Does our nation's current economic situation have you worried? The investment experts at Treece Investment Advisory Corp. offer information and advice on getting through this troubled time.
THE SECURITY OF BANKS
For the majority of Americans, money held in their banks remains secure, largely because the government currently guarantees bank deposits up to $250,000. In addition, Dock Treece explains, as a part of the economic bailout package the government is "also guaranteeing all the bank debt, and the latest thing I heard is they are going to guarantee all bank deposits."
Dock Treece, Jr., agrees that for the average person, $250,000 in guaranteed deposits is more than enough. However, he cautions that "there might be a couple of small failures. Nothing like Lehman or J.P. Morgan, but things like Integrity in Atlanta and similar-sized banks."
When it comes to investing in the stock market, Dock Treece won't say that your money is "unsafe," but he's quick to point out that, "there is going to be a huge amount of volatility [in the market]."
Dock Treece, Jr., contents that "the days of playing the stock market are over. You can't do today what people did in the late 90's with the tech bubble... While we may or may not be at - or past - the bottom of the market, the next five years are going to be rough. It's not going to be a straight shot back to the top." His advice: "People need to make a decision and say, 'For the next five years I am going to ride it out or get out.' If you are going to need a substantial portion of your assets in the next five years, the stock market may not be the place for it.
Dock Treece ads, "I would have to say one place that I feel the average person has a risk of loss - it's not a risk of losing money - it's a risk of losing purchasing power. Because what I see the treasury and the Fed doing over a long period of time is very inflationary so people who seek safety may find themselves not earning enough to keep ahead of inflation."
401(k) AND PENSIONS
Living in the moment without a definitive plan of action can be frightening. "If where your money is invested is causing you to lose sleep, then you need to do something different," says Dock Treece. "A person has to be able to accept the volatility or the risk of what they are investing in and still sleep well."
Unsure of your financial advisor's strategy? Dock Jr. advises, "Shopping for an investment adviser is like shopping for an investment. Shop around!"
For those nearing retirement, it's still important to keep an eye on the long term.
"People retiring today, if they are retiring in their mid-to-early 60s, are looking at living 30 years on their retirement income," Dock Treece points out. "To make short-term decisions based on money that you aren't going to need for 25 or 30 years is not a good plan of action, in my opinion."
For the money you will need in the short-term - that is, over the next few years - it may be wise to move it out of our volatile market and place it in something with less risk, such as CDs or short-term treasuries. "If you look five years out, we are going to be looking at a different world and you are going to have to prepare for that because you are going to live through it. That is one of things that I had to tell some people who have walked in and said, 'I really want to retire.' I have had to say to them, 'That is really not in your best interest.'"
Dock, Jr., adds, "There is no point in someone, just because they are near retirement, to say, 'That's it, I am done with the market; I am never buying another stock, bond, mutual fund. I am putting my money in CDs and letting it sit there until I die.' This market will recover... They need to approach these circumstances for what they are and know that they will be temporary. It may take some time for the market to work through them, but eventually it will."
THE CREDIT CRISIS
Still wondering what caused it all? The collapse on Wall Street, Dock Treece points out, was the result of a credit crisis "of unbelievable proportions".
"The amount of debt carried by individuals, companies and the government just became so huge that it couldn't go on any longer." For instance, banks were giving loans to individuals who didn't have the income to make their payments. As a result, "what we had, and I use the past tense, was a major credit crisis."
"But when you analyze debt, there are only three things you can do with it. You can pay it off; you can default, or the government can put it on its balance sheet and inflate it away over time. This entire bailout was designed to move all of that bad debt - whether it was bad mortgage debt, credit card debt, auto loans, bank debt - they are moving it all under the balance sheet of the federal government, and over time the government is going to inflate it away."
That brings us to the question of inflation. According to Dock Treece, those "who are not protecting themselves against inflation are going to regret it down the road."
"Let me give you an example of inflation. When I was in high school, I used to buy a Baby Ruth candy bar. I paid a nickel for that candy bar. Today, that candy bar is probably close to a dollar. What's happened? That candy bar is the exact same weight, has the same amount of caramel, has the same amount of chocolate and has the same number of peanuts in it. The only thing they did was take out a little cardboard bottom that used to be in it because now it's just in a single wrapper. So, what has changed? The value of the nickel? The nickel has no value anymore."
THE ECONOMIC BAILOUT
Dock Treece says that without the government bailout, "It would have been a mess ... massive defaults across the board, and you would have had bank failures that you couldn't even imagine. You would have been back in the middle of the 1930s."
BETTER TIMES AHEAD?
One thing to remember is that there is hope in the future.
"Thirty years in this business tells me that things constantly change. We have been through some pretty serious times before; we will go through them again. While these seem very bad, they are actually equivalent to what we went through in 1973, 1974."
"There have been about 10 or 12 panics in the last 150 years in the stock market," Dock Treece continues. "All of them have stopped their decline, somewhere between the 40 and 50 percent range. The only one that went over 50 was in 1932, where we were down to 53 percent. This market decline at its worst was down 43 or 44 percent."
"Most of [the market declines] last anywhere from one year to about two years. We are 12 months into it this month because last week was the one-year anniversary that the market started down. So this one is a lot closer to the end than most people think they are, in my opinion. But I guess you could say, it is always darkest right before dawn."
WHAT WE NEED TO LEARN
As Dock Treece says, "Wall Street is not a one-way street. That you are going to have corrections, you are going to have major corrections like the one we are in now, and if you think you are going to buy anything and it's a free ride forever ... then you are seriously misleading yourselves about what happens in the investment world."
Dock Jr. adds that we need to rethink the way we spend money as individuals. "The average American, way more than average, probably 95 percent of Americans have been living way, way, way beyond their means for way, way, way too long. We have one of the lowest savings rates in the world in this country. We borrow for absolutely everything. We borrow for everyday purchases with credit card, and I think that it is not something that policy in Washington can change. It is something that American people need to get through their heads."
Dock Treece agrees. "That is probably far more important than most people understand. People today have tried to borrow their way into prosperity; you cannot borrow your way into prosperity; you can only save and invest your way into prosperity."