Should I Be Worried? A Response

28 10 2008


I recently found this article on the Colorado Springs website.  I felt that it absolutely needed a response, so I decided to share my thoughts on Mr. Stanley’s commenary:

Yes, you should be worried about the current financial crisis. But you should not panic. 

I probably would not use the word worried and concern is appropriate.  Dale Carnegie’s advice is totally appropriate. There is no sense worrying about something you cannot control. 

I don’t like the fact that we taxpayers must bail out financial people who have made dumb decisions. But the fact is that something must be done right away to bring confidence to the stock market and reverse the credit crunch. We all will suffer if there is no money to borrow. 

I agree we need to do “something.”  I absolutely do not believe what we did was the pathway we should have chosen. 

Thanks to our very own representative in Congress (as well as one of guys running for the Senate) who voted against the initial rescue package, we have suffered already through the loss of thousands in our investment and retirement accounts. 

BULL!  Merely addressing “mark to market” would have had a far greater and quicker impact.  Socialism is never the answer.  

I’m confident that smarter heads will prevail,  

Unfortunately, those smarter heads don’t appear to represent the majority in Congress. 

and there will be a rescue package in the near future.  

RESCUE??? Let’s take away the massive governmental intrusion and let the private sector go to work and we will actually accomplish something without going down the path to Socialism. 

If you have cash in an insured financial institution and the balance is under $100,000, you have nothing to worry about. Your money is safe. 

At least your “principal is safe.”  Realize, of course, that your principal is only safe to the extent that the dollar is not devalued.  That devaluation has been going on for years and it may be the greatest “tax” we as a society are experiencing. 

Your investments are down, but if you have a plan, you should be OK.  

Planning is certainly important.  At the same time, don’t assume what comes down must go up.  The “market” has been significantly DOWN for the last decaded. 

Let’s review my rules on investing.

Rule No. 1: Diversification. I recommend that no more than 50 perent of your portfolio be invested in the stock market (exception are those in their 20’s and 30’s who only have retirement accounts). 

I believe it should be FAR LESS than that and TRUE cross asset class diversification is the appropriate strategy.  Real Estate, insurance products, alternative investments, hobbies, etc. should all be part of a truly diversified portfolio. 

Rule No. 2: If you will need the money in three years or less, it should not be in the stock market. If you have broken one or both of these rules, see a financial advisor immediately (an advisor, not a salesman). 

Most “advisors” are merely salesmen under the banner of some credential.  Wolves in sheep’s clothing.  My advice is get information and screen people and ideas.  Then choose people who represent the ideas you feel are appropriate. 

If you are investing on a regular basis (and I recommend that you do), continue your periodic investments. If you have new money to invest, I now recommend that the money be invested equally over the next six quarters, starting now.  

You are describing “dollar cost averaging.”  I don’t disagree.  Inherent in your suggestion is that money be invested in the “market.”  There I might strenuously disagree.  Cross Asset Class Diversification is ESSENTIAL! 

What caused this mess? I’ve been in the financial industry for eight years and my biggest surprise is the high level of ignorance compared to the other sectors I’ve worked.  

Eight years???  That really isn’t very long. 

Take the now-fired CEO who earned $24 million a year (that’s $11,500 per hour). Basically he loaned money to people who he knew couldn’t pay it back if the interest rates went up. The interest rates went up and the people couldn’t pay their mortgages. His reaction was – surprise? 

This is an incredibly simplistic summary.  You sound like the media and that is not a compliment on my part. 

Same company, low end – the broker who was not aware of the 2008 capital gains rates, something his clients counted on him to know. Take this ignorance, add greed, and you have the recipe for a financial disaster. 

Again, unbelievably simplistic analysis. 

Ignorance in the financial industry has caused this crisis. However, if you spend more than you earn and you don’t pay your credit cards off at the end of each month, don’t blame my industry. 

Government intervention and ridiculous accounting standards like “mark to market” are a much more significant cause of the problems we are having today.  If you want to point blame, go back to Freddie Mac’s proclamation in January of 2007 that functionally killed a performing 14% of the mortgage industry.  I interviewed the head economist of Freddie Mac at the time and they didn’t have a clue of the impact what they were doing was going to be. 

Bill, I had the pleasure of interviewing you a couple of years ago.  I admire much of what you do.  On this one, I believe you are being trapped into media speak thinking and the realities of the situation are far different than you perceive.




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