Year-end Financial Q&A

CHAD CARLSON, FINANCIAL ADVISOR

Making sense of today's financial markets is putting even the most seasoned investors to the test. This week, I want to share with you some no-nonsense answers to some questions I've heard recently.

What is "the market" going to do?


Barring any near-term recoveries, 2008 will likely go down as one of the worst years for stocks since 1937. Unfortunately, the other asset classes – real estate, commodities, and even bonds – have also performed poorly. The good news is that corrections like we're experiencing, even recessions, are a normal and natural part of the process.

The longest recession since World War II lasted roughly 16 months. We now know that this recession started back in January, 2008. If it matches or slightly exceeds the longest postwar recession, it might be late spring to late fall of 2009 before we see an economic recovery. Since a rebound in the stock market typically precedes economic recovery, the financial markets could rebound before then. Historically, it's turned up 60 percent of the way through a recession. While confusing and scary, we will get through this.

Are we close to the bottom?


While it would be reassuring if we were at or near the bottom, the possibility still exists that things could worsen. Expect more negative earnings reports and a string of announcements about job-cuts and downsizing. But keep in mind that it's normal for the markets to overshoot on the downside, just like they do on the upside.

Billionaire investment guru, Warren Buffett, has already started buying US stocks that he thinks are undervalued. In the October 17 issue of the New York Times, he wrote that "Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky's advice: 'I skate to where the puck is going to be, not to where it has been.'" That's confidence.

In a Wall Street Journal article entitled "Is Now the Time to Buy Stocks?" a University of Chicago professor named John Cochrane said, "If you're less leveraged, less affected by recessions, and have a longer time horizon than average, it makes sense to buy. If you're more leveraged (i.e., indebted), more affected by recession, or have a shorter horizon, it might be time to sell – even if you might be cashing out at the bottom. If you're about the same as everyone else, do nothing and relax." I'm an advocate of patience, as tough as that can be during this time.

What should investors be doing now?


I recommend holding off on making any big changes or drastic rebalancing decisions. It is always a good time to add to cash reserves (emergency fund) and to reduce debt. Year-end is also a great time to meet with your CPA to discuss harvesting unrealized tax losses — losses that may be used to offset any gains or up to $3000 of ordinary income. For investors already taking income from their investments, the best strategy may be to tap those assets for income that haven't declined significantly first, supplementing income with cash and short-term bonds or CDs. For those still saving toward future retirement in IRAs and 401(k)s — keep on investing. And yes, stay diversified.

What is the most common mistake investors are making?


One of the biggest is investors raiding their 401(k) accounts through loans or outright withdrawals. A recent report cited one in five Americans are tapping their retirement plans early. These withdrawals should be avoided. Not only are withdrawals taxable and potentially subject to an early withdrawal penalty of 10 percent, investors may be selling their investments at depreciated prices. The greater problem is that investors taking early withdrawals are robbing themselves of a more secure retirement.

The other big mistake is trying to time the market. If you missed out on just 10 of the best days over the last 10 years, you would have reduced your return by nearly 50 percent. And missing the best 30 days would have put an investor in negative territory. Leave the speculation to the stock-jockeys on TV.

What should I do now?


Stay with your plan. Investing is a long-term process. Storms like we're experiencing with the current economic situation are a part of that process. They come and they go. But for the unprepared, it can be disastrous. For even the most seasoned investors, it can still be scary. If you don't have a financial plan, get one.

With 2009 around the corner, year-end is a wonderful time to tie up loose ends. Make a short-list of two to three items or priorities that you've been putting off all year long, especially the basics like updating wills or consolidating bank or investment accounts. Remember that financial planning is a process. It is a series of consistent action over time, making slight adjustments along the way. And lastly, spend time with the people you care about most. All the money in the world can't buy you time as valuable as these.


Chad Carlson, Financial Advisor for Delta Trust Investments, Inc., may be reached by email at ccarlson@delta-trust.com. Consult your CPA and attorney prior to making tax or legal decisions.