Wednesday, August 17, 2011

Hold On Tight Part II

We understand that many of you are nervous and apprehensive about the markets and economy.  I will reiterate what I told a client over the weekend, since the same message is true for all.  First off, don't panic. Bad decisions are made in times of duress.  I don't know if we are in a secondary recession (double dip, etc..) and I'm not very sure it truly matters with respect to the markets in the short term, which are as volatile and unpredictable as ever. The most important idea for an equity investor to remember is that you are most concerned with the profitability of the companies you own, over the long term. None of your short term money is in equities, and you all have at least six years (or more) of spending in "safer" assets (ie cash and bonds).  This enabled us to withstand the last crisis and to more than fully recover during the following market rebound. 
An important long term risk right now is certainly inflation. Cash and bonds will at best keep pace with inflation or at worst significantly underperform inflation. Equities still offer a higher expected return than cash or bonds and have the best chance to outperform inflation, which is important for everyone.
So I still recommend that we stay the course and let our asset allocation plans work over time. The only alternative is to sell equities for some time and then see about getting back in. This is market timing and is a sure recipe for failure.
One final comment.  This morning's anxiety is due to S&P's downgrade of the US credit rating.  Would you prefer to believe S&P (who played a key role in bringing on the sub-prime crisis and its aftermath), or Warren Buffet (who, in an interview on Bloomberg Television Saturday, said that S&P was wrong and that the US merits a AAAA rating instead).  We prefer the latter.  Buffet's optimism and common sense have helped to make him one of the richest and most successful men in the world.
Please reach out to us if you'd like to discuss anything or if you just need a pep talk.