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When I don’t know what to say, I look to people that I trust for their insight, and to the data for the story behind the story.  Here are some nuggets that I’ve found enlightening in recent days.

The Data:

• We’re Saving More – from 1993-2008, US Consumers saved about 2-3% of their personal income.  The average American household had deb service requirements that peaked in July 2007 at 14% of personal disposable income.  Today, these same consumers are saving 5.5% of their income and debt service per household is down to around 11.5% on average.  (PSAVERT data series from Federal Reserve Economic Data)
• The US Downgrade Hasn’t Hurt Us Yet – Versus the 17 countries with AAA ratings, the United States has among the lowest cost of borrowing, about 2.125% on their 10 year bond (Bloomberg Rates and Bonds lists the following yields on 10 year soverign bonds: Australia (5.75%), Germany (3.25%), and UK (3.75%) as of 8/10/2011 (link)
• Stock Dividend Yields are Strong, Historically – The current yield on the S&P 500 index is about 2.15% making blue chip dividends historically cheap versus government paper (Wall Street Journal)
• Retail Spending is Up – The retail consumer is whta we’ve been told is missing from this economic recovery.  Retail Sales are up by about 5% over the last 12 months.  (RRSFS data series from Federal Reserve Economic Data)

“A strong dose of modesty is clearly in order. We all need to be aware of the limits of our ability to forecast future stock prices. No one can tell you when the stock market will end its decline, but there are some things that we do know. Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong. We have abundant evidence that the average investor tends to put money into the market at or near the top and tends to sell out during periods of extreme decline and volatility. Over long periods of time, the U.S. equity market has provided generous average annual returns. But the average investor has earned substantially less than the market return, in part from bad timing decisions.

My advice for investors is to stay the course. No one has ever become rich by being a long-term bear on the fortunes of the United States, and I doubt that anyone will do so in the future. This is still the most flexible and innovative economy in the world. Indeed, it is in times like this that investors should consider rebalancing their portfolios. If increases in bond prices and declines in equities have produced an asset allocation that is heavier in fixed income than is appropriate, given your time horizon and tolerance for risk, then sell some bonds and buy stocks. Years from now you will be glad you did.” (Wall Street Journal 2011-08-08)

Once again, the investment markets are testing new lows, and I can feel from here how tired you are of dealing with the combination of economic crisis, scandals, portfolio losses, and most of all, uncertainty about the best course of action.  Not to mention the lack of political leadership we seem to be facing from either party as they argued and played politics with the recent debate over the federal debt ceiling.

What gets us through the difficult periods-be they due to bear markets or personal stress or sorrow – are three things:

1. Following consistent practices that keep us moving forward and help us keep our focus
2. Keeping a long-term perspective and continually reminding ourselves that this, too, shall pass
3. Enjoying and giving thanks for what we have.

Let me share a few historical headlines that I’ve run across recently and let me know if they are different than anything you’ve seen.

“Investors have been frightened of an economy that seems out of control….The stock market has scarcely been so shaky since 1929…A Gallup poll published last month found that 46% of adults feared a depression similar to the classic one of the 1930s.” (Time Magazine, September 9, 1974)

“Falling real estate prices and the fragile state of the banking system make this recession unlike any other and extremely difficult to forecast.” (John R. Dorfman in The Wall Street Journal, February 7, 1991)

“This time it is different. This time the market won’t be so quick to bounce back…Who can look at the world right now and not conclude that things have changed dramatically?” (Joseph Nocera in Fortune Magazine, September 28, 1998)

A fellow planner shared the following story to illustrate a common investor dilemma.  Assume that you live on Long Island and need to go to Los Angeles.  You plan to go by car.  You make it to Manhattan fine, but hit gridlock (despite it being mid-day on a weekday) on your way to the Lincoln Tunnel.  It is so bad that folks on bicycles are making progress as you are stopped.

You may be tempted to trade your car for a bike.  You likely would make it to New Jersey sooner than if you stick with your initial plan. But then what would you do?

If you had known about the gridlock ahead of time, you would have made different plans.  But you didn’t know, and now you are in gridlock, considering your options.

Once in the gridlock, making any progress (by bike) certainly feels better than the frustration you feel going nowhere in your car.  This better feeling, however, will just as certainly abandon you once you emerge from the tunnel, facing the remaining 2400 miles of your journey.

By the way, if it was clear to everyone that gridlock was going to happen at that time and place, that knowledge itself would likely have prevented the gridlock, for most people would have taken steps to avoid it.

So, what are your options today?

Switching to all cash or CDs could prepare you for 2011 if it is a repeat of 2008.

What is the likelihood of that?

We have already been blown off course.  You have already paid a price.  If your cash and bonds can handle your withdrawals for several years, then aren’t you better off letting your stocks remain in place to recover their value as the global economy recovers?

I have no illusions that it feels awful today.  It feels foolish to keep money in stocks.  Recognize that these feelings are hardwired into our brains, the result of centuries of lessons of creating trends where none really exist.  Actually, the contrary is true.  Admit that your heart is telling you that investing in stocks today is foolish, but that your head is telling you that investing in stocks today is smart. Recognize the conflict, and be very deliberate in how you resolve it.

There is a mountain of cash sitting on the sidelines.  Research from Jennison Dryden shows an average 36% return in the 1st year after a market bottom over the last 9 bear markets.  Some of this cash is likely to find its way into stocks and bonds at some point as investors become more willing (or realize the need) to take on more risk in order to earn higher returns than they can get from holding cash.

This crisis is just another reminder to keep our eyes on the right ball.  Feel free to ignore the media telling you how the Dow is doing every 20 minutes.  Consider calling a friend instead.  Ignore whether IBM met its quarterly earnings estimate – meet family for lunch.  As the 4000th report on the economy is coming up next – consider going for a walk through your lovely neighborhood.

It would be better for you to watch the season premiere of Jersey Shore tonight than it would be to spend the night watching talking heads lose their minds about what is happening.  

The financial media’s goal isn’t your peace of mind.  Their goal is to keep you watching so ratings go up and they can sell ads.  Go about your life.  Jersey Shore or otherwise.

Have faith in capitalism and the markets. Stay invested. Keep your spending in line with your resources. Focus on what is truly important to you. If you can do that, then we really believe that you’ll be OK.

Failing all of that, give me a call.  504-717-4862.  If I don’t answer, I’ll call you right back, just leave a message.

Jude