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Guarding Your Wealth for Senior Citizens
You Don’t Sell Your Home Just Because You Fear the Storm
Market upheavals leave investors three choices
By Jeffrey D. Voudrie, CFP
Aug. 27, 2007 - The stock and bond markets
worldwide have been in upheaval the last several weeks. Panic has
gripped the markets as investors run for the exits. As the markets
continue to go down, even seasoned investors find themselves asking how
much pain they are willing to take. What should you do?
It’s important to recognize that the market gains
have not been following traditional patterns. From July of 2006 to July
of 2007, the DJIA went up 30%, way above the historical yearly average
of 10%.
But the DJIA’s recent drop of 8.5% isn’t out of the
norm. According to information compiled by American Funds, a look at the
markets since 1900 shows that a decline of 5% or more typically occurs
about 3 times a year and lasts 47 days. A decline of 10% or more occurs
about once a year and a decline of 20% or more occurs every 3 ½ years.
Equity-based investing provides higher long-term
returns than fixed investments because there is more fluctuation along
the way. Equity investors must recognize that retreating markets are
normal and too be expected.
I believe that the current market decline has not
been based on fundamentals and thus current share prices do not reflect
the true underlying value of companies. It’s common for markets to be
over-bought or over-sold at any given time. When that occurs, they can
reverse course fairly quickly.
ExxonMobil is an example. They have some $40
Billion in cash, no debt and sell a product that will remain in high
demand for years to come. Yet their share price has dropped 12.5% in the
last month.
There are many other companies like ExxonMobil
where the share prices don’t reflect the underlying value of the
company. There are closed-end bond funds that aren’t going to be
heavily impacted by the current liquidity crises. Yet their shares have
been hammered like everyone else. The list could go on and on, but I
think you get the idea.
The bottom line in most investors’ minds is what
they should do now. There are a few courses of action that you can take.
First, you can sell your holdings and move
everything to cash. The key question for those taking this course is
when will you get back into the market?
If you move to cash and wait for the markets to
recover, you won’t have participated in that recovery. The interest
earned in the meantime won’t do much to offset the current loss. If you
don’t plan on returning to the markets, how will that affect your
longer-term goals?
Second, you can sell a portion of your
holdings. This will decrease the downside risk while still allowing you
to participate in any recovery. The more you withdraw, the less the
downside risk and the longer it takes to recover.
Third, you can maintain your current
holdings. If you feel that current share values don’t accurately reflect
the true underlying values, then you can weather the storm.
I believe that your decision should be based on two
things. The first is your time-frame. The second is your emotional
ability. If it is too difficult emotionally for you, then you should
probably look at options 1 or 2.
For those with longer-term views and the emotional
wherewithal, I recommend option 3.
Whichever option you choose, you should keep your
goal in mind. Think of it in terms of your home. The current credit
crisis combined with the ‘housing bubble’ has negatively impacted home
prices. Most likely, the value of your home now is considerably less
than it was 1 year ago, perhaps 10% or even 20% less.
Are you selling your home? If not, why not?
What you will probably see is that you aren’t
selling your home because you know it will recover and continue to go up
in value. And it’s providing you a place to live in the meantime.
Moreover, if you sell your home you will have to do something to have a
place to live - either buying another home or renting. Neither of those
will make much sense.
Your investment portfolio should be viewed in a
similar light. It is designed to increase your purchasing power—to
protect you from inflation over the long-term. And it should continue to
do so.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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