Letter to Our Clients - October 8, 2008

October 8, 2008


Dear Clients and Friends

Events unfold so rapidly that letters I draft one day are outdated the next. However, I would like to make some points now that do not depend upon headlines or breaking developments.

People say things like “I cannot afford to lose any more,” or “I cannot afford to have it go down any more.” It is important to understand what is being “lost” and what the “it” is.

Imagine a bucket in your hand, filled with water. Your investment accounts are not like water in this bucket. When your account values go down, it is not as though a bucket of water has a leak in it.

Your accounts hold investment assets. Your account value is the sum total of the value of all of the individual assets in that account at the end of the trading day. The “value” is determined by price the last buyer and the last seller agreed upon at the end of the trading day. If you owned 1000 stocks worth $10 each at the beginning of the day, and if they were worth $9 at the end of the day, what have you lost? Either $1000, or nothing.

You “lost” $1000 if you sold all your holdings at the $9 per share price. You lost nothing if you did not sell, because you would still own the 1000 shares.

Were they worth $10 a share when you bought them? Maybe, maybe not. That was the fair market price at that time.

If the next day the stocks went to $11 per share, did you gain $1000, or nothing? Actually, nothing.

This is why the technical terms for your fluctuating values are “unrealized gains and losses.” They become “real” or “realized” when you sell.

There were reasons we purchased what we did.

1. Based upon the information we had at the time, we felt we were making prudent allocations between stocks, bonds, cash and whatever else you own.

2. When we bought individual securities, we bought them because, based on the information available, we felt they had good growth or income potential and acceptable fluctuation risk.

So, what are we “losing” as our accounts are going down? Nothing, unless we sell. Can we or can we not afford to have “it” go down more? Can we or can we not afford “to lose any more”?

There are two ways to look at the questions. There is the textbook or “objective” way, and the subjective or emotional way.

Using objective thought process, if there has been no change in your fundamental financial circumstances, then the prudent allocation decisions made at the time of purchase should not be changed now (# 1 above). This would mean we should not sell when things are down. We may want to make adjustments in the account because perhaps the fundamentals have changed on one or more security (# 2 above). For example, assume Company ABC is losing market share and cutting its dividend, and Company XYZ is now in a stronger position than it used to be. Perhaps we sell ABC and buy XYZ. That is a prudent textbook move. What would not be textbook prudent would be to sell ABC and leave the sale proceeds in cash or money market.

Listening to our emotional side might give us a different result. The news is full of drama and panic. Much of the news is genuinely bad. It is possible these current crises will end up changing our lives by requiring a change in lifestyle, spending patterns, etc. It certainly is changing the institutions, beliefs and philosophies at the highest levels.

Some people are finding themselves unable to sleep, and/or they have become anxious and even depressed throughout their day because they cannot stop thinking about what is happening to their accounts. If that is you, if you feel you cannot afford to lose any more, or have it go down any more, then it is important you call me, and call me very soon.

I am here to help you in any way I can, including selling all your holdings and going to cash or to insured bank deposits. I will tell you the insurance may not give you the security you think it does, but my point is that I will help you do whatever you think needs to be done, taking into account your financial resources, age, and ability to cope with these kinds of financial turmoil.

However, my basic recommendation is that we make no major changes at this time. I do not say this because it is scripted, or because it is dialogue advisors like me are supposed to use. Whatever I say will be addressed to the specific individual to whom I am talking, not just “the average investor.” I will give my opinions based upon the convictions and perspective that come from my 26+ years of experience in financial markets, and based upon the study I have done on the history of financial markets and on the research I do on a daily basis about the current state of affairs.

If I do not hear from you, I will assume the decisions we have made remain appropriate for you at this time. Even so, if you would like to review your holdings, the performance of your accounts, or the outlook going forward, please do call. I look forward to that conversation.

If you are not comfortable with the way your accounts are now structured, please – it is very important you call as soon as possible.

Thank you again for the opportunity to continue working with you. Good luck seeing through the “noise” of our political, economic and financial crises so that all our decisions prove to be thoughtful and well-informed.

Best Wishes,

Robert K. Haley, JD, CFP®, AIF®