Fagan Associates Archive for March, 2008

The economic news could not have been worse over the last couple of weeks. At one point or another, reports and economic data have painted a picture of inflation, deflation, stagflation (basically every kind of “flation” imaginable). Housing prices have decreased, gas prices have risen and, if you listen, read and watch the news, the general sense is that the United States is bordering on economic collapse. To add insult to injury, Euros are now being accepted in many Manhattan shops.

The reality is that the economy of the United States is incredibly varied with certain regions in recession, just trying to keep their respective heads above water while others are thriving. All Americans are facing the rising costs of energy, but Iowa farmers have to be happy with corn prices while Miami real estate speculators are on suicide watch. In Upstate New York, we are somewhat isolated from the ravages of the sub-prime debacle but our own real estate market is fraying at the edges with gas/food costs weighing on consumption.

Out of the malaise of this economic slowdown/recession, historically, like a phoenix out of the ashes, bull markets in stocks have arisen. The dismal expectations of tough economic environments have generally been solid times to buy stocks. Closing your eyes and muting the television might be required before doing so, BUT it has produced positive returns for investors.

Dating back to 1954, as measured by the Standard & Poors 500, eight out of the last nine recessions have produced positive stock returns three years after the end of the recession. The only recession to not have a positive return after a period of three years was the recession during 2001. Not surprisingly, the terrorist attacks on September 11^th influenced these results.

Although all investors talk about “buying low and selling high,” in reality few achieve this nirvana. Most tend to buy high and sell low. They buy on greed and sell on fear. A study from one large mutual fund family dating from 1982-2000 had not so surprising results. The S&P 500 (the largest 500 publicly companies domiciled in the United States) rose an average of thirteen percent per year while the average equity fund rose at an average of just under ten percent per year. However, the average investors netted out less than three percent per year! The reason is simple and noted above, most investors buy high and sell low. They become conservative when it is time to be aggressive and aggressive when it is time to pull in the reigns.

Investors need a game plan which includes an allocation of your investment assets between equities, fixed income, real estate and cash. However, prior to arriving at an appropriate asset allocation one needs to evaluate their own personal goals, objectives, concerns, family situation, tolerance to risk, and financial obligations. Once having completed this task and arrived at what percentage of your investment assets you want in stocks versus fixed income and cash, stick with this allocation regardless of the current investment climate unless one of the criteria noted immediately above changes.