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Broken Record

By: Frank Armstrong

By: Frank Armstrong, III, CFP®, AIFA®

Occasionally I feel like a broken record.

I’ve been in the financial services and investment business for almost 35 years. And while much has changed, the underlying fundamentals remain the same. The same issues and questions come up time after time. My answers are always the same. You may conclude from that that I am either consistent in my beliefs, or not too bright. While my brother believes the latter, I hope you will opt for the former. In any case, as recent events are bound to generate a certain level of concern I thought one more repetition might be in order.

During good markets and bad, the story doesn’t vary: Stay the course, don’t try to time the market, build the appropriate portfolio for your financial situation and risk tolerance and hold it through thick or thin.

When the market is going up, this is easy advice to follow. Unfortunately, some days it goes down, and keeping the faith gets a little more difficult.

You couldn’t have chosen a much worse time to start a career in the financial markets than 1973, the beginning of a catastrophic two year bear market. Bombs were going off and full fledged riots were routine. The National Guard massacred protesting students at Kent State, and the Chicago Police beat defenseless volunteers at the Democratic National Convention. The nation’s attitude was ugly as it dealt with a humiliating defeat in Vietnam, Watergate, the resignation and disgrace of a Vice President, and the President. We witnessed the conviction and jailing of half the White House Senior Staff along with the Attorney General of the United States. Then we suffered the first of the “Oil Shocks”.

Things didn’t improve much during the later part of the decade as Saigon fell, the Second Oil Shock sent Americans to endless lines for gasoline and hyperinflation arrived along with economic stagnation. In 1979 Business Week proclaimed the Death of Equities on its cover. No one disputed them at the time. However, they missed the beginning of the longest bull market in history by just a few months.

The 80s found 52 US Diplomats held hostage in Iran, and the US Military so weak that they were unable to mount a rescue operation. We emerged from the longest recession in US history. Then on Black Monday the US Market crashed with a percentage loss greater than 1929. In one single trading session the market declined 22.6%! By 1989 the crash had almost been forgotten and the market recovered when it crashed again.

Toward the end of the 80s it seemed like half the commercial office buildings in America were in foreclosure. The Resolution Trust Company (RTC) began shutting down insolvent Savings and Loans and buying up their assets in one of the largest bailouts ever seen. After it was all over, the market was cleared and RTC managed to return funds to the Treasury. The whole world thought America was dead, our products were non-competitive and our landscape dominated by the Rust Belt. Japan was going to take over the entire planet. The fall of the Wall began the collapse of the former Soviet Union.

The federal deficit had grown alarmingly throughout the Reagan and Bush 41 presidencies. 1990 found us in the First Persian Gulf Crisis (Desert Storm) which turned out to be a great success but was shortly followed by a recession. The economy was a large factor in the election of a Democrat in 1992. That president surprised everyone by raising taxes, balancing the budget and turning in a surplus. Notwithstanding a scandal that resulted in an impeachment trial, the 90s were marked by the return of America. The dollar was strong, we were the only remaining superpower, the Internet and Tech Stocks were going to change our world, and the stock market took off. Irrational exuberance was the order of the day.

Shortly after the turn of the century, the Tech Wreck led to the largest single stock decline since the Depression, and America was attacked by foreign terrorists. The heart of the financial district was destroyed along with heavy loss of life. The market closed for several days and promptly dropped 5% on opening.

A two front war followed, accompanied by massive federal deficits, a rapid devaluation of the dollar, and enormous increases in credit to keep the economy humming. Ninja (No Income, No Job) loans arrived along with Subprime debt instruments. When this bubble burst, housing came to a screeching halt, investment banks took massive write downs, some parts of the world’s credit markets froze up, and the Federal Reserve had to bail out the fifth largest investment bank on Wall Street.

Today we have serious political division, a financial crisis, and a slowing economy. Our two wars are dragging on with no end in sight. As you should expect, these problems have been reflected in recent stock market prices.

Still, through 35 years of troubles, a dollar invested in the S&P 500 on January 1, 1973 has grown to $33.79 as of the end of February 2008, which is a highly respectable 10.62% annualized return. All you had to do was buy the index and hold it. However, you did have to resist the temptation to bail out when the going got tough.

Staying the course requires a small measure of optimism. You must believe that the world isn’t going to end and that over time the value of the world’s economy will continue to grow.

As an investment advisor, I find it difficult to plan for the end of the world. If, by chance, the world does end, I’m sure that many of you will wish to point out the errors in my judgment. Meanwhile, I’ve seen much worse before, and staying the course was the right decision. So, my advice remains: Don’t try to time the market, build the appropriate portfolio for your financial situation and risk tolerance and hold it through thick or thin.