The Market Is Crashing Again, AWESOME!

Hi all, long time no write. Today as I sit here, it's a cloudy and dismal Friday here in the 'Burgh. But, even more dreary than the weather, the market is tanking again just when it looked like it might recover some of the ground it lost in the past two weeks. I guess it just wasn't to be. It's hard to get giddy about anything when many are out of work, wages are stagnant, prices of goods are going up, no one is buying homes and on and on. But because of this I'm going ask you to do something crazy this weekend. I want you to go in to your retirement or investment account client access portal this weekend grit your teeth, bite the bullet and TAKE A LOOK. Let me warn you now. IT AIN'T GONNA BE PRETTY. And the more you have in stocks, either here or overseas, the uglier it's going to be.

Now you maybe wondering why I would ask you to do something like this. I mean seriously, it's bad enough everything is going to hell in a handbasket, why can't you just wonder how bad it all is? Why not wait till the beginning of October when you get the inevitable end of third quarter statement in the mail? Besides, with enough "ice cold ones" you'll forget all about it till Monday, right?

Actually there is a very good reason I'm asking you to do it now. You see, as a financial adviser, most of the time I'm called in to invest new money for current or new clients, economic times are stable to awesome, and the client can wait to "play" the market because they're bombarded ad nauseum by the media, friends, family, and co-workers about how they are losing money by not being in the market. Come on, you know what I'm talking about. Even though those times seem so distant now. It's said in professional circles that investors oscillate between fear and greed. In good times everyone wants a piece of the pie, and in bad times no one wants to be near the market, and in my 10+ years of experience, having seen the joys of the 90s, the lows of the early '00s, back up again only to crash again in the end of 2007, back up again in 2009 and 2010, finally to the 2011 rollercoaster ride that's still going on, I'd have to say the fear and greed thing is spot on!

Now whenever I meet with a new client I give them what we call an I.P.Q. or Investor Profile Questionnaire. Every adviser has one though it may be called something different. Anyway, this thing has a series of questions about the money to be invested. Several of these questions include wording such as "How would you feel if your investment dropped 10% overnight? 20%?" Now when the market is on a rocket ride up, the thought of a big drop phases almost NO ONE! Even the 80 year old ladies want to play penny stocks. So a 10-20% drop? Pffft, chump change! THIS is why I'm asking you to look at your portfolio now because the losses are REAL now! The market is on the decline and who knows where and when it will finally put on the brakes and change course. Now we can get a TRUER idea as to what your tolerance to risk REALLY is.

Okay, here's what I want you to do. Take a deep breath, and log in to your account. Let's take a look at what it is overall. Having a copy of the end of last year's or beginning of this year's figures would help tremendously for comparison's sake. First whats the percentage loss since December 2010? You figure this by using a calculator to divide the lower number by the higher number then remove the decimal point and subtract that number from 100. For example, if your calculator gave you a value of.9399945, you would subtract 93.9 from 100 and get 6.1%. So, what is your change since January 1, 2011? is it 2%? 6%? 10%? more?
I always use the guideline of 8-10% for more aggressive investors since that is what the stock market has averaged over many years. As far as I'm concerned, if you claim to be aggressive, you should be able to stomach at least as much down as you can up, i.e. 8-10%. If you can't, you're not as aggressive as you think you are. After all, the little old lady investing in C.D.s at the bank would LOVE to have 10+%, but she knows that number isn't realistic because she can't afford the risk, but she's at least honest about it. Many so-called "investors" are not honest about it and whenever the stuff hits the fan they're looking around for someone to take disciplinary or legal action against. Unfortunately, if you claim to be aggressive, you're going to be taken at your word, and staying aggressive is TOUGH in bear markets.

Next let's take a look at your investment mix. It's usually tough for me to help clients with their retirement plan allocations with their employer's plan because most don't have various asset classes that I use to soften the blow of a bad market by historically moving in the opposite direction of a market index such as the S&P 500. Examples of these "alternative asset classes" include real estate, and precious metals. But even though most plans don't have such options, most can do far better with what's available. One very big mistake that I commonly see is people that have three or four different funds that are invested in basically the same stocks and tell me they are diversified. They are usually quite shocked when I show them how UNDIVERSIFIED they really are. Just because the funds have different names doesn't always mean they are invested in different companies. Your broker or adviser can do an analysis for you, but if you are a "do it yourself" kinda guy or gal, go to the Morningstar site and use their Portfolio Manager tool, the Stock Intersection View is the thing you want to be concerned with. If one or two funds have the same stock that's common and acceptable. If five or six funds hold the same stocks the entire way down the first page and onto the second or even third, this is not good because while they will all rise together, they will all fall together too. Do you include bonds in your portfolio? All 401ks that I know of have bond funds available, but many don't use them because their potential for gain isn't nearly as good as stocks and stock funds. Usually though (hasn't always necessarily been the case in the past two or three years) bonds and stocks run contrary to each other which softens the fall when stocks head south. Also, bonds pay an interest payment which adds to their return.

The final thing that I want to look at is, presuming you have any type of diversification, do you re-balance on a regular basis? That is, do you tell the company managing your investments to buy more of what lost and sell what made gains in order to return the allocation to the same percentages when you set up the plan? Now this comes with the caveat that the original allocations still reflect your current wishes. BUT you you should have a system in place to take profits off the table regularly, as well as buy not so good investment sectors at bargain prices. Whether you re-balance quarterly, semiannually, or annually is a matter or opinion that varies among investment managers. What doesn't vary is the opinion that it needs to be done. Research shows that rebalanced portfolios have performed better over time. Research also proves that very few retirement plan participants do it. They instead adopt a "set it and forget it" mentality. With most plans re-balancing can be set up to do with one push of a button. Just do it.

Well, glad to be back again after a long absence. I will try and get a few more relevant articles out here before tax season is upon me. But until then, I believe the "to do" list created by this article will keep you busy for awhile.

Christian Halas is owner and wealth manager with Halas Consulting located in Pittsburgh, PA. Halas Consulting prides itself in providing unique and objective solutions to various insurance, investment, banking, tax, and estate issues faced by individuals and small businesses. Investment services provided in conjunction with Venn Wealth and Benefit Services, a PA Registered Investment Advisor. Christian can be reached via email at chalas@venn.us with any questions or comments on this article

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