Post on 03-Aug-2015
Staying Afloat During Turbulent Times (As printed in the June 2009 publication of the Muslim Hoosier Magazine)
People have turned to various avenues of investing in hopes to create riches. You
have recently minted college graduates investing in their company’s 401k plans,
working professionals with several years of experience finding aggressive ways to
grow their hard earned money and soon-to-be retirees making sure that they will
have enough saved away to last them the rest of their lives. We may not all be on
the same path in our lives, but we do simultaneously feel the effects of
unprecedented market movements.
No one ever invests with the intention of losing money, but when that unfortunate
time comes, very few are prepared. For a while everything appeared optimistic
and we were fed false hope that the stock market would not collapse. The
economy pushed us full speed ahead while not allowing us to realize the potential
downside. The 1990’s brought innovative technology and introduced the global
economy to the internet. This new relationship led to the start of a trend and yet
another “bubble” in our era. Day-by-day, companies which promised the world
formed at a faster rate and pulled investors into that technology bubble. The
explosive effects of the technology boom were highly visible in the growth of the
stock market, but many failed to realize this growth was not sustainable. Despite
holding little book value, high enthusiasm and consumer confidence increased the
market value of these companies to unrealistic levels. Unfortunately, a company
needs true value and cannot be weighed solely on enthusiasm.
Once expectations became realistic and the true worth of the firms emerged, the
bubble popped. At the turn of the century, the DOW dropped over 3,000 points
within a matter of four months, the September 11th terrorist attacks took place, and
several gigantic firms, such as Enron, started to collapse, causing accounting
scandals to spread fear and uncertainty throughout the country. We now face a
recession which has been compared countless times to the Great Depression and
the infamous recession of the 1970s. The unemployment rate is climbing to new
heights and it is becoming common to have several friends out of work for
months. Unfortunately, the first decade of this century has been anything other
than helpful in our efforts to cultivate wealth.
Investors have many reasons to panic; a volatile stock market and a housing
market which continues to deteriorate and has yet to find a bottom. During such
times every investor wants to know what they can do to protect and create wealth
for themselves and their family. No one can predict the future, but we can plan
ahead accordingly.
A popular adage, “it’s too good to be true,” should resonate in the minds of every
investor when they come across persistent salesmen with great presentations who
guarantee soaring numbers. There is never a guarantee when you invest, so you
must be prepared to perform some form of due diligence and take your emotions
out of the process – safe, not foolish investing. Unless you have both the time and
skills needed to properly select various assets and position them accordingly, all
while insuring that you are keeping up with both regulatory and market changes, it
may serve you well to go with a professional. These individuals have access to
research and tools needed to optimize your capital using a systematic approach to
Saliq J. Khan
Editor-in-Chief
Saliq Khan is the Editor-in-Chief
of InvestmentHead Market
Commentary, a weekly market
commentary report. A Chartered
Retirement Planning Counselor,
Mr. Khan specializes in individual
and corporate retirement planning,
pension plans, asset management,
investment strategy, income taxes
and estate planning.
InvestmentHead publishes market
commentaries for the individual
investor to gain market
knowledge. Publishing weekly
market commentaries, specialized
reports and charts,
InvestmentHead facilitates the
process of investors seeking to
gain investment knowledge and
utilizing it to better serve their
individual investment goals.
investing while removing emotions from the process.
Many times the investor puts full faith in their advisor and presumes that
everything will be all right. This is not the approach an intelligent investor should
take. To protect your wealth, you need to understand how it’s created. Despite
having lost over 50% of the value in your portfolio, now is not the time to sell.
The selling process should be done at the height of the market or as the market is
coming down, not when the market has seemingly reached a bottom. Buy high-
sell low strategy has been the cause of collapse of many investment portfolios.
You wouldn’t buy a house when it’s extremely expensive and sell it when it loses
all of its value, so why do it with your investment portfolio? There are great
investment opportunities available and now would be the time to think about
buying. The only time an individual should sell their holdings is if it has an
adverse affect to their health or the person has a hard time sleeping due to the
stress of their declining investment portfolio. It’s better to take a loss than to
jeopardize your health.
Due to the gravity of the situation in the economy, holding cash has seemed very
appealing for the last year, but you can’t get rich holding cash. As the economy
reaches a bottom and the risk appetite returns, investors should look at assets that
can generate the returns needed to reverse the negative effects of the last year and
a half. Bear in mind that this will not happen overnight and you may not gain
back all your losses. Careful screening of securities can lead to investments that
may have the potential to endure market gyrations, volatility and fraudulent risks.
Dollar-cost averaging is a method which can aid this process, by making regular
deposits into your investment accounts to take advantage when stock prices
decrease. Countless investors try to time the market when determining when to
jump back in, but missing just a few best days of each year can significantly
reduce portfolio returns. The chart below is a prime example of why investors
should carefully review their fund selection and diversify them in order to
capitalize on discounted firms.
Pitfalls to avoid and strategies to deploy:
� If the majority of your investment capital is invested in the firm which you
work for, look to diversify that capital. You don’t want to be in a situation
where your company goes bankrupt or loses the value of its stock
dramatically.
� Don’t take funds out of your retirement accounts until you’re of age 59 ½.
You will generally be subject to an additional tax of 10%, unless you
qualify for certain exceptions.
� Don’t make radical changes to your investment portfolio except for when
your investments are performing in a manner in which you are unable to at
least mimic a certain benchmark.
� If you need liquid cash within the next 5 years, you shouldn’t be heavily
invested in equities. You don’t have time to play with the ups and downs
of the stock market. This applies to items such as retirement accounts,
college tuition, buying a home, etc.
� Government bonds provide the safety needed in such turbulent markets,
but may offer rates which aren’t enough to cover inflation.
� Today’s winners may not be the winners of tomorrow.
� Go back to the basics and perform the necessary due diligence on the
funds and your trusted advisor. This will mitigate the risk and the pitfalls
we have seen recently.
Disclosure: No positions held
© 2009 InvestmentHead.com. All Rights Reserved. The opinions expressed here are solely that of the author. This is not intended to be relied up as a forecast, research advice,
recommendation, or solicitation to buy or sell any securities. The opinions expressed are as of the date above and are subject to change. The information is derived from sources deemed to be reliable, and are not guaranteed as to accuracy. The information contained in this paper is based upon or derived from information generally available to the public
from sources believed to be reliable. Past performance is no guarantee of future results. Reliance upon information in this material is at the sole discretion of the reader.