Don't Move to Montana Just Yet

Regarding the fear generated by the recent headlines regarding the bank and insurance company failures, perhaps the following can give you a little perspective.

I worked for First Federal Savings & Loan in 1987 when the S&L’s went out of business, due in large part to the Texas oil bust. The stock market dropped 25% in ONE DAY. Government bond mutual funds that investors had bought for their safety ended up going in the tank because the fund managers were selling options on the bonds. Of course no one knew this, and when they blew up, average investors that thought they had something solid got kicked in the pants.

Also, don’t forget about the junk bond meltdown about this same time. Michael Milken went to jail and Drexel, Burnham, Lambert, the biggest junk bond investment bank, went belly up.

That was a far worse time than this!

And since history does have a tendency to repeat itself, I would remind you that after all the speculators, crooks and con men got cleaned out of the system in the 80’s, the 90’s turned out the be the best economic decade of the century. So what might this say about the next 5-10 years here?

So, my advice is PARTLY, don’t panic because you can be pretty sure that THIS TIME IS NO DIFFERENT!

BUT, WHAT IF IT IS DIFFERENT? WHAT IF THIS IS THE BIG ONE? WHAT ARE YOU GOING TO DO TO PROTECT YOURSELF?

1. Should you put all your money in the bank because it is FDIC insured? Not hardly. (See the post below How Can The System Collapse?)

If you are protecting against the unthinkable, against the system locking up where banks begin to fall like dominos, the FDIC cannot bail all of them out. People in-the-know understand that the FDIC program was simply a PR move by the government to restore the public’s confidence in the banking system after the great depression. It was never intended, nor could it ever be, a bailout of the entire system. According to news reports, we came perilously close to a meltdown when Lehman bit the dust, and even closer when AIG bought the farm. I don’t know if these dire reports are overstated or not, but why take a chance?

2. Hold everything in cash? Again, not a good call. Paper is worth, well, paper! If our financial system collapses due to failure, terrorism, natural disaster, war or computer terrorism, believe me, the dollar will be worthless. Our trading partners would quickly demand gold in exchange for goods and services. (But keep some cash on hand anyway, because toilet paper might become scarce!)

No, these are not options, because in times like these, gold is the currency of last resort. You may remember in 1998 when Korea turned over $2.2 billion of its citizens' gold to the IMF to prevent economic collapse. Even with the bailout, 630 financial institutions collapsed. Dominos.

So, should you put everything in gold? Nope!

In times like these, whether the world comes to an end tomorrow or not, there is only one way to protect yourself and that is to diversify. That doesn’t mean to put your money in different banks. No, that means put your money in different asset classes all together. Put some money in the banks, put some in cash, put some in gold, put some in bonds, put some in real estate, put some in some quality stocks, and put some in an envelope and send it to me.

ALL of these aren’t going to zero anytime soon, AND, if things turn around (like they always do) you will do very well going forward with a nice mix of quality assets. This sure beats converting to cash and moving to Montana and waiting on big one to hit!

SO……In conclusion, don’t worry too much about this short term negative performance. This up and down we are seeing now is no different than doing a real estate deal.

If people watched the short term performance of the value of their real estate like they do their brokerage statements, they would never buy a thing. Thank God we don't get statements every month from our realtors showing what the highest bid for our land is.

Remember, property is only worth what someone is going to give you for it. Now if you just bought it, that means you are the high bidder, right? Well that means that if you want to turn around and sell it, you are going to take a loss, since no one else was willing to pay what you did. And if the real estate market tanks for a couple years, you might have to take a lot less for it if you sell it. But you don’t worry because you bought a physical asset that is not going to do anything but go up over the LONG TERM.

Your investment accounts are the same. So what if your mutual funds that invest in SCANA, GE, Ford, Microsoft, Sara Lee and Pfizer are down in value now? Just like the real estate, you don’t worry because you know that LONG TERM these companies will still continue to make money because people will still use electricity, gas and food. And the profits from those products will be passed on to you’re the shareholder in the form of higher stock prices and/or dividends.

As a broker, I will move things around from time to time in my clients' accounts to take advantage of perceived market inefficiencies ( like gold right now), but my long term philosophy has always been to buy quality and then hold on to it.

Western civilization probably still has a little time left.