Fagan Associates Columns

Nearly two years ago, October 2008, Standard & Poor’s published results of a study that went back several decades and examined the impact that stock dividends had on total return (dividends +/- capital appreciation/depreciation) as well as stock price stability.  Although not surprising, the results did illustrate the value of dividends as they pertain to total return and share price stability.  As of this writing, with the ten-year U.S. Treasury Note hovering somewhere near 2½ % forcing investors to look for alternatives, we thought now would be a good time to examine the impact of dividends on total return.  Some of these findings are detailed below:

“From August 1989 to September 2008, dividends contributed approximately 28% of the total equity return of the S&P BMI World Index, while price appreciation contributed roughly 72%.”  However, “from August 199 to September 2008, dividend income accounted for as much as 52.05% of total return.”  It is important to note that the timeframe referenced immediately above occurred during a period of time when the stock market was relatively flat.

The study notes further that “in addition to providing a steady source of income for investors, dividends also play another important role during periods of volatility.  While price returns can be either positive or negative, dividend incomes are by definition positive.  This provides a cushion during negative equity markets….  Not only are dividends positive, they are relatively stable through time.  Wide swings in stock prices can be partly attributed to speculation and market sentiment; whereas dividend income, as a component of a company’s earnings, is less subject to speculation.”  In fact a study done by Fuller and Goldstein (2004) “examined the return behavior of dividend paying and non-dividend paying firms in both up and down markets, from January 1970 to December 2000.  The authors found that dividend-paying firms outperformed non-dividend paying firms more in down markets than they did in up markets.  Therefore, dividends allow investors to capture the upside potential while providing downside protection in negative markets.”

What’s an investor to conclude from this information?  We suggest that should your financial objectives allow for some allocation to the stock market, dividend paying stocks and dividend paying stock mutual funds represent an attractive alternative to fixed-income investments, including Certificates of Deposit and Money Market Accounts.

Investors looking for dividend income must first determine whether or not they can expect the dividends to continue at least at their current level.  A relatively simple way would be to calculate the current annualized dividend as a percentage of total earnings from operations.  For most companies, dividends should be no more than sixty percent of normalized earnings while for regulated utilities, this percentage can be as high as eighty.  For even more security, calculate this percentage for the past five years.  This will give you a clearer picture of the potential for a continuation of the dividends.

For accounts that can accept the risk of equity investing, we would consider Altria Group (MO); Conoco Phillips (COP); Darden Restaurants (DRI); Abbott Labs (ABT); the Jensen Fund (JENSX) and the Vanguard Wellington Fund (VWELX) which carry dividend yields of 6.1%, 4.1%, 3.1%, 3.5%, 1.04% and 3.02%, respectively.

THE BOTTOM LINE – With interest rates at multi-decade lows as a result of this “once in a lifetime bull market in bonds,” investors with a time horizon of more than five years might be wise to consider alternatives to Bonds, Certificates of Deposit, Annuities and Money Markets.  Stocks with dividends can provide investors with more income than many bonds, but with some added risks.

Compare and contrast the tenor of the statement released by the Federal Reserve after the most recent meeting of its’ Open Market Committee (FOMC) this past Tuesday with the prior one released June 23^rd as well as comments from John Chambers, the CEO of tech bellwether Cisco Systems, after it reported quarterly earnings this past Wednesday with those from the prior quarter and it becomes evident that there has been a marked slowdown in the pace of economic growth coupled with an acceleration in uncertainty over where the economy is headed.

Consider how Press Release dated June 23^rd.  The Fed begins “information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually.”  Further down within the same release the FOMC states that it “anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.”

Flash forward to the statement released this past Tuesday.  This time the Fed begins with “information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months.  Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.”  Further down in the statement the Fed notes that due to “low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.”  Finally, to support this objective the Federal Reserve will now “keep constant the Federal Reserve’s holdings of securities at their current levels by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.”

Equally cautious but candid comments were echoed by John Chambers on the quarterly conference call centering on their earnings.  Chambers observes that “we are seeing a large number of mixed signals in both the market and from our customers’ expectations, and we think the words ‘unusual uncertainty’ are an accurate description of what is occurring.  The Federal Reserve’ s comments yesterday that the pace and output of the recovery has slowed in recent months, and that the recovery is likely to be more modest in the near term than had been anticipated just a few months ago, are comments that most of our large customers that I have talked with recently would agree with.”

Compare this with a statement made by Mr. Chambers on May 12^th within their prior quarter earnings.  “Our financial results were outstanding, achieving record level revenue and earnings per share results.  We witnessed a return to strong balanced growth across geographies, products and customer segments that we haven’t seen since before the global economic challenges began.”

This cautionary tone expressed by both the FOMC and Cisco is part of the reason that stocks are having a tough time breaking out of their recent trading range, a range that we believe will be around until the mid-term elections.

THE BOTTOM LINE –If we are right and we are stuck in a trading range and as we mentioned in the past, look to add to your mutual funds down around the “Flash Crash” panic lows of May sixth of around 9,756 on the Dow.  Other than that keep some cash on the sidelines and await a better opportunity.  We believe this will come before the end of the year and will ultimately close out calendar year 2010 with mid to upper single digit gains in the major indices.

Regular readers of our column recognize that every once and awhile some issues not sufficient enough to comprise an entire article accumulate so we put together a “hodge-podge” like column.  Like other times when we have done this, some of these topics provide little tidbits of insight while others are profound.  Enjoy.

Not surprisingly, according to a study completed back in 2006 by Professors Michael Ferguson of the University of Cincinnati and Hugh Douglas White of the University of Missouri and related in an article by Mark Hulbert, “the Dow between 1897 and 2004 produced an annualized return of 5.3% when Congress was out of session, in contrast to just 0.4% when it was in session.”  Why does this occur?  Within the study completed by the two professors and noted in Hulbert’s article is a quote in 1930 from Will Rogers.  “This country has come to feel the same when Congress is in session as we do when a baby gets hold of the hammer.  It’s just a question or how much damage he can do with it before we take it away from him.”  Enough said.

Continuing along the topic of how markets historically respond to politics, when examining the four-year Presidential Election Cycle, according to SeasonalCharts.com, this year, the Midterm Election Year, the stock market has provided little or no return.  Furthermore, any return that is realized typically comes during the fourth quarter.  It makes sense.  Presidential Administrations, no matter which side of the aisle, initiate programs, reforms and push forth policies that typically come to a head during this year.  This year is no different.  Consider the Cap and Trade Energy Policy, Health Care Reform, Financial Regulation and the push for higher Personal Income Tax Rates.  Thus far this year, this has resulted in a flat stock market.  Case in point, year-to-date, through the end of July the Dow Jones Industrial Average has risen just 0.36% while the index that provides the broadest look at stocks, the Wilshire 5000 Total Market Index has fallen 0.04%.  Despite this lackluster performance, we are holding on to our outlook for the stock market which we first presented in writing within our Q1 2010 newsletter, The Fagan Financial Report, that “stocks move in fits and starts, but end the year modestly higher, perhaps by high single digits.”  We are expecting that a reestablishment of the balance of power in our elected offices, much like the 1994 mid-term election, could provide the catalyst for a year-end push higher.

Topic number two.  Since the Dow Jones Industrial Average was first introduced back in 1896, the months of July and December have provided the greatest average returns logging gains of 1.4% per month.  However this is closely followed by the month of August with an average of 1.3%.  That said, then why don’t investors continue to pile into the stock market at this time?  The reason is clear.  The month of September provides the worst return with the Dow falling an average of 1.2%.

THE BOTTOM LINE – Usually when a statistically anomaly becomes widely accepted it fails to provide any guidance.  We don’t use any one particular statistic as gospel.  However, we do take all rational ones into consideration when investing client portfolios.  We hope this article will help you.

It is more often that you hear or read of reasons to convert from a Traditional IRA to a Roth IRA than you hear or read of reasons not to convert.  Given the fact that this column pertains to the latter, we will only briefly note the reasons to convert.  These include the potential for rising personal income tax rates, tax free withdrawals after five years from a Roth and no mandatory distributions.  That said, there are several reasons why one should not convert from a Traditional to a Roth IRA.

First and foremost, a bird in the hand is worth two in the bush.  When you convert from a Traditional to a Roth IRA, you must pay the tax on the conversion immediately.  This has two negative consequences, the first being that you are paying those taxes from retirement savings thereby reducing those savings and secondly that the tax money is now in the pocket of the Internal Revenue Service rather than continuing to work for you.

One must also keep in mind that the dollar amount that is converted is added to your current income and taxed as ordinary income, which for most of us is at a federal rate of 28%.  This added income may push you into a higher tax bracket or cause your Social Security Benefits to become taxable, if you are currently collecting.

Another reason not to convert is that for many of us, our tax bracket during retirement may be lower than our tax bracket while working.  If you convert during your higher income earning years, you will most likely lose 28% to the IRS.  However, there is a fair chance that in retirement you may be in a lower tax bracket, perhaps 15%.  Therefore, why pay 28% now when you can pay 15% later?

Current law states that an individual may begin to withdraw from your Traditional IRA without penalty after you turn age 59½, but that you must begin to make withdrawals on or before April 15 following the year the individual turns 70½.  For some of our clients, we are able to make calculated withdrawals between these dates in such an amount that will keep the client in a low tax bracket.  This is another reason not to convert while you are in a high income tax bracket.

We like to turn the tables on those that recommend conversion due to the fact that with Federal and State budget deficits at alarmingly high levels, higher personal income tax rates are a fait accompli.  Although we do believe that marginal rates will rise, we do not consider it a done deal nor do we believe that they will rise substantially for the middle class.

With the tidal wave of baby boomers set to retire and thus set to begin to live on their savings, pensions and Social Security, we believe the Federal Government through the IRS will begin to explore different methods of taxation as a supplement to the personal income tax.  These alternatives include a flat tax, a value added tax (VAT), consumption tax or a national sales tax.  This may result in personal income tax rates remaining at or near where they are now with the added revenue coming one or more of these four sources noted immediately above.

Finally, although somewhat remote and given the wave of baby boomers nearing retirement, we would not be surprised should the government eventually tax distributions from Roth IRAs should the income or assets of the taxpayer exceed a certain level, a la Social Security.  “Somewhat” remote, but not that unlikely.  Think about it.

THE BOTTOM LINE – Think twice prior to converting from a Traditional to a Roth IRA.  As noted above, a bird in the hand is worth two in the bush.  Why pay taxes now when you can pay them later.

This past week President Barack Obama signed into law sweeping changes meant to provide the framework believed required to regulate the financial services industry and prevent the potential for a systemic collapse of the economy, a collapse that we came precariously close to during the Autumn of 2008.  In addition to the regulatory authority, several bodies have been created that will oversee the application of the law.

Recalling the causes for the near collapse, during the early 2000’s, after the repeal of the Glass-Steagall Act, a bill signed into law during the Great Depression and meant to provide regulation and oversight to the financial industry, banks and other financial organizations began to securitize mortgages in an effort to collect fees, maximize profits and make home loans available to more Americans.  Unfortunately, this process of securitization led to lax underwriting procedures for mortgages by regulated entities such as FannieMae, and FreddiMac and banks as well as unregulated entities including Bear Stearns, Lehman Brothers and AIG.  A bubble and subsequent collapse occurred in the housing market.  The rest is history.

Enter financial reform.

For consumers, the federal government has established the Consumer Financial Protection Bureau within the Federal Reserve that will oversee banks and credit unions with more than $10 billion in assets as well as all mortgage related businesses.  Furthermore, the law also permanently lifts Federal Deposit Insurance (FDIC) to $250,000 and establishes minimum underwriting standards for mortgages.  Regarding mortgages, the law now requires verification of income, job status and credit history.

The law also attempts to address the issue of “too big to fail,” one which led the U.S. Treasury to bail-out AIG and Citigroup, but let Bear Stearns and Lehman Brothers go by providing authority to the Treasury, FDIC and the Federal Reserve to seize, regulate and perhaps even liquidate struggling companies, regardless of whether or not they can be defined as a bank in the strictest terms or not, if their collapse would pose a systemic risk to the U.S. Economy.  In order to provide adequate oversight, the government would assess charges on firms with more than $50 billion in assets.

The assumption of excess risk, a contributor to the meltdown, is also intended to be regulated by the law through a limit on proprietary trading by financial firms.  In addition, the law also raises capital requirements.

The securitization of mortgages noted above as well as the usage of derivatives, intended to maximize profits from the potential increase in market value of the underlying real estate also contributed to the deep recession when real estate prices tumbled.  Furthermore, given the fact that much of this risk was taken by unregulated firms, the Government was slow to respond.  The Financial Reform Bill, officially known as the Wall Street and Consumer Protection Act, begins to regulate the over-the-counter derivatives market by requiring transactions to be completed over an exchange, thereby increasing transparency.

Finally, the law also establishes a Financial Services Oversight Council, chaired by the Secretary of the U.S. Treasury, and charged with identifying potential issues or companies that pose systemic risk to the global economy.

THE BOTTOM LINE – No legislation is ever perfect.  However, we believe that this is certainly a step in the right direction as it will hopefully provide early warning signs, thereby preventing a similar near-death economic collapse like the one we experienced during the latter stages of 2008 and early 2009 and from which we continue to recover.

According to a recent Economic Letter from the Federal Reserve Bank of San Francisco, “U.S. household leverage, as measured by the ratio of debt to personable disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s.  Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.  That dramatic rise in debt was accompanied by a steady decline in the personal savings rate.  The combination of higher debt and lower saving enabled personal consumption expenditures to grow faster than disposable income, providing a significant boost to U.S. economic growth over the period.”

Furthermore, according to Haver Analytics, “annualized, credit growth averaged 8% during the fifteen years ended 2007.  Over an even longer time period that increase does not loom particularly large.  However, against an average 5% growth in disposable income during those years, it precipitated a rise in the ratio to disposable income to 24% from a longer term norm of 17%.”

Taking into consideration both of these statistics noted above, the meat of the issue and the main cause of our current economic predicament is illustrated by the next statement contained within the aforementioned Economic Letter.  “In the long-run, however, consumption cannot grow faster than income because there is an upper limit to how much debt households can service, based on their incomes.”

This past month the Federal Reserve also released data that showed revolving (credit card) debt has fallen 9.6% over the past year while non-revolving (automobile and consumer durables) has risen only fractionally.  This combination has helped push the U.S. Savings Rate above four percent, a multi-decade high.  We consider this contraction of consumer debt, either voluntarily due to a lack of demand or involuntarily as a result of a lack of availability, to be a permanent change in the spending patterns of American consumers that will negatively impact the strength of the current economic recovery.  We believe the recovery, unlike past economic rebounds, will not be led by the housing or the automobile industry, purchases that results in debt accumulation.  Unfortunately, thus far it has been led by government spending that will, hopefully, eventually give way to the private sector.  Specifically, we find attractive for investment those sectors that export their goods and services to the emerging economies of the world; those industries that provide materials and services for the infrastructure build-out both here and abroad; and finally, those industries that provide goods that consumers can purchase without breaking the bank, namely those items under $500 (see Apple).

THE BOTTOM LINE – From its peak in 1989, Japanese Automakers are selling approximately fifty percent of that amount, locally.  Automobile sales in the United States peaked at around seventeen million during 2007.  We do not believe that U.S. automakers will suffer the same fate as those of their Japanese counterparts.  However, we do not think it likely that we will see sales in the U.S. move back toward their old highs anytime soon.  In addition to the sectors noted above, investors would be wise to look at companies such as Nike, McDonalds Corp and Pepsi or other companies that have a strong presence in the United States as well as growing sales abroad.

During volatile markets like the one we have witnessed over the first half of 2010, we often go back to the basics, focusing on some of the tenets of legends in the investment business.  Two individuals that come to mind are Warren Buffett, CEO of Berkshire Hathaway and the individual who wrote the book on value investing, Benjamin Graham.  As you read through these quotes, try to determine of you are heeding their advice or are you like a rudderless boat being tossed about by the wind that is the day-to-day noise of the stock market.

“I don’t want to buy any stock where if they close the New York Stock Exchange tomorrow for five years I won’t be happy owning it.  I buy a farm and I don’t get a quote on it for five years and I’m happy if the farm does ok.  I buy an apartment house, don’t get a quote o it for five years – I’m happy if the apartment house produces the returns that I expect.  But people buy a stock and they look at the price the next morning and they decide if they’re doing well or not doing well.” ~ Warren Buffett

“What you’re looking for is some way to get one good idea a year, and then ride it to its full potential.  And that’s very hard to do in an environment where people are shouting prices back and forth every five minutes.” ~ Warren Buffett

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.” ~ Warren Buffett.  We ask you, when you are investing, are you deciding to buy or sell with your heart or your head?

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.  The investor’s chief problem – and even his worst enemy – is likely to be himself.” ~ Benjamin Graham

“Most businesses change in character and quality over the years, sometimes for the better, perhaps more often for the worse.  The investor need not watch his companies’ performance like a hawk; but he should give it a good, hard look from time to time.” ~ Benjamin Graham

“Basically, price fluctuations have only one significant meaning for the true investor.  They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.  At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.” ~ Benjamin Graham

Finally, our favorite, “the market, like the Lord, helps those who help themselves.  But unlike the Lord, the market does not forgive those who know not what they do.” ~ Warren Buffet

THE BOTTOM LINE – Be rational when investing.  Keep emotions out of it.  Spend some time learning how do invest and if you can’t or won’t spend the time or are ill-suited to invest by yourself, contact a professional.  We’d like to apply for that job.

The oil spill in the Gulf of Mexico is tragic on a number of levels, most important being the loss of eleven lives, workers on the BP oil rig.  We can add to that the potential life changing disruption for the people living along the Gulf Coast, the environment, the economy and the loss of animal life.  Furthermore, the potential for the spilt oil to eventually travel around Florida and up the Atlantic Coast is nearly unimaginable.  That said, investors can also glean several valuable lessons from this event.

Probably the most important lesson that investors can learn from this tragedy is that diversification is of utmost importance when it comes to investing in individual securities.  Let’s assume that your portfolio totaled approximately $100,000 and that at the time of the spill you owned 100 shares of BP which was then trading at around $59.50 per share for a value of $5,950.  BP therefore represented 5.95% of your portfolio.  Today, BP trades at or around $34.50 per share and has acted as a 2.50% drag on your portfolio relative to the stock market.  That’s not great, but it will not destroy your portfolio.  You will live to fight another day.

Investors should also diversify across sectors of the economy.  Since the oil spill, not only has the stock price of BP been pummeled, but so has those of deep-water drillers as well as oil service companies.  It is appropriate to slightly overweight an industry.  However, to grossly overweight an industry is like playing with fire.  You can get burnt.  Lesson number one.  Diversify among companies (at least twelve to fifteen) and across industries.

Don’t chase companies solely for the dividend.  The landscape is strewn with companies that used to pay high dividends only to then have to cut that dividend as a result of poor market conditions, changes in government legislation or poor company performance.  Some of the “widow and orphan” stocks that investors relied on for income have severely cut their dividend over the past couple of years.  Consider General Electric, Bank of America, KeyCorp and JP Morgan Chase, just to name a few.  BP pays out $3.36 per year in the form of a dividend.  At the time of the disaster that would have resulted in a dividend yield of 5.65%, attractive to many investors.  Today, due to the decline in the share price that yield approaches 9.00%.  However, don’t be surprised if BP either cuts, suspends or eliminates their dividend to conserve cash during this period of uncertainty for the company.

Finally, remember that nothing is for certain and to think you “know” what is going to transpire or you “know” that BP is a good buy at these levels is arrogant.  Investing is like eating ice cream, everything in moderation.

THE BOTTOM LINE – Investors would be wise to diversify across companies, across industries not invest solely for dividend income.  This should help preserve sudden portfolio drops due to changes in the outlook of a company or an industry.

If there is one thing that stock investors dislike more than anything else, it is uncertainty.  Unfortunately, today there exists a great degree of uncertainty which is reopening the deep wound that investors still feel from the bear market that ended in early March 2009, the second one in less than ten years and one that took the major indices down by more than fifty percent.  Although many of the uncertainties noted below are real, we believe that within seven or eight percent the stock market has taken them into consideration.

Contrary to what many thought just a few months ago, one of the bright spots in the global economy is the United States.  The balance sheets of many of our major corporations have never been stronger and corporate profits have surged off the bottom.  Despite the fact that this has not yet been felt on Main Street, it is nonetheless a necessary precursor to a rebound in the labor market.  Understandably, many are skeptical that this will transpire.  However, looking back at in what order economies recover, one can see that the labor market is a lagging indicator as employers are reluctant to hire back too early in the economic cycle in fear that they will just have to lay people off again.  Nonetheless, we will watch the labor market closely as the United States cannot have a sustainable economic recovery without a recovery in the labor market.  Keep a close eye on Initial Claims for Unemployment Benefits as well as Continuing Claims for Unemployment Benefits which are released every Thursday and despite some improvement, remain stubbornly high.

Another concern affecting the ability of the stock market to further their fifty-plus percent gains off the March 2009 lows is continued weakness in the housing market.  Home prices in major markets such as Tampa, Phoenix, as well as in many cities in California and the Midwest remain thirty to fifty percent off their peaks set during 2007.  Furthermore, demand remains relatively tepid, slowing down the depletion of current inventory as well as the construction of new homes.  On the bright side, ironically the sovereign debt troubles in Greece and its drag on the Euro has resulted in a stronger dollar which should help keep interest rates and therefore mortgage rates low, supporting the demand for housing which is more affordable than it has been in forty years.

A third concern negatively impacting the willingness of investors to commit capital to the stock market is the belief that the rapidly growing Chinese economy, one that helped lift the global economy out of the severe recession, is slowing thereby reducing the demand for raw materials as well as consumer goods.  We agree with this assumption, although disagree to what extent it is slowing.  China posted annualized gains in its Gross Domestic Product (GDP) over the past three quarter of more than ten percent.  Although we are no experts regarding China, the reports we read from those who are predict that mid- to upper single-digit gains in Chinese GDP represents the “slowdown.”

There are many other concerns that are providing a headwind to our stock market, not the least of which include the negative sentiment of our voting population toward politicians, the distrust of Wall Street exacerbated by the “Flash Crash” we experienced a few weeks ago when the Dow Jones Industrial Average plummeted more than 700 points in seven minutes and our ballooning deficits, both public and private.

THE BOTTOM LINE – This period of malaise in the stock market is not without precedence and is in fact, quite normal by historical standards.  Yes, it can go on for quite awhile longer.  However, the longer stock investors go with little or no monetary reward, the greater that reward will be when the time comes.  We are not saying that time is now.  However, we are saying that at or around current levels, stocks seem relatively fairly valued, especially with Certificate of Deposit rates closer to zero than two percent and the ten year U.S. Treasury Note closer to three than four percent.  Make a shopping list.  Be patient and extend your intended holding period awhile.

During early January, we noted within our annual year-ending client letter that “2010 will be a year in which stocks move in fits and starts, but end the year modestly higher, perhaps by high single digits.”  Despite the issues with our domestic economy, problems in Greece as well as the European Union, a what many perceive is a slowdown in China, and an approximately ten percent selloff in the major stock averages over the past month, we continue to hold to this prediction.

That said, despite these strong headwinds and as noted above, we are also not forecasting a bear market for stocks but rather one that will remain within this tight trading range, perhaps seven percent to either side of its current value for the remainder of the Spring and well into the Summer.  If we are wrong, we believe that our outlook will prove too bearish and that stocks will move higher.

What’s an investor to do?  An investor should do what he/she should always be doing.  Focus on your objectives and make certain that you have the proper asset allocation that will enable you to reach those goals.  Maintain diversification within asset classes (stocks, bonds, cash, real estate) and maintain diversification within those asset classes.  We also strongly recommend extend your intended holding period and time horizon.

Accurate asset allocation helps an investor make objective, rational decisions during volatile periods in the market rather than emotional, irrational ones.  One also needs to place the current market movement in historical perspective.  Market conditions like these are not without precedent.  It pays to keep this in mind when you’re listening to all of the talking heads on television.

Finally, as harsh as it may sound, either you have faith in the stock and bond markets or you don’t.  Regardless of whether stocks are trending up or down, if you do not have faith that you are getting a fair deal, get out!  If you have faith, stay the course.  For those that don’t have faith, keep in mind that exiting the markets for good also carries risk, risk that you will be earning around one percent on your money for the foreseeable future.

THE BOTTOM LINE – For many, investing in stocks and bonds provides the greatest opportunity at achieving your financial objectives.  Keep this as well as the fact that stocks usually bottom during uncertain times, not make tops.