Monday, October 6, 2008

It is the Darkest Before the Dawn

The world sold off today and there was no place to hide. The baby, the bath water, the tub and all the plumbing in the house were thrown out today in every country of the world that had a stock market. People don’t know what to do so they just sell everything with out any thought of what needs to be done. If you have a stock paying an annual dividend of 8% would you sell it, take a loss and then buy a T-Bill for .46%? If the company looks like it has a chance to continue to pay the dividend, then keep it. If on the other hand if you are not being paid a dividend you really have to look at the prospects of the company if you want to keep the stock.

People are flat out scared about what is happening and trying to figure out what could happen next. Many people wonder what they should do with whatever amount of money they have left. I did get a response from one of my readers to my blog last night, who said, “I liked your comment, IT WILL PASS. That has always been my attitude, but I just hope I do not PASS first.” My reader is over 90, has been investing for many decades and has seen all the bull and bear markets.

I think we can learn a lot from what she is saying. Markets do go up and they most certainly go down. What gets scary is when some of the emerging markets like Russia drop 20% in one day. I was encouraged, yes, I said encouraged, today with the fact that the US markets, which at one point were off over 800 points, finished the day down about 360.

I know that 360 points is a significantly scary drop, but it is a hell of a lot better than the 800 points we were down earlier in the day. The markets on a global basis are trying to deal with the problem of liquidity, they will sort things out, and this will pass. If I knew how long it would take to sort things out I would control a great deal more money than I do today. As I have said many times before, get paid for the risk you are taking.

Over the next few weeks, you will be receiving your 401k, IRA, brokerage or mutual fund statements. Be prepared to be shocked at what has happened through the end of September. I believe that many millions of Americans have no idea how much their accounts have declined in value.

The statements they will be receiving will understate the decline that has already taken place in the first 6 days of October. The panic will increase as people see their statements and they will want to sell, probably selling too late. Ask yourself how much time you have until you will need this money. If you have time then continue to add money and take advantage of dollar cost averaging. If your time horizon is shorter then think about selling some of your positions on any rallies.

I do have one concern that I need to discuss with you. It is your choice as to what you want to do about my suggestion. Perhaps you have read in the papers about the inability of some companies to get cash to pay bills. As I said yesterday, an HMO in Florida had to shut down because it could not get at its money. I think it might be a good idea to have some cash around the house. I can not tell you how much to have on hand but it might be a good idea to have enough to buy two or three weeks worth of food and fuel. After things settle down and you do not need the money, put it back. I hope I do not have to use emergency cash, but I will feel much better if I need cash and have it in hand.

Dan Perkins

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