Recent Market Declines Are Cause To Review Your Financial Ob

Recent Market Declines Are Cause To Review Your Financial Objectives

Russell Bailyn submits: Last
week my office huddled together in the conference room to discuss the
looming correction in the Dow Jones Industrial Average. A market
correction is sometimes defined as a drop of at least 10%, but not more
than 20% over a short period of time. The major difference between a
bear market and a correction is magnitude and duration. Bear markets
last much longer, and the magnitude of loss is greater.
Last week, during a wild day of trading, the Dow briefly hit a level
which was 10% below the high of 14,015 which we reached on July 19th.
Fortunately, the market has shown a bit of strength--partially aided by
some emergency policy decisions of the Federal Reserve Bank--and moved
up a few hundreds points since its lowest levels. So what should you
know? And what should you do?
First, you should have a basic
understanding of why the markets have dropped so much so quickly. The
primary reason is concern over the current quality of the credit
markets. These concerns aren’t new--they’ve actually been around since
about five years ago when interest rates were especially low and a
large, dedicated force of mortgage brokers and loan officers helped
organize thousands and thousands of these so-called “sub-prime” loans;
referring to the less rigorous restrictions imposed regarding the
credit scores, income levels, and current assets of the applicants.
At
the same time, the evolution of financial markets, especially through
hedge funds, have created avenues through which banks can sell off
chunks of the default risk taken on through new loans to investors
looking for some income in their portfolios. The New York Times had an
article over the weekend which cleverly compared the default risk on
many of these loans to a “joker in a deck of cards.” Most people don’t
understand where, if it all, they are exposed to these sub-prime loans.
Now would be a good time to explore some of the following ideas:
•Market
volatility presents a real opportunity to understand risk and how much
of it you’re taking on in both your retirement and personal portfolios.
If you feel uneasy about these big swings, you may want to review your
investment choices. If the volatility doesn’t bother you, you may
actually consider becoming more aggressive (tactical asset allocation)
now that market prices have pulled back considerably.
•This
may be a good time to call your financial planner (yes, that may be me)
to review your financial goals and objectives and be sure you still
have a plan in place to get there.
•You might want to contact
your mortgage professional, financial advisor, or anybody else that can
help you fully understand your loan. If your payments are going to
become “variable” at some point, you should figure out your risk
exposure and double check if the mortgage you currently have is the
right one for you.
Overall, my feeling is that both stocks and bonds are now priced at more attractive levels.
I don’t believe we’re about to face a major recession or anything
drastic like that. My view is that private equity firms and hedge funds
have really created some waves in the market. The broader economy
should be able to protect itself against further declines in price
level. Remember, traders focus on the daily swings in stock and bond
prices. Investors don’t.