No Need to Panic: an update.

Back in March, I posted a column entitled No Need to Panic. In the aftermath of the Fannie/Freddie takeover, the fall of Lehman Brothers, and the federal buy-up of AIG, I sent an email to my clients. Here it is.

Dear Clients:

Most of you have known me for quite a while. So what's in this email will come as a no surprise at all to you.

This is the email where I tell you that everything’s going to be OK for investors with properly allocated portfolios.

The financial world has undergone tremendous upheaval in the past two weeks or so. Government intervention has salvaged several financial giants, and as I write this, a further government bailout for the economy is in the works.

Should you be worried about these events?
No.

Am I worried about these events, either professionally or personally?
No.

It’s true, as the analysts are saying, there will be ripple effects from the rescue or collapse of finance giants and­—if it comes to pass­—the takeover of bad debts held by financial firms. But ask yourself this question:

When these giant financial firms were prospering, how much did that affect your well being?

Chances are, not much. At least, not nearly as much as your own good habits of saving some of what comes in and living within your means. The effects of following your plan likely did more to benefit you than any ripple effects of the growth of giant financial firms.

In the same way, the effects of the failure of giant financial firms will, in the long run, be more than canceled out by following your plan, which will provide you better results and more calmness of mind than trying to outguess what’s about to happen next. In challenging times, following your plan is usually the best strategy. It’s still the best strategy, even with­—especially with­—headlines like those we’ve been reading.

The news tends to focus on the wild swings of the stock market. But remember, you’re invested in more than stocks. My investment recommendations assume that it’s important to have other assets prepared to stay afloat during a market downturn.

We do this because we can’t possibly know what’s coming next. Many analysts try to outguess the near future, but the machine they’re trying to deconstruct has too many moving parts.

So, what is coming next? Is it going to get worse before it gets better, or better before it gets worse? The answer is yes. It will either be one, or the other. Or something else entirely. That’s why we don’t try to rush to “where the action is,” because by the time we see what’s happening, it’s too late to fully participate in it.

We’re much better off to identify what we need in our lives, and then structure our savings and investments to serve those goals. So typically, we should strive to have enough cash for the near term, bonds or bond funds for deflation protection, real estate for inflation protection, domestic stock mutual funds for long-term growth and foreign investments to hedge the dollar. Your specific situation may vary: Since our allocations are based on your life, your investment recommendations are unique to your situation.

Who will be hurt in the current market? The investors who suffer the most will likely be those who panic and cash out. They’re locking in their losses, and if they wait until the market “gets better” before they reinvest, they’re planning to skip the recovery. This is not a strategy to profit from the investment markets. The last time I looked, the procedure went “buy low, sell high,” and sadly, fear will make many people do exactly the opposite.

If we want to buy low and sell high, then as we look at your investments, we’ll sell some of what’s been doing well and buy some of what’s been doing lousy. This is how we keep the financial risk at an appropriate level, and as markets fluctuate, it means you automatically buy low and sell high.

So I am not being overly sanguine in saying that if the balance of your portfolio was reasonably sound before these market shocks, it will likely require only a little attention in the wake of them. I am simply confident that like any market boom or bust, this, too, will pass. And those who profit most will be those who stick to their long-term strategy.

Of course, if you have any questions, especially if you’re feeling nervous, please call me. I’ll be glad to schedule as much time as we need to be sure you’re traveling through the market turmoil as comfortably as possible.

Best regards,

Ken.