A recent study written about bear markets comes to some dangerous conclusions. The study looks at three different scenarios of recovery following a bear market and how investors should react. The conclusion is that even investors in their middle to late 50’s should stay invested in stocks at all costs. This article appears in Money Magazine which unfortunately is a magazine that too many people look to for financial advice.

Should someone so close to retirement just stay invested with the hope that everything will work out OK? When you read these financial articles, you always have to look at the assumptions that are being used. Just like most financial articles, they are assuming that the worst is behind us and that this is going to play out like any other bear market and recession. They don’t even consider that this could get much worse. If that is the case, being invested in stocks so close to retirement could result in disaster. To understand the best and worst case scenarios, you first have to consider the concept of long-term bull and long-term bear markets. If you go to this link, you can look at a more in-depth study.

A long-term bull market is a period which typically lasts 15 to 20 years, where the market goes up. It is a great time to be an investor.

Long-term bear markets are the exact opposite. They are horrible periods to be invested.

Two great examples to look at for the best case and the worst case scenarios are as follows. The best case scenario is the current long-term bear market which began in 2000 is like the 1966 to 1982 bear market. In 16 years and 7 months, the S&P 500 managed around a 15% return or an average of .87% a year. If we were 8 1/2 (amount of time we are in this bear market) years into that bear market, your investments would have returned around a 4% return for the balance of that bear market which would have lasted another 7 1/2 years. That wouldn’t have been disastrous.

However, let’s look at the worst case scenario of the 1929 bear market. That bear market lasted 13 years with much steeper loses. If this was the bear market of 1929 and you were invested in stocks, you would have lost another 28% over the next 4 years. Keep in mind these are approximations.

The Money Magazine article assumes that anyone in their middle or later 50’s should without question stay invested in stocks. Most people in that age bracket would read it and come to the conclusion that is doesn’t make sense to sell their stocks or reduce their exposure to stocks. What if we are in the worst case scenario? It could result in retirement disaster.

It makes more sense to approach it from the standpoint of managing risk rather than buy and hope that everything works out in the long-term. If you don’t have someone managing your money that has the philosophy of managing for both risk and growth, then base your investment decision making on risk levels of the market. If the risk level is too high in the market (I believe it is) then it makes sense to lower the percentage you have in stocks for now. Remember, you take risk (invest in stocks) when there is a high probability that you are going to be rewarded in the future for taking that risk. Remember, it is Prudent to always consider the worst case scenario in your decision making process.

Tags: bear market, Bob Brooks, Deceptive Money, long-term bear markets, long-term bull markets, Money Magazine, Prudent Money, retirement, risk, stocks

January has an interesting track record for the stock market.  Every negative January in the stock market since 1950 proceeded a new or extended bear market.  This has a track record of 100%.  Thus a negative January would be a strong indication that this bear market continues and is not over.  The old saying is as January goes so does the rest of the year.

What is even more interesting is the track record of the first 5 days of January.   

The first five days has a 85% accuracy of predicting the return of the market for the year.  Today is the 5th trading day of the year.  If today ends on a down note, the market will be negative during the first 5 days.  Thus there would be a 85% chance that the market will finish the year negative.  

For the S&P 500, you would want todays close above 903.

Well shell-shocked investors are more than happy to shut the door on a miserable 2008.  If you were not actively trading and/or shorting the ‘08 stock market, it was a tough experience.

So, how do things look going forward?  How about a forecast for a new year?  Well, I am in the middle of working on that forecast.  I must say that writing forecasts for ‘07 and ‘08 were much easier than writing one for this year.  We are working our way through a crisis and the Government’s only solution is to create more debt to fix a debt crisis.  Starting January 21, 2009, this will get completely out of control as President-elect Obama kicks it into overdrive.

Conventional wisdom would tell you that the appropriate Government response is to pump money into the economy to stimulate things.  As I have written many times, in normal market cycles that has worked.  This is no normal market cycle.  We face huge structural problems in the economy.  I would suggest that only time and loss will ultimately correct this problem.  Government intervention only prolongs the problem.

Does that mean we could still have a decent 2009 in the stock market?  There is no question that this market could end with a gain for the year.  However, it might be a miserable bumpy ride over the next 360 days that are left in 2009.  The key to the stock market surviving this year is the absence of any big shocks to the system. 

A shock to the system is something that the market just didn’t see coming or a problem that the market knows is out there (see bankruptcy GM, Chrysler, etc) however feels it will not happen.  I would suggest that any type of shock to the system will have a further damaging effect on confidence.  The biggest problem that the markets face right now is this crisis of confidence.  We need confident investors, companies, and consumers to start a full recovery.  Right now, there is the feeling that the worst is behind us.  Anything that shatters that belief will put us further in the hole.

I will be publishing an ‘09 probability forecast next week.  In the meantime, it will be important to watch the unemployment numbers that are coming out this Friday.  I am pretty confident that the market is expecting very bad numbers.  The market will be able to digest bad employment data.  Horrific numbers will be another thing.

So, we have many potential game changers facing this market right now.  Earnings reports, economic reports, and the Obama factor all preside in January.  The market is gaining a little confidence with a pretty impressive stock market rally since the November bottom.  At the same time, stock market rallies of 20 to 30% are very normal within the bounds of a bear market.  Thus, I don’t think that this is the time to get overly aggressive with stocks.

The financial services industry is preaching that this is the time to buy.  At the same time, stocks can go much lower making it not such a great time to buy. 

Bottom line – This looks more like a corrective bear market rally that could continue through January.  Be careful when the bear wakes up from hibernation.  The selling and the risk can still look a lot like 2008.

The mutual fund industry is out in full force trying to convince you to not sell your investments and just stay invested.  They work to convince investors by presenting statistics that are so convincing that you would never want to sell your investments.

The last thing that the mutual fund industry wants you to do is sell your investments.  Is that advice for their benefit or your own good?  In other words, is there a real strong benefit for staying invested in their mutual funds?  So, they write these papers with all of the statistics showing you why it makes sense to stay.  The problem is that the numbers are misleading and not telling you the whole truth.

One such paper is entitled The Cost of Missing a Market Rebound.  Their premise is that you don’t want to sell your investments because you might miss the rebound.  They illustrate this by showing you the last 9 bear markets.  In the paper, they write that the average bear market lasts 384 days.  Of course, this bear market has lasted about that amount of time.  Thus, you would conclude that since it has lasted the average length of time, it is close to being over.

The second point they make is that the average bear market loses -32%.  Thus, you would conclude that since this bear market has lost almost 50%, then the worst is probably behind us.

Then if you conclude that we are probably very close to the rebound, then the good news is that the average investment performance the first year after the bear market is a 36% gain.  So, if you get out now, you might miss the rebound.

Here is what they are not telling you while begging you to never sell your investments.

1)      They are comparing 9 normal bear market cycles.  In a client newsletter I recently wrote, I talked about normal bear market cycles versus unusual bear market cycles.  A bear market cycle is one that occurs because of normal recessions or high inflationary periods.  An unusual bear market cycle occurs when an economy is facing major imbalances and problems.  That would describe our situation today.

This paper that I am referencing only looked at the last 9 bear markets.  All of those bear markets would be considered normal bear market cycles.  To compare today’s bear market with the last nine is comparing apples to oranges.

2)      If you compare this bear market cycle to the last one that occurred as a result of a credit crisis, history would show that we have a long way to go before this thing is over.  In addition, the average loss has the potential to be much greater.     

The bottom line is that if you are going to stay invested and not make any changes, then do so on the basis that you are confident in your investment strategy and not because a financial advisor told you to stay invested because you are a long-term investor and that you don’t want to miss the rebound.  The key is not that you miss the rebound.  The key is that you miss the next 30% decline.  

Tags: bear market, Bob Brooks, credit crisis, Deceptive Money, financial advisor, investment strategy, mutual fund industry, normal bear market cycles, Prudent Money, unusual bear market cycles

I have heard it numerous times over the past 3 days.  “This is a great buying opportunity.  You always buy when people are this scared.” 

There is an old saying that the best time to sell stocks is when everyone is over the top optimistic about stocks and the best time to buy stocks is when everyone is so negative.

If this were an ordinary bear market, I would agree about the buying opportunity.  However, this is no ordinary bear market. 

Most bear markets occur because of an isolated event such as economic recession and/or a decline in corporate profits.  The market has the ability to deal with that isolated event.  Today, we are dealing with a real estate bust, a credit crisis, what looks like a deep economic recession, deflation, a decline in corporate profits, etc.  All of these issues have to be dealt with and that is going to be a process.

Most bear markets don’t cause investors to have a crisis of confidence.  During the last bear market, investors held on with the belief that things would get better.  This time around, investors are selling by the billions.  It is tough to get anything going again without confidence.

Most bear markets have the benefit of the Federal Reserve Board saving the day.  This time around we don’t have the advantage of the Fed.   They have 1% left to cut in interest rates.  If that doesn’t work to stimulate demand, then we have a real problem on our hands.

Most bear markets are not this volatile.  It is tough for investors to either stay invested or commit new capital when a loss of 15% over the course of the week becomes a normal event.  Their hopes are crushed every time the next shoe drops.

Most bear markets don’t have debt/credit as the main problem.  The unsuspected is the greatest challenge of a credit crisis.  You never know what big surprise lurks behind the door.  In debt/credit crises, there are always a number of unsuspected events.

I want to stress that this is an 80 to 100 year event that we are facing.  The risk remains extremely high for stocks.  If this is THE buying opportunity, I would want to see some very positive things before jumping right in for a long-term investment.

However, there will be a buying opportunity and it will be the greatest buying opportunity since 1932. 

Tags: bear market, Bob Brooks, Deceptive Money, deflation, economic recession, Federal Reserve Board, Prudent Money, recession, stocks

ASK Bob Q and A

Currently my 401(k) portfolio has the following distribution. This was done after reading your advice on the coming recession/crisis in July and I have limited my losses to ~12% for the year.  After reading your advice this morning, how can I still make my financial goal for the retirement? 

I am 56 and have half of what I need to retire currently. Since I have 9 years, I need to grow it at 8% annual return to double what I have now. If I stay where I am currently, the best I can do is about 4%, which is 1.4X rather than 2X what I need. I am discounting what I will invest every year in this calculation. That will be kids college fund -They will be in college at this time.

That is a great question.  The key is not to lose big chunks of money.  You have accomplished that so far.  You want to be in position to really get invested when this bear market finishes up.  Unfortunatey, I think that we have a ways to go before that happens.  However, when it does you are going to be in a position of making up for 50% plus losses.  You can make up for lost time due to the strength of the rally that should be coming out of this bear market.  That is how you play it.  Keep watching my writings – when I start to see something positive I will start writing about it.

Tags: 401(k), bear market, Bob Brooks, Deceptive Money, Prudent Money

The good news is that we should be getting to a point where this panic selling should subside.  There is a key level that you want to watch in the S&P 500.  Back in October 2002, the stock market reached a significant bear market low of 775 before the start of a brand new bull market. 

It went as low as 768.  So, there are your key levels to watch.  As the markets fall into this danger zone, this bear market turns into a good news or bad news story.  It is great news as long as the stock market remains above 775.  In the event that the stock market closes a trading day below the 775 to 768 range, this quickly turns into a bad news story. 

Below that level, the stock market could easily fall as low as 650.  If that level were not able to support the stock market, then we would be looking at the next key level of 450. 

The good news is that we are falling into this danger zone with every metric available suggesting that the selling should be coming to an end.  Should this happen, we then shift the focus onto the recovery.  Will a recovery put this bear market in the rearview mirror or will it be just an extended break in the selling that eventually leads to a return to the decline?  Will the next bottom of the bear market be “a” bottom or “the” bottom?  These are the big questions.

This week the Federal Reserve Board meets to make a decision on interest rates.  It will be interesting to see how the Federal Reserve Board reacts.  On one hand, the stock market would greatly benefit from an aggressive cut in interest rates.  On the other hand, what the market thinks would be in its best benefit could also be something detrimental in the long-run. 

Ben Bernanke is considered an authority on deflation.  The odds are that we are in a deflationary recession.   Lowering interest rates that close to zero would not be advisable given a deflationary situation.  It wasn’t a good thing for Japan and I don’t think that it would be a good thing for the United States.  So, the conflict will be to do what is good for the country long-term or give into the short-term need for stimulus. 

At some point, the Government has to get out of the way to allow this debt crisis to fix itself.  That will mean speeding up the painful process we ultimately have to face.  By continuing to intervene, the Government just pushes a problem off into the future.

A debt crisis cannot necessarily be corrected with a signature on a piece of legislation.  Time and loss are the only two natural solutions for a debt bubble. 

Tags: bear market, Bob Brooks, bull market, Deceptive Money, deflation, Federal Reserve Board, Prudent Money, S&P 500, Stock Market

I find it very interesting that financial media took Warren Buffet buying up stock last week as an indicator that the worst is behind us.  Now far be it for me to suggest that Mr. Buffett might be wrong.  He has an incredible track record of success when it comes to investing.

At the same time, buying stocks just because Warren Buffett is buying them doesn’t seem to be the best of reasons for putting good hard earned money to work. 

In a New York Times piece he wrote:

“Today people who hold cash equivalents feel comfortable.  They shouldn’t.  They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.”

“Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

Well, I hope that he is right because it has been money markets that have out performed stocks for the past 10 years by almost 2 full percentage points.  He also wrote about how buying in July 1932 even in the midst of the Great Depression proved to be a great buying opportunity.  Well, I would hope so.  The stock market had just dropped 86% over the proceeding almost 3 years. 

Here would be my concern investing like Warren Buffett.  There is no question that is has a great track record of being right.  The problem with that type of track record is becoming over confident.  When people with that type of track record are wrong, it is usually wrong in an enormous way.

Richard Russell is considered one of the greatest investment writers and gurus in the history of investing.  He has called the tops and bottoms of some of the major bear and bull markets.  This guy really has a track record.  Well that was the case until he was convinced that last year we were starting a major bull market.  After decades of writing one of the finest newsletters around, Mr. Russell has had to quit because of poor health. That was a sad day for the investment world.

Bill Miller of Legg Mason was known for beating the S&P 500 15 years in a row up until 2005.  This was quite a feat.  However, he fell in love with Countrywide, Freddie Mac, and Fannie Mae and other financial stocks.  He believed without a shadow of a doubt that they were going to come back.  He was completely convinced that he was right just like he has been for years.  Between 12/31/2005 and 9/30/2008, he lost -25% to the market’s loss of  -8%. 

Be careful listening to someone who is pounding the table claiming emphatically to be right.  Especially be careful when they have  alot to lose if they are wrong.  Remember, Mr. Buffett has bankrolled a lot of money into the banking system. 

Warren Buffett is an investment legend not a stock market indicator.

Tags: Bear Market Bottoms, Bob Brooks, bull market, Deceptive Money, money markets, New York Times, Prudent Money, Richard Russell, S&P 500, stocks, Warren Buffett

I had an opportunity last week to attend a conference in Boston and it gave me a chance to really take a look at what the last 12 months has brought and why this bear market will go down in the record books.   

First, we have to consider the length of time of the decline.  During the 1973 decline, it took 21 months for the stock market to decline 47%.  In 2000, it took the stock market 31 months to decline 49%.  Today, it took a mere 12 months for the stock market to decline -42%.  

Second, typically there are investments that work in this type of environment.  Of the 69 mutual fund categories on www.morningstar.com only three have average positive returns year to date.  The short-term government bond category, the intermediate government bond category (barely positive), and then of course bear market mutual funds.  

Over the last 79 years, in only 5 years have both stocks and bonds lost money in a given year.  If this trend continues, this would be the 6^th year.  I heard a municipal bond fund manager speak on Friday who has managed money for 23 years.  She said that a bad year in the municipal bond market was typically no more than a -2% loss.  Today, she has seen a loss greater than 10% year to date.  

Typically, you depend on bonds and fixed income to soften the blow in a fully diversified account.  Unfortunately, that is not even available to investors.  

Third, Government intervention creates a crisis of confidence.  That is probably the biggest concern that we face today.  Once confidence is lost, it is tough to get it back.  Just this last month, the largest withdrawal of money from mutual funds was recorded.  A record 47 billion dollars was taken out of mutual funds and I think October might just be another record.  

Tags: Bob Brooks, Boston, Deceptive Money, Government, mutual funds, positive returns, Prudent Money

I have been away from the office and out of town attending a funeral.  Funerals always provide the proper perspective of what is important and what really matters.  Being away also afforded me the opportunity to get away from the market and the computer screens and financial media.  I wanted to share a few thoughts with you.

(1)              These declines in the market have been worse than anything we saw in the last bear market between 2000 and 2002. 

This even includes 9/11.  I think that it is important to put the severity of this decline in proper perspective.  The indicators that I follow are at extreme readings.  These readings are more extreme than the crash of 1987 and any time period in the last bear market.  In fact, some of the indicators that I follow have set historical records over this past week.

(2)              This is not an ordinary time period in our country right now

William Straus and Neil Howe wrote a very fascinating book called The Fourth Turning.  In the book they describe a theory of American history as a series of recurring 80- to 100-year cycles.  Each cycle has four “turnings”-a High, an Awakening, an Unraveling, and a Crisis.

Basically, a country will start out at the bottom, experience growth, greed will take over, everything becomes imbalanced, and then crisis hits.  Once the crisis has ended, the country is back at the first “turning” again and starts over the progression through the four turnings.

Each one of these crisis moments has defined America.  The last crises have been the American Revolution, the Civil War, and the Great Depression/World War II.  Each one of these events has shaped the future of our country.  I believe that we are in such a crisis right now.   I do believe that this crisis we face will create change in this country. 

(3)              The Federal Reserve Board and the Treasury do not matter anymore

In my various writings over the past few years, I wrote that I felt a time would come when the Federal Reserve Board and the Treasury would not matter to the market.  Up until now, the Fed could decrease interest rates and the market would take off to the moon.  The Fed had influence over the markets.  Now, that influence has diminished.  They “over manipulated” the market.  Now their manipulation strategies have no influence.    

There is nothing there to support the market.  They are just about out of ammo.

(4)              Right now is probably not the best time to just dump stocks unless you have an alternative strategy in place

I continue advocating for anyone to reduce risk when it comes to investments.  At the same time, right now when the market is at these extremes, it is probably not the best time to do so.  Some of the biggest stock market rallies happen within bear markets. 

For instance, look at these stock market moves during the last bear market.

-  Between March and May of 2001, the S&P 500 went up 17%

-  Between September 2001 and January 2002, the S&P 500 went up 20%

There can be some big increases in stocks as the selling takes a breather.  The better time to reduce some of your risk in your investments is during those times when the market starts increasing. 

Put a system together to reduce your stock exposure.  If you are in a situation where the stress is eating you alive and affecting your health, I think that it is important to go ahead and consider getting out.  This is not an easy strategy.

If you are moving your investments in an active investment management strategy where the money would be managed, then it would probably make sense to make the changes based on your new money manager’s suggestion. 

Tags: bear market, Bob Brooks, Deceptive Money, market, Prudent Money, Stock Market

I can almost predict the advice that will be given by the financial services industry.  It goes something like this -

“Stay invested and invest for the long-term.”

“You can never time the market.”

Then there is my favorite.  “You always want to buy low and sell high.  Why would you want to sell anything when we are probably at the end of the bear market?”

I heard that little gem yesterday on CNN.  A financial author basically telling you that you are stupid for selling any stocks right now.  Then they show a chart that graphically illustrated how investors always sell at the wrong time.

Well, let’s take a look at history and see if these experts are correct in being so convinced they are right.  I always like to look at past bear markets because bear markets have similiarities and you can learn things from past bear markets that can be applied to this current one.  Let’s look at the length of past bear markets.  Now this is the length of time, calculated in market days, that it took for the bear market to be completely through and the market stopped dropping.

1968 Bear Market – 408 market days

1973 Bear Market – 451 market days

2000 Bear Market – 549 market days

Current Bear Market  – 316 market days (based on the top being in July 07 and not October 07 – there is a long list of reasons why I believe that July was the top, not October)

Do you really think that the worst credit crisis since the Great Depression is going to produce a mild bear market?  Yes, I agree that you don’t ever sell in a panic.  However, you do reallocate your investments if it is interfering with your financial goals.  How do you determine if that is the case?  If this current bear market is starting to drastically interfere with you achieiving your goals, then a change might be in order.

You never change your investments out of panic.  You change your investments if it does not meet your investment profile.  Whatever you decide to do, don’t let some financial author make you feel stupid for doing something that is probably very prudent.

Please read this week’s Stock Market Outlook for more information.

Tags: bear markets, Bob Brooks, buy low, CNN, Deceptive Money, financial services industry, past bear markets, Prudent Money, sell high, stocks

By the grace of God, we dodged a major bullet with Hurricane Gustav. It was great to see the country come together, to see the levies hold, and to see the Government pull off a successful massive evacuation. Unfortunately, there are still people who are negatively impacted by nature’s wrath and our hearts and prayers go out to those affected.

Anytime a massive hurricane builds in the Atlantic, the forecasters are pretty gloom and doom. Fortunately, we have continued to dodge major bullets. New Orleans under water would have been a major bullet. It makes you wonder, “At what point, do we face the big one? At what point are we not so fortunate?”

I feel the same way with the banking system. We see all of the ingredients for the Category 5 hurricane. We have thus far been able to dodge the big bullets. Yes, we have had some casualties (to name a few…Bear Sterns, Country Wide, and the list of banks that have not made it). However, we have been fortunate to avoid facing anything horrific.

We are right at the height of hurricane season. With two other major storm systems in the Atlantic, this has the potential to be a tough stretch. At the same time, we are also entering into a tough stretch for the stock market with all of the ingredients of a Category 5 hurricane.

The last four months of the year have the potential to be explosive one way or another. In bull markets, the last four months of the year have proven to be great investing opportunities. In bear markets, the last four months have proven to be problematic.

This should be an especially interesting four-month stretch. Let’s take a look at the dynamics going into the last four months.

- A barrel of oil has dropped -25% in about 1 ½ months. This is the bright spot as gas prices continue to fall. Ironically, politicians complain about the speculation effect driving up the price of oil. What about the manipulation effect of politics driving down the price of oil?
- Banks remain in crisis mode. Last week, the FDIC reported that their list of problem banks increased by 30% in the second quarter.
- Going into this Friday’s job report, we have had seven straight months of job losses. Call it what you want – with or without the official negative growth numbers, this is a recession.
- The S&P and the Dow Jones are down roughly -11% for the year.
- Most importantly, we have one of the most important and tightest elections in our history in November. We are also a nation that is extremely divided.
- We have what looks like 3 monster storm systems that have developed in the Atlantic. This looks to be an active hurricane season.
- We are locked firmly in a bear market.

What is my take? Although there remain many factors to be concerned about, my greatest concern is the banking system. Banks are having a tough time raising capital. Banks have billions of dollars of debt coming due in the final four months of the year. The ability for an economy to produce and supply credit to individuals and businesses is crucial for future development and growth.

Therein lies the problem. The credit markets are still in lock down mode. There has never been a greater need for credit. The only credit available comes with high interest rates. Thus far, we have been able to get by in this high risk situation. How long does that continue?

This is the financial storm that concerns me the most for those who are not prepared.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tags: Banking System, bear market, Bob Brooks, Bull markets, credit, credit markets, Debt, Deceptive Money, Dow Jones, FDIC, financial storm, gas prices, God, high risk, Hurricane Gustav, investing opportunities, Oil, Prudent Money, S&P

I was talking to my assistant this morning and she said that someone on one of the news stations was declaring an end to the bear market. I tell you what concerns me about this type of news casting. Of course, this guy might be right on the money and his guess (because no one can predict the future) might be lucky enough to be right.

Before I go on, I don’t want to always come out as the one who throws cold water on the party. Let’s face it – the stock market has had a few good days. That is the good news. At the same time, a few good days in the stock market don’t make for the end of a bear market.

Anyone who has taken the time to study bear markets, and especially anyone who is going to make predictions, would know that you not only look at bear markets from the standpoint of how much the stock market has lost, but you also look at it from the standpoint of time. The average length of the last three major bear markets has been 447 days. We are currently at day 268. If history is any indication, we still have a ways to go.

So, it is a little too early to be putting on the party hats and declaring an end to the bear. This is not the time to be complacent. In fact there is never a good time to be complacent when it comes to your investments and the subject of risk.

I have done quite a bit of research on the structure of this bear market. My analysis would suggest that the bear market actually started July 17, 2007. That would make this bear market one year old. That was the date the two Bear Sterns hedge funds were declared for the most part worthless because of all of the credit losses. That was the first of a year’s long series of problems in the credit markets which takes us to where we are today.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tags: bear market, Bear Sterns hedge funds, Bob Brooks, Deceptive Money, Prudent Money, Stock Market

The IndyMac bank failure was certainly a sign of the times. It was sobering to see bank customers lined up outside the bank just trying to get their money. Of course, this leads to speculation that hundreds of banks could potentially fail.

Of course, thus far, it is tough to tell which banks are in trouble. Most companies tell you that they have plenty of money and that there are no concerns up until the day that they close their doors. Companies always put a brave face on in the midst of potential collapse. If you think back to Bear Sterns, just four days before their collapse, the CEO stated that everything was just fine.

Regardless of whether hundreds of banks fail or not, there are general principles that you should follow. The number one principle in this situation is to have your money diversified. This principle also applies to bank accounts.

You should always have your money in the forms of bank and savings accounts and CD’s only in FDIC insured banks. In addition, you should always stay within the limits of the FDIC regarding FDIC insurance.

The Federal Deposit Insurance Corporation (the FDIC) was created by Congress in 1933 to protect consumers against bank failure. The FDIC protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails.

The FDIC insures up to $100,000 per person per bank. So if you have $105,000 in a CD, it will insure that you will receive $100,000 of that back in the event of a bank failure.

If you have a joint account, that joint account is insured up to $200,000. Remember the rule of thumb is $100,000 per person per bank. If you have an IRA, that $100,000 increases to $250,000 due to legislation passed by Congress.

The FDIC doesn’t insure investment accounts or money market accounts. This only applies to savings, bank, and CD accounts. It also applies to various other cash type instruments.

So it makes no sense to go beyond those limits whether or not we are facing a banking crisis. Go only with FDIC insured banks and stay under those limits and you should be just fine.

Incidentally, the FDIC fund has a value of $53,000,000. The IndyMac bail-out is estimated to cost $4 to $8 billion.

What about brokerage houses where you have your investments? The Securities Investor Protection Corporation, commonly known as SIPC, provides customers with limited protection. The SIPC, a non-profit, non-government membership group, is the insurance body for the brokerage industry.

It protects up to $500,000 per customer and of that amount, $100,000 protection of cash. It only protects customers in the event the broker firm fails and or the broker steals the customer’s money. It doesn’t protect against investment value loss.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tags: Bear Sterns, Bob Brooks, CD's, Congress, Deceptive Money, FDIC, IndyMac Bank, Prudent Money

(this week’s stock market outlook)

I was watching an analyst on Fox News channel give his analysis of the current bear market. Yes, now we can call officially call it a bear market after the now greater than 20% decline in at least the Dow Jones Industrial Average.

It would make sense. If you have lost around 30%, that should mean it is over. Well, unfortunately, it doesn’t quite work that way. Most bear markets don’t decline in a straight line and then end. It is much more complicated. There are two other elements at work during a bear market – volatility and time.

Let’s take a look at the last three major bear markets.

2000 Bear Market 664 Market Days
1973 Bear Market 505 Market Days
1968 Bear Market 464 Market Days

To date, we are only 160 days into the current bear market.

It is the journey of the bear that is brutal for investors. The volatility is tough. Consider this journey for the S&P 500 during the 2000 bear market.

Go to the stock market outlook to see the real story of the ups and downs of the stock market.

During that bear market period, the S&P 500 declined over -20% on three different occasions. A bear market declines over a period of time then recovers for a certain period of time only to start declining again. This repeats over and over until the bear market completes.

One of the tactics of the financial service industry is to convince investors that it is all about the percentage lost or gained. What they fail to communicate is the importance of the loss of time to the equation. If you were invested in the Dow Jones, you would now be -3.7% below the high set back in 2000. This is what happens, bear markets take it away, bull markets give it back, and then bear markets take it away. This is why buy and hold is a tough strategy to justify.

Yes, I do acknowledge that this bear market could be of the milder type. However, I believe it is a low probability. It would be hard to imagine that with the issues we are facing today that it is going to be just a mild one.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.

Tags: bear markets, Bob Brooks, Deceptive Money, Fox News, Prudent Money, S&P 500, Stock Market