Newsletter

October 2018 Newsletter

The legacy of Lehman Brothers 10 Year Anniversary

September 15th marked an ominous anniversary. Ten years prior, Lehman Brothers declared bankruptcy, sparking a financial crisis that engulfed the global economy.

Lehman’s failure could easily be described as a “systemic event.” That’s financial jargon for an event that triggers severe financial instability and sends shockwaves through the economy.

Economically, we’ve recovered from the downturn. Unemployment is low, and GDP is above pre-crisis levels. Major U.S. market indexes have topped pre-recession highs, but the crisis left
an indelible mark on investors. For some, the scars remain.

While today’s bull market pushes higher, some investors fear a repeat. You see it every time the market experiences a correction, or a decline of at least 10%. One day, I believe the memory of
the crisis will recede. It may take another downturn that doesn’t lead to severe losses, but I believe it will eventually fade.

Can it happen again?

We cannot unequivocally say “Never.”

Gone are the days when a borrower need only a pulse to obtain a mortgage. OK, that’s a bit of an exaggeration, but I think you understand what I’m trying to convey. Whether you blame it
on the banks or blame it on borrowers, too many folks jumped into or were placed into loans they couldn’t afford or didn’t understand.

Today, banks are much better capitalized than in 2007. The major banks have a much bigger cushion to absorb loan losses. And underwriting standards for home loans are more realistic.

During the Fed’s quarterly press conference, Fed Chief Jerome Powell was asked about financial conditions.

Powell, said, “The single biggest thing I think that we learned was the importance of maintaining the stability of the financial system.” It’s something “that was missing” back then.

“We’ve put in place many, many initiatives to strengthen the financial system through higher capital, and better regulation, more transparency, central clearing, margins on unclear
derivatives, all kinds of things like that, which are meant to strengthen the financial system,” Powell said.

These measures won’t prevent another recession, and systemic risks haven’t completely abated, but the financial system is in a much better position to withstand a shock than it was in
2008.

 

Takeaways

 It’s not about timing the market. It’s about time in the market, diversification, and the balance between riskier assets (such as stocks) that have long-term potential for appreciation, versus safer, less volatile assets that are less likely to appreciate.

Headlines can create short-term volatility. We saw that earlier this year, and we’ve seen it at various times in recent years. But patient investors who stuck with a disciplined approach were rewarded. Longer term, stocks historically have had an upward bias.

While heading to the safety of cash during volatility may bring short-term comfort, opting for the sidelines can have long-term costs.

Let me repeat a Fidelity study I recently quoted. “Investors who stayed in the markets (during 2008) saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%” between Q4 2008 and the end of 2015.

“That’s twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Even worse, over 25% who sold out of stocks during that downturn never got back into the market.

Yes, the safety of cash during volatility may bring short-term comfort but opting for the sidelines can have long-term costs.

The opposite is also true. Don’t become overconfident when stocks are surging. Some folks feel an aura of invincibility and are tempted to take on too much risk.

That gets them into trouble, too.

Preparing For A Natural Disaster 

And/Or A financial Disaster

 

Important records. Most advisors have copies of your financials, but this doesn’t preclude you from safe harboring your records.

A short list of financial documents that can fit into your kit includes mortgages, property deeds, and legal documents such as a power of attorney, estate planning, wills, and insurance policies.

Also include recent bank and credit card statements, brokerage accounts records, and statements related to investments that might be held outside a brokerage firm (such as mutual funds or 529 college savings).

If you access accounts or documents online, include a list of password hints. Also, pack recent retirement account statements and your most recent tax return.

A password-protected flash drive or file might be safer than hard copies—as long as you have a way to access the files. If you receive electronic copies of bank and brokerage statements, it is advisable to place recent copies in your kit.

What are your valuables? Create an inventory of your personal belongings. Assemble a paper, photo or video inventory, and put it into your emergency kit.

Be sure to save receipts for major items, home upgrades, or any appraisals of valuable belongings. For your household items, record what’s in each room. For major items, write down serial numbers.

While you’re at it, record the cost. Take closeup pictures of valuables, including details such as serial number tags. You can also videotape your belongings with a narrative description of the relevant information.

If the project seems overwhelming, you may start by tackling one room at a time. If it’s ever needed, it will help you maximize benefits from your insurance policies and expedite the claims process.

Your kids: children/adult

A disaster will take an enormous mental toll on you. Having your financial house and records in order will remove one burden. But what about your children?

Your children’s wellbeing will largely be dependent on you. Kids look to Mom and Dad for their security, despite their age!

Here is a checklist for your kids obtained from UNICEF USA;

  • Pack their essentials such as medicine and clothes.
  • Pack their toys, favorite books, music, electronics, and have fresh batteries.
  • Talk to your kids about what to expect at a shelter.
  • Develop a system with your children that will allow them to be identified if they are separated from you.
  • Learn basic first aid skills in case you are your child becomes sick and medical supplies are scarce.

Chat with your kids in ways they will understand. Be honest, reassure them, but don’t make promises that aren’t realistic. Just as important, let them know there are resources available that will assist your family.

While I sincerely hope you never experience the pain that comes with the loss of property or worse, we are here to assist. Taking proactive steps in advance can help eliminate one source of uncertainty in the event disaster strikes.

I hope you’ve found this review to be educational and helpful. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. If you have any concerns or questions, please feel free to reach out to me at rich@rjgfs.com or call us at 856914-1449 and we can talk. That’s what we’re here for.

Happy Retirement,

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