As Market Drops Below 7,000, is there any refuge left for investors?

As the Dow dropped to a 12 year low yesterday, many retirees and near-retirement baby boomers who have remained invested in the market are seeing their lifelong savings drop like a rock. The struggle for those without the insight to move out at much higher values is whether or not to continue to hold. I hate to say it, but the more than 50% drop in the market has created a mindset among many investors that they must now hold their current financial positions in hopes of a quick recovery. The truth, however, is that now is the time that everyone should be considering a comprehensive review of the retirement, education and other savings and re-evaluating their risk/reward positions.

It’s easy to make no changes, after all during a typical recession the vast majority of the market recovery comes in the months immediately following the end of the recession. This recession, however, is not you typical recession. The government is injecting itself into the private sector at a pace never-before seen and the refusal to let giants such as AIG, Bank of America, Citi and other die while sacrificing smaller companies is only contributing to long-term economic concerns. Unlike previous bear markets, coinciding with recessions, that last on average 13 months, our current market pullback is nearly twice that of the average bear market drop.

The truth is that market indices have dropped over 50% off of their highs with nothing but uncertainty as to when a bottom might possible come. The other truth is that at this point, investors who remain fully invested will have to earn over 100% in order to recoup their losses. The truth also remains, that this drop has been so large that it will take years to recoup losses.

The truth also exists that more than 80% of all investors have been in the market for less than 14 years, with the largest influx of new investors entering the markets between the years of 1998 and 2000. As a result, a vast majority of investors who entered the markets at the height of the tech bubble have seen their gains erased by the 2000 recession, erased again by the 2002-2003 recession and no erased by the current recession. A study performed by DALBAR in 2005 found that the average non-institutional investor had earned slightly over 2% on their investments during the preceding 10 year period, that rate is now negative. In other words, this recession is hurting the average investor more than previous recessions because they have no long-term performance.

So the question remains: What now?

Well first re-evaluate your budgets, short-term and long-term goals; then visit with a qualified financial professional to seek help and discuss your risk/reward objectives. Regardless of your financial position, there are products that will fit your individual needs. Products that may offer low expenses, may offer minimum guarantees, may offer income protection and may work in conjunction with your other savings to meet your goals. Of course, products will vary from company to company and although one company may offer a flexible and consumer-friendly financial product, another company may offer the same type of product but with greater fees, less liquidity and more restrictions.

There are products you should be wary of, for instance Variable Annuities, Whole Life, Variable Life and other life insurance products being offered as savings vehicles, managed accounts whereas the same investments could be held without excess fees outside of the account, junk bonds and of course my new favorite, mortgaged-back securities. There are downsides to every type of investment and savings vehicle, the real question is not the downsides but rather if the product fits your needs, objectives and risk/reward requirements. The objective with everyone’s money should be simple, not to measure results by short-term performance, but rather to maintain consistent upward growth, something that most investors have yet to experience.

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HCM Financial