Wednesday, January 23, 2008

Words Of Wisdom From Wells Fargo

I subscribe to Wells Fargo's Daily Advantage, a daily recap of the market's movement. Usually it is garbage can fodder, but every so often there as moments of grandeur, like this one.

The stock market is in a bumpy patch, but I'm going to sleep well tonight as usual. Here's why: My wife Kathy and I are very broadly invested in stocks, bonds, and cash in a way that we think roughly represents the U.S. economy. That means that as the economy goes, so go our investments. With the economy slowing down and maybe even entering a recession, we fully expect that our nest egg might stop growing for a while and maybe even shrink. So what? We also believe the economy will sooner or later resume its growth as it has after every downturn for the past 200 years. Why should this time be different? When the economy starts growing again, so will our investments. (Indeed, our nest egg may never stop growing, but that remains to be seen.)

About the only way Kathy and I could lose our savings is if the economy goes away, and I don't see how that could happen. It's a $3.2 trillion economy. Where would it go? Americans love to work and work hard. We make stuff or we provide services and then we take our compensation and spend it. That's the economy in a nutshell. And it's not going to stop. In fact, with the population growing and our productivity increasing, the economy will get bigger in the future. So we've bet on the long-term growth of the American economy and nothing that has happened in recent months suggests our bet is misplaced.

That's not to say we never do anything with our investments. We rebalance when growth of one sector or another alters our intended allocation. And if we thought there was a massive readjustment ahead, we might change our allocation. We moved some money out of stocks and into bonds in January 2000 just before the tech bubble burst and that move preserved some value for us. But we don't see any distortions like the tech bubble in our portfolio today. And while the recent downturn has been marked by dramatic losses to some firms and a lot of psychological angst, otherwise it's a pretty ordinary correction so far. So, as I was saying, long-term investors sleep better. Zzzzzzzzzzzzzzzz.

A huge amen to Wells Fargo's Peter Nulty!

It's true. If you look at the Dow Jones Industrial Average, for about the last 80 years, if you look at any date along the line, 10 years prior to that point the market will have been lower, and 10 years after that point the market will be up.

Another great quote from Dave Ramsey on CNN is summarized in this;
"A Recession is defined as 2 consecutive quarters of negative GDP growth, and over the past decades economists have predicted 20 of the last 3 recessions."