Wow, Lehman Brothers and Merrill Lynch, some of the biggest names in the finance industry, gone overnight. AIG and Washington Mutual may be next; both are teetering on the brink of bankruptcy, too. That’s hard to imagine. A 500-point drop on the Dow is also difficult to handle; the worst one-day decline since 9/11.
The good news is that the backlash to the Federal Reserve’s bailout of Bear Stearns sat so poorly with the public that they didn’t step in to save Lehman with taxpayer guarantees. The
bottom line here is that when a company makes poor investment decisions, it ultimately suffers the consequences. In Lehman’s case, it was investing in poorly underwritten mortgages, also known as sub-prime mortgages.
So, what does all this mean? Several months ago readers of my newsletter will remember that I pointed out the average bear market drops 32% from its top, which would indicate a bottom on the Dow of UNDER 10,000. Yesterday’s close was at around 10,900, so I still think we have a ways to go, but who really knows?
What we are going through is a NORMAL correction to five fantastic years in a row of positive market returns. I remember the mid 1980’s when we were going through the savings and loan meltdown and savings institutions all around the country were closing down by the thousands. We survived that terrible market, didn’t we? And we haven’t seen anything like that during this bear market, at least yet.
Many investors who invested in a portfolio of various asset classes still have above average returns over the past 5 years. The good news for KFG clients is that we have broadly diversified portfolios in nine asset classes, so that will help cushion any plunge of any single asset class as US Stocks are doing today.
The better news is that the sale in US stocks is getting better every day. If you have capital to commit to your portfolio, now may be a great time to be adding to it. As one of my mentors once said, “Don’t steal in slow motion!”
