. There are other possibilities, including a more extensive financial collapse, a Japan-like deflationary period…and even the possibility of a relatively quick bounce back in the economy and markets.
What To Do
You know our philosophy by now; one client calls it our mantra. We say it in different ways but it may be summed up as:
Invest in a diversified portfolio of low-cost assets tailored to your risk and return objectives. Don't panic or make big investment moves during down or up markets. Rebalance to strategic targets as markets move.
So we are now telling our clients–as we always have–to move cautiously, be patient, avoid big bets and to rebalance their accounts, as appropriate.
Why do we adhere so strongly to this position? This is not a blind, unthinking investment approach. It is based on three important precepts:
- 1) An understanding of capital market history
- 2) An appreciation for the power of free markets
- 3) A realistic assessment of the cost of alternatives
Capital Market History
Equity returns have averaged 9% over the last hundred years in the US. This timeframe includes world wars, depression, recessions and assassinations of presidents. At those times, investors went through high stress levels and the strong emotional distress of dealing with immediate uncertainty.
Looking at the past 35 years on the accompanying chart, we see that this current bear market is within historical norms of other down markets. No one knows how deep this one will go or how long it may last, but so far results are not unprecedented.
These historic negative events have certainly resulted in market losses, but new companies have always emerged, offering their investors the prospect of sharing in their earnings in the delivery of goods and services to customers.
Free markets
One cannot just count on history to repeat itself; we can't watch the road ahead while looking in the rear view mirror. The reason markets are resilient is the faith in our capitalistic, free market system.
Of course there must be governmental safeguards to protect citizens and investors. This is the nature of the current debate about the proper role of governmental regulations of markets. But faith in the future means investors are counting on continued developments in the free market system and balancing it with appropriate governmental limits.
Having a free exchange of information and the freedom to create entrepreneurial solutions has resulted in an unprecedented period of prosperity in the United States over the last century. Other nations have taken note–many are implementing our free market system. Allowing individual initiative to flourish leads to creation of wealth. Countries which have mirrored this approach have enjoyed the same benefits and have given investors diversification benefits in international equities.
The Alternative
We understand the temptation in these markets to do something else. If only we could sell our stocks and bonds, go to cash, wait it out, then get back in when the future is clearer.
First, there is an up-front cost for making this move. Transaction costs of trading out of the portfolio can be significant and taxes must be paid on any realized gains.
But more importantly, the future is never clearer. One cannot rationally choose the best time to buy back into markets. When investments rebound, it is almost always unexpected and rapid. Ironically, this is when we feel better, when investments have became more expensive to buy. So those on the sidelines seldom are able to effectively decide when and how to re-invest. The opportunity cost of missing some or all of the rebound is significant.
Summary
We thank you for trusting your assets to us during these difficult times. There are no easy answers in the current markets–uncertainty will remain a constant. But we can help you limit losses and position your portfolio for future growth. Stay focused on your long term investment goals, avoid the temptation to overreact and talk with us about changes in your investment situation.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this newsletter, will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Arbor Investment Advisors, LLC. Please remember to contact Arbor Investment Advisors, LLC if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services. Please also advise us if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure statement discussing our advisory services and fees remains available for your review upon request.
Return to Newsletter page
|
