UNPRECEDENTED TIMES
By Gus Krafve
October 3rd, 2008
What we have witnessed in the global financial markets has no real historical precedent in modern times. A spiral of bad debts, credit downgrades and collapsing equities turned into a full-fledged global market meltdown. Credit markets seized up, and many different types of assets became illiquid and couldn’t be traded. Major financial institutions failed, merged or were taken over by the U.S. government. Markets and financial institutions, in short, experienced the modern equivalent of a depression-era bank run. Stock market volatility has approached record highs as measured by the VIX index which hit levels not seen since the Asian crisis of 1998 and investor capitulation experienced when the market bottomed in the summer of 2002. We are optimistic that the government rescue package will ease the credit markets and help restore investor confidence.
We have spoken with several of you recently and thought it would be helpful to answer a few common questions that have been asked.
Does it make sense to liquidate my stocks?
No. We would not recommend changing your asset allocation now. Your investment objective was established based upon your long-term goals and objectives. While it is difficult not to second guess yourself at times like these, changing an asset allocation during times of market turbulence is almost always the wrong thing to do. Stocks bottom during times of emotional panic, not when people are optimistic. As you know, over longer periods of time, a well diversified portfolio of high quality stocks has proven to be the best performing asset class.
What if we sell my stocks now and get back in when it looks like things are turning around?
While this strategy sounds good, it hardly ever works. The reason is that the market is a discounting mechanism. It prices in good or bad news on average six to nine months before the fact. In the present case, the stock market will have hit bottom several months before we see the trailing economic data reported as getting better. By the time everyone starts to feel like the economy and credit situation is back on track, the market will have already rallied significantly and left those who sold at the bottom holding nothing but their realized losses.
Is my money market account safe at Trust Company of the Ozarks?
Yes. Many investors have realized that not all money markets are created equal. We have seen some institutions’ money market mutual funds decline and not maintain their stable value against the dollar. The reason that a few money market mutual funds have gone down in value is that they invested in corporate bonds and some of those corporate bonds have defaulted or have significantly declined in value. Trust Company of the Ozarks uses the Northern Trust Government Select fund for the majority of its clients’ money market allocations. This fund only invests in government treasuries or government agency bonds which are protected by the backing of the U.S. government.
We realize these are difficult times and want you to know that we welcome the opportunity to talk with you at any time. The hallmark of Trust Company of the Ozarks has always been our disciplined approach to the markets and our client focus. Times of economic stress reinforce the value of consistent, conservative management practices that have historically served Trust Company of the Ozarks clients’ well.
