Coping With the Markets’ Maalox Moments

It was a heck of an August on Wall Street. The yield on 10-year Treasuries fell to its lowest level in 50 years. If your income depends on the interest your money earns, you might as well stuff it in your mattress. In terms of stock market performance, last month officially goes down as one of the worst Augusts on record. Thanks to worries about the European debt crisis, revolution in the Middle East and partisan bickering over the soaring government deficit which led to a debt rating downgrade, not only did equity prices fall, volatility spiked. Hundred-point swings in stock prices were disconcertingly common and there were four consecutive 400-point days. Gold soared 16% in the first three weeks, hitting an all-time high of more than $1,900 an ounce, then sank 7% in the space of two days, only to rebound sharply as the month drew to a close.

Unfortunately, Augusts weak jobs report marked a less-than-auspicious start for September. To paraphrase the great American philosopher Yogi Berra, is it any wonder investors are fearing its d�j� vu all over again?

Craig Fehr understands peoples anxiousness, but begs to differ we are experiencing the financial crisis all over again. While some of the recent volatility might feel like 2008, the economic fundamentals [today] are dramatically different. Fehr, a senior equity research analyst at brokerage firm Edward Jones, lists several reasons that the economy is not headed for a double-dip recession.

First, contrary to what we experienced three years ago, the economy is growing. In 2008 [GDP] was contracting. Just dont expect miracles. The economy isnt going to grow dramatically, cautions Fehr. It will be uneven, sluggish, but there will be growth.

Another positive? Non-financial corporations are holding $1.9 trillion on their books. That means cash represents about 13% of corporate net worth, close to an all-time high. Cash levels in 2008 were much lower, according to Fehr.  A bigger buffer gives companies greater flexibility to navigate an environment where growth is slow.

Even an unemployment rate seemingly stuck above 9% doesnt faze Fehr. He points out that during the first half of this year, 1.8 million jobs were created. In contrast, the economy lost 1.9 million jobs in the last three months of 2008 alone.

Nonetheless, other experts point out that were unlikely to see a significant improvement in the economy- or in stock and bond prices- until the labor market improves. Consumer spending makes up roughly 70% of our economy and if consumers dont have income to spend, that has a huge impact on the economy in general. Still, Fehr points out that consumers budgets are getting some relief in the form of lower prices at the gas pump. Oil prices are less than $90/ a barrel. In 2008, they were approaching $150 a barrel.

Our focus on the day-to-day moves of the financial markets makes it feel as if the economy isnt improving. Though the media generally talk about stock prices in terms of what happened on a given day, its important to look beyond the daily noise and put things into perspective.  For instance, you might not have noticed, but according to Fahr, Corporate earnings are growing. Thats the brightest shining star in the past two years. Earnings were declining three years ago.

Jane Honeck, a Portland, Maine CPA, who gave up her tax practice to become an author and money coach, says were each our own worst enemy when it comes to how we handle our finances- in both good times and bad. Indeed, although its taken 40 years to gain widespread acceptance, the new branch of economics called Behavioral Finance has scientifically proven that, contrary to the classical model of financial decision making, our emotions cause us to make irrationalchoices about money. This means were apt to panic and sell when an investment declines in value. On the other hand, we tend to wait to buy an asset- stocks, real estate, gold, etc.- until others have bid up its price. As a result, we sell low and buy higha sure-fire recipe for losing money!

Honeck, who often gets referrals from marriage counselors, says our financial actions are largely driven by the unconscious beliefs we have about money. We learn some of these from our parents and others are picked up from messages we receive from society. If, as Fehr expects, the economy continues to stumble as it gradually recovers, you might want to keep in mind Honecks advice about dealing with market volatility:

1. Share. When you hear reports of economic doom and gloom, dont simply accept this information as a fact. Talk with others, get more viewpoints and broaden your perspective.

2. Stay in the moment. When you feel yourself growing afraid about what might happen in the future (Im going to lose my entire nest egg!), take a deep breath and focus on the near term. Did you make it through yesterday, last week, last month? Have things really changed that much?

3. Determine whats causing your fear. Perhaps its a sense that things are out of your control, or youre feeling powerless. While you cant predict politics or moves on Wall Street, you can control your own portfolio. Heres where working with an experienced advisor is key. In times like this you have to rely on your professional, says Honceck, because the average person doesnt have the perspective of the professional financial advisor. If your portfolio is properly diversified, the smartest thing to do might be to sit tight.

4. Take the next step. Begin shifting from emotion to motion, advises Honeck. If your portfolio needs adjusting, begin the process. Or, perhaps you should start an emergency fund to cover three to six months of living expenses so that you can more easily weather a market downturn without having to sell investments at a loss. Taking small steps in the right direction will get you unstuck and give you a sense of control.

5. Repeat No.s 1-4. The next time you hear or read a scary headline about the economy or financial markets, repeat the preceding four steps. Fear is a part of life, says Honeck, But it doesnt have to take over our life.

1. Learn more about this in Honecks book, The Problem With Money? Its Not the Money! 

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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