In the January issue of the “print product,” the inimitable Marty Cortland delivered some financial advice, the thrust of which was: get out of the market and pay down any debt you have. Our good friends at the Dallas Fort Worth Financial Planning Association thought the advice was short-sighted. The group’s president, the ever-amiable Mark McClanahan, asked for equal time. His response to Marty comes after the jump:
I am writing in response to Marty Cortland’s January 2009 article, “A Realist’s View of the Market: Aaarrgh!” sharing the “four rules for surviving the worst economic crisis in generations.” Mr. Cortland’s solution is to sell all stocks and go to cash and pay off credit card debt with the cash proceeds. With the stock market down 45 percent as of the January article, Mr. Cortland reminds readers that between 1929 and 1932 the market dropped at its bottom 86 percent or another 6,600 points on the Dow. He also counsels against buying into any stocks for up to two years and corporate bonds at any price. Once the market improves, he says to buy only index funds instead of individual stocks or mutual funds.
Mr. Cortland may be correct — the stock market could fall to 1932 levels and he is accurate in the fact that during the current crisis, diversified portfolios did not hold up as well as in the past. Investors panicked and sold all asset classes. However, I would suggest that readers should ask themselves several questions before they heed Mr. Cortland’s or anyone’s advice. Firstly, who am I listening to and what are their credentials and experience? I would also take a look at history before they make such a major change in their investment strategy at what may be the bottom.
This most recent stock market downturn may have found a bottom on November 20, 2008, with a 51 percent drop of the Standard & Poor’s 500 from its 2008 high. Although, as of this writing we are very close to the November low. According to the Leuthold Group, an independent research and money management firm, if we look at the 16 worst bear markets since the Depression, there are only two which were more severe than this market.
The worst of these was the bear market to which Mr. Cortland referred which lasted from September 7, 1929, to June 1, 1932, and saw the S&P 500 fall 86.2%. The second such market lasted from March 6, 1937, to March 31, 1938, when the S&P 500 dropped 54%. Thus there has been only one bear market in the last 70 years that was significantly worse that the market that we have recently experienced.
Are we really in the same situation? The similarities are disturbingly close but also remarkably different. During the Great Depression, we experienced the collapse of the financial and banking sectors brought on by excessive leverage. The Federal Reserve stood by while thousands of banks failed, unemployment shot to 25 percent versus 7.6% today. Gross Domestic Product dropped by a staggering 30% versus the current projection from the Congressional Budget Office that projects a 2% GDP decline in 2009.
In the current crisis, the Fed has stepped behind the banking institutions with their balance sheets effectively saying we will attempt not to allow a repeat of the 1930s. In the past crash, Congress also exacerbated the situation by passing the Smoot Hawley Act which suppressed trade between the United States and other countries. To date, this type of protectionism has not occurred.
Here is one of my concerns with Marty Cortland’s comment “What’s the worse that can happen (if you liquidate and go to cash)? You miss a big run up.” Do you really expect that?
Historically markets begin their recovery when the economic news is at its worst. Again, according to the Leuthold Group, the average bear market bottoms toward the middle of the recession, not at the end. The United States has now been in recession since December 2007. A number of economists are calling for economic improvement by the end of this year or early 2010. If their forecasts are correct, we may already have seen the stock market bottom or may experience a trough in the near future. The most difficult thing for investors to understand is that stock and bond markets are forward-looking and recover before the economy does.
Additionally, note that recoveries from bear markets are front-end loaded. The average gain for the Dow Jones Industrials following the last 22 bear markets has been 19 percent during the first three months, 26 percent over six months and 45 percent after one year. If you are fully invested in cash, you will miss these initial gains. A diversified portfolio of cash, bonds and stocks, whether owned individually or within mutual funds or Exchange Traded Funds has historically been better suited for a recovery than an all cash portfolio.
This last year has been an extremely difficult and unnerving time. No one has a crystal ball to tell us when the worst is over. History does tell us that this current crisis will end and that the move up on the stock and bond market could be as dramatic to the upside as it has been to the downside. Selling all of your stocks after the market has fallen 45 percent historically has been a very poor decision with only one exception in the last 70 years.
Don’t panic, review your financial situation and ask yourself when will I need to begin taking income from my portfolio? If the answer is now or very soon, you would certainly want to make sure you have ample cash and high quality bonds in your portfolio to provide an income and so that you are not forced to liquidate stocks at depressed levels. If your investment time horizon is longer and you can tolerate the risk, being a long-term investor has proved to be profitable over time.
As I conduct my due diligence on investments, I ask myself what are the credentials and background of the author I am reading and what are the historic parallels, if any. I try to be cautious of my emotions and making what could be impetuous decisions.
If you would like to seek the opinion of other financial planners in your area, you may do so by logging on to the Financial Planning Associations website, fpadfw.org and clicking on planner search.
Mark McClanahan CFPTM
President of the Dallas Fort Worth Financial Planning Association
23 comments
If I claim to be fabulously successful but provide no further detail and insist on operating under an alias, can I write a medical advice column for D?
If I understand Mr. McClanahan’s argument, it is basically that:
(i) we are possibly near a Bear Market low,
(ii) equity values rise sharply following the end of Bear market decline and
(iii) investors would be unwise to miss that accelerated return of value.
Yet analogous advice has no doubt been given with equal assertiveness by CFAs worldwide at the points over the past nine months where the DJIA broke successively through 12000, 10000, 8000 and 7000 bottoms. And in each such case, the advice has in retrospect proven decidedly wrong.
At some point Mr. McClanahan’s advice will be objectively correct: but such facts are only known as events transpire and viewed through the Rear View Mirror.
But more importantly: until the currently-ongoing value erosion subsides, his perspective will continue to be objectively proven wrong.
The issue here is suitability. Marty’s advice is spot on…for some people. McClanahan’s take, while more vague, is also an advisable route for others. The key differentiator is the overall situation of the investor (objectives, time horizon, liquidity needs, aversion to risk, etc.).
What I think Marty was trying to address (and what Mr. McClanahan is clearly ignoring) is the fact that millions of Americans have received terrible advice from their financial planners. When looking at individual portfolios, it becomes clear that a significant portion of the losses these investors have accumulated over the last year could have been avoided.
Unfortunately, now that many financial planners have been exposed for providing terrible advice, they frequently use statements similar to those used by Mr. McClanahan (i.e. “the market HAS to be near the bottom”, “if you get out now you ,lose your upside”, etc.). Tragically, most of the actions necessary to reduce losses in portfolios require advisors to recommend strategies that may save the client’s assets, but cost the planner money (assets taken out of the market=reduced commisions for the financial planner).
Therein lies a huge problem. There are a number of simple, sound strategies that are perfect for allowing investors to remove their assets from the market now with plans to trickle them back in place over the next 12 months. Any investor who had utilized this strategy in early January would likely be as much as 1/3 better off than the DJIA over the same period. Those who did not will have to realize gains of 40+ percent to get back to even (yes, that number is correct). Even in a strong bear market, you are talking about a multi-year proposition.
TOMC…don’t confuse your acronyms (or maybe you didn’t)
CFA > CPA > CFP
Dear Mr. McClanahan:
When did you write your letter? You state, “as of this writing we are very close to the November low.” What charts are you looking at? The Dow has blown past November’s low by 1,000. We would love to be at November’s low!
I agree that one should evaluate the source of the financial advice one is being given, and the credentials and experience of the advisor. I would also suggest that one should ask how the financial advisor is being compensated — and what stake he or she has in the advice being followed.
Through the close of business yesterday, the Dow was down 24.5% for the year (and the Russell was down almost 30%). I’m not proffering either my credentials or my experience as being dispositive, but at least I can say that I didn’t add insult to my readers’ injury by charging them for bad advice (the same can’t be said for a certain group of somebodies who shall go nameless) — and anyone who followed my advice when the article first hit the newstands would have avoided further massive losses.
Finally, you can talk about all your post-bear recoveries you want (and I agree with the Other Marty Cortland that we probably haven’t endured the full extent of this bear’s mauling), but what you can’t contest is that paying down high credit card debt is a guaranteed 19% – 29% return, and I would take that any day over uncertain stock market returns. Except, of course, that that’s not advice you get paid to dispense.
Harrumphingly,
MC
@Matt: don’t forget DOA.
(This would be in referral to my IRA right now.)
I am so tempted to cash out, fold it and put it in my back pocket next to my a** because no matter what my A goes through, at least there’s a better chance of survival than floating in a Netherworld under someone else’s control.
You can’t survive without healthy reserves but when you see that dwindling… it’s time to Castle that.
Blegh.
Puddin-
Why not shift your IRA to a heavy money market position, at least for the near-term? Then you can move back when the market starts a solid move north.
Also, there are several investment options outside of the market that fall within the guidelines of IRA-approved investments.
ALWAYS be wary when someone calls a bottom in a market. Always.
Just look at this for verification:
http://bigpicture.typepad.com/comments/2008/04/tracking-nar-sp.html
I agree with the CFP. Cortland doesn’t sound qualified to write on this subject and continues to demonstrate his ignorance.
No doubt, no one should have high credit card debt–ever. The advice to take money out of the market to pay off those cards would have been spot on two or three years ago.
But if someone is in such bad shape that they have that debt at this point, now might not be the best time to pay it off. You just don’t know unless you see the rest of their assets, liabilities and needs. With the current credit crunch, they may be unable to obtain alternative debt financing (if necessary) and, god forbid, if we have runaway inflation even high credit card debt may be more attractive that being unable to finance other needs. And yes, the odds aren’t bad that the market could surge again.
You get what you pay for with financial advice. But D Magazine is putting its stamp of approval on the advice printed in its pages. Let’s hope readers don’t heed that advice, or they’ll likely be unable to be able to pay for a subscription.
Actually, Marty knows a lot about finance and the local economy because his firm’s sales forecasts and results are reliable bellweather of economic activity. In fact, he just right sized 12% of his company.
@ Marty. It appears Mark is speaking of the S&P 500, the most common index used by the financial professionals, which is close to his estimate…if he wrote the article at the end of Feb/first of March. Since then, the S&P is even lower.
Bottom line: no one knows where the bottom is. If they say they do, they’re lying, or trying to fool you. But getting out of the market will hurt you once it does go back up.
The easy thing to do is pull all of you money out and stuff it under the mattress. It takes a lot of courage to weather this, but doing so is the only way to recoup your losses….that, or winning the lottery.
Learn the ForEx, love the ForEx.
There’s also gambling and betting, buying companies, and transferring liquid assets into art, investment jewels, etc.
If one loses 40% of ones net worth-well. Maybe you should look at what you’ve done wrong. Or, where you’re getting your information.
Otherwise his advice is free; anyone with a brain will consider that.
‘Course, the free advice I’ll deign to offer is something one should keep in mind no matter how the markets fare: IF YOU HAVE TO BUY THE BENTLEY, THE MANSE, THE FLAT SCREEN, ETC on the installment plan YOU CAN’T FECKING AFFORD IT. NEVER buy anything unless you can plunk down the full cash amount. If you don’t overextend, you’ll be better equipped to handle this nonsense.
Gaining a bearish attitude doesn’t hurt right now either. Channel Marc Faber.
Oh, and never make decisions based on the news-remember that by the time you hear it on your little CNBC America, its no longer seductive or credible.
Dear Brett:
I used the Dow because (i) that’s the index most lay people follow, and the article was targeted to D readership; and (ii) it’s the index I used in my article, so I wanted to make sure I was being consistent in my comment above.
Also, I didn’t suggest staying out of the stock market forever — just for the next two years. (The stock market will always be there, and there will be plenty of opportunity to enjoy rallies and run-ups from 2011 and thereafter.)
Finally, there’s a certain irony in your mattress example. I don’t know what you might consider a “long view” but 12 years probably comes close. And, yet, if you had stuffed a dollar in your mattress every day for the past 12 years, every single one of those dollars would be worth more today (i.e., a dollar) than if you had put those dollars in the stock market every day for the past 12 years.
@ Marty: both you and Mark are right to an extent in your observations/opinions. Going all out or all in rarely turns out well.
What amazes me is that many advisors weren’t getting their clients into more convservative investments back in late 07/early 08. One of the most impressive bull runs in history only means that the bear is sure to return soon. I guess it boils down to greed: people buying houses they can’t afford, people investing into high risk securities with no vision of what could happen in the future, etc.
It almost appears that we’re approaching the inverse of that thinking now.
I don’t understand how you can give blanket advice like “stay out of the market for the next two years.” Isn’t that idiot investing? Shouldn’t a smart investor research companies and pick where to put the investments based on fundamentals? Perhaps picking a particular industry or country for investment?
And the whole mattress example is equally lame. If you’d put a dollar in the stock market every year and then pulled it out a year ago, you’d be richer for it. That’s called smart investing. Thinking about your investment. Taking calculated risks and not panicking.
I am really troubled that you would feel comfortable giving strangers such blanket financial advice. I guess I would hide behind a fake name too, so people couldn’t hold me responsible for lousy advice.
When Marty wrote his piece, I e-mailed him and told him I followed all of his advice. I am still hanging on as a solid hundred-aire.
Wow. My first censorship by D magazine. I thought i*iot investing was reasonable.
Dear Mr. right:
You would be surprised how comfortable I feel giving strangers blanket advice, financial or otherwise.
Best,
MC
That’s Ms. Right.
I’d be happy to buy Marty a drink any day- just let me whip out my IRA from my back pocket.
(Maybe I’ll move my money from my Backpocket Fund to the Tempur-Pedic Fund per Marty’s suggestion.)
Dear Ms. ‘Tane:
If I were less of a gentlemen, I would observe that there are other money-optimizing opportunities with the Tempur-Pedic than using it as a cash stash, but I’m not and I won’t.
Moreover, a gentlemen doesn’t allow a lady to buy him a drink, but I’m sincerely flattered by your offer. But should I see you at Al’s, I will be honored to buy you one — and we shall endeavor to avoid the topic of the Tempur-Pedic.
Gratefully,
MC
@ Marty Cortland & Puddin’Tame:
You two need to get a room.