The Bear Market 2008

Dear Valued Client:

The recent market meltdown has us all feeling anxious and in pain. As your advisors and fellow investors, we feel the same pain you are experiencing. However, calamities like the ones we are currently encountering are not unique – just think back to 1987 or September 2001. Crises, like the current one, have occurred before and will occur again. When they start or when they end is just about impossible to predict. While we can’t predict such events, we can anticipate them. That is why now is a good time to revisit the principles upon which we built your investment portfolio. These principles have served true in bad times as well as the good times, and I firmly believe these principles will be a rock-solid foundation as we move ahead.

When we established your investment portfolio, we told you that we would work with you to attain your goals and dreams by building a diversified portfolio of investments suitable for the long term. Our investment program, built on the twin disciplines of asset allocation and diversification, and executed by excellent managers, has functioned exactly as designed. We have prudently diversified your portfolio across a set of distinct asset classes through a variety of disparate investments. We didn’t just scatter your eggs in several baskets; we made sure we placed them in different kinds of baskets. This strategy has, to a great extent, inoculated your portfolio against potentially massive economic and capital market disruptions.

Through multi-asset class diversification, your portfolio should not suffer nearly as much as any single asset class or single investment. Because of the cushioning effect of asset allocation, we urge you to stop focusing on isolated pieces of your portfolio, like any single asset class (for example: U.S. equity markets), single mutual fund, manager or stock, and think only in terms of your overall portfolio performance. The discipline we used to structure your portfolio remains solid and will be our framework for moving forward, today and in the future. It is also crucial to consider your current stage in life. If you are in the wealth accumulation stage, it is imperative to invest in a portfolio discipline based on diversification and asset allocation, as we have always preached. For our clients in the distribution/income phase or who are approaching that phase, we recommend and continue to implement investment models that are less volatile and place more emphasis on income generation than growth. All of our clients’ portfolios are specifically customized to match your unique goals and time horizons.

We understand the anxiety induced by the current market volatility. This anxiety is being escalated by the media; the talking heads at CNN, MSNBC and all the other cable and broadcast news shows that are trying to bolster their ratings. They know that creating extreme anxiety through sensationalized media benefits their station with higher advertising rates, and higher profits and revenues for their companies. Remember, behind all news presented by the media lies an agenda. We urge you to stop listening to the media or at least think critically about the media’s point of view and motives. When you want to hear the facts or need an educated opinion, please contact us. We can help you by separating the important information from the unimportant and interpret what it all means to you and your wealth management plan.

Our experience suggests that investors who require constant, complete and detailed information about everything (including the current value of their securities) do not fare well in the long term. Investors who can tolerate a state of "not knowing" obtain more favorable financial results. This psychological phenomenon, called "information deficiency paradox," is a strange concept, but it makes sense. You may be suffering, in small part, because of your reliance on short-term information to evaluate your investment portfolio, and right now, that information is not good. However, history has shown that when investors have fled the equity markets and go to cash in a bear market, they rarely get back into the markets in a timely fashion. Historically, when bear markets bottom out, 33 to 50 percent of the market recovery occurs in the first 40 days.1 Missing out on an upsurge can severely hamper your long-term investment returns. For additional perspective on bear markets, see the enclosed piece "Perspective: The Bear Market of 2008."

In our opinion, free market capitalism is not in trouble. Capitalism has passed the test of time through a variety of horrific historical events. Owning good investments through both good times and bad is the only way to earn the rewards of an economic system based on the private ownership of property.

The basic economic law of supply and demand teaches us that when consumer goods go down in price, there is a corresponding increase in demand, and when prices goes up, there is a decrease in demand. Why is it that this sound economic law that has worked so well for consumer goods is somehow ignored or rejected when it comes to intangibles like investments? When stock prices go down, as in today’s climate, there should be a significant increase in demand for these equities at lower prices. Clearly there are some good buying opportunities right now, but where are the buyers? Warren Buffet states, "A bear market is a period of time when the stocks of companies get transferred back to their rightful owners." That creation of value in stocks is happening right now and you should think of yourself as "a rightful owner," not a panicked seller. We need to discuss the strategy of rebalancing your portfolio and buying more equities, not selling them.

In light of the uncertainties of today’s markets, and the media noise pressing in on all of us, we invite you to call on us to discuss your investment portfolio and your total wealth management picture. We can provide you the comprehensive perspective you need to analyze, evaluate and act prudently to help safeguard the important promises you make in life.

Sincerely,

Dion Gouws, CPA

1 Standard & Poors. 8 October 2008. <http://money.cnn.com/2008/10/08/pf/money_crisis.moneymag/index3.htm>.