Staying the course

On January 15, 2009, 90 seconds after lifting off from LaGuardia Airport, the now famous US Airways flight 1549 lost all engine power upon striking a flock of geese 3,200 feet above New York City. Three-and-a-half minutes later, the crippled Airbus A320 touched down in the Hudson River, and what could have been a major loss of life became a textbook lesson in crisis management.

Listening to the cockpit communications, it's quickly apparent that "The Miracle on the Hudson" was made possible by the skill, poise and careful coordination of Captain Chesley Sullenberger and First Officer Jeff Skiles. Yet the transcript also reveals the importance of a tool that for decades has helped pilots manage both the routine and unexpected during flight. That tool is the checklist.

Indeed, in the moments just before the bird-strike, Sullenberger is heard saying, "After takeoff checklist complete." Upon losing power, the first directive he gives Skiles is "Get the QRH." The QRH or Quick Reference Handbook, is a manual consisting largely of checklists to be utilized in troubleshooting various problems such as loss of cabin pressure or engine power. After the order is given, Skiles and Sullenberger can be heard working through a series of steps designed to save the flight.

As they attempted to address an emotionally fraught, seemingly impossible situation, the two pilots had a simple resource they could turn to for help.  Beyond the aviation world, checklists are used to manage a host of complex processes: from constructing skyscrapers to administering critical care in hospitals.

Of course, the decisions investors make when markets become volatile don't have life or death consequences, but they can prove vital to ong-term financial wellbeing. And given what we know about
how market volatility can transform a calm, cool and collected investor into an emotional, panicked and scattered one,having a checklist to consult during the next period of instability might mean the difference between reaching your goals and falling short of them. The next time volatility strikes, consider these six steps:

1. Take your emotional temperature.

Even with the recent market tumult still visible in the rearview mirror, it may be difficult to recall just how unsettled investors felt in 2008 and early 2009. Yet it's all but assured that a future downturn will find us back in the same emotional boat.  We shouldn't be surprised that when markets decline our moods tend to do the same, as losses can make us feel as if our financial objectives are imperiled. Yet even if we acknowledge that declines are a reality, we are still susceptible to letting the emotions that accompany those downturns drive decisions at odds with key investing goals. One way to help keep them at bay is to gain a deeper understanding of where they originate.

Consider, for example, the strong compulsion to sell when markets become erratic. At heart this urge is essentially a flight response, We seek to eliminate a source of anxiety - in this case, the possibility of monetary loss - by disengaging from it. On a practical level, that generally means converting assets into cash, which limits the possibility of loss.

Psychological studies and research in behavioral finance confirm that this aversion to loss is actually part of our neurological programming, hard-wired into us from a time when survival depended on hunting and foraging - and holding on to the fruit of those efforts meant the difference between life and death.

Viewed in that light, it's no surprise that the visceral urge to limit losses overtakes the rational part of our brain that may be telling us that selling assets into the teeth of a down market locks in losses and reduces considerably the potential to benefit from a market recovery.

Aversion to loss is but one of many tendencies that surface during volatile periods. Others include the impulse to move with the herd - a phenomenon exemplified by the late 1990s rush into tech stocks - as well as our penchant to heavily weigh the importance of recent events rather than considering them against the backdrop of market history.

According to behavioral economist Dan Ariely in his book, Predictably Irrational, it's important to understand the surprising power that emotions can exert over our choices. "Although there is nothing much we can do to get our Dr. Jekyll to fully appreciate the strength of our Mr. Hyde, perhaps just being aware that we are prone to making the wrong decisions when gripped by intense emotion may help us."

2. Turn down the volume.

When the market is rising like a rocket or sinking like a stone, the popular press seldom provides analysis that's useful to long-term investors. Instead the headlines tend to play up whatever information or trend has grabbed the momentary attention of traders and pundits. In an age of nonstop connectivity, tuning out financial news can be tough, but fixating on daily or even weekly market returns can spur us to actions that might ultimately impede our long- term success.

It's interesting to consider that the temptation to monitor stock and bond investments on a daily or even hourly basis stems mostly from the fact that there is always new data available, as trading creates regular re-pricing. To remain focused on long-term goals, it may be helpful to take the same approach with your investment portfolio that you do with assets that don't get re-priced with similar frequency. For example, short-term fluctuations in the value of your home or car don't prompt you to immediately put them up for sale.

Another strategy for curbing the emotional impact of market volatility is to review the value of your investments only at regularly scheduled times. Many investors elect to do so quarterly upon receiving account or brokerage statements. This diminishes the likelihood that they will feel it necessary to make constant changes in response to day-to-day market swings.

3. Find the broader context.

Ask the average investor how many 20% market declines they'd expect to experience over a 25-year period and chances are the answer will fall short of the number suggested by history. The figure, based on the unmanaged Dow Jones Industrial Average dating back to 1900, is about seven. That's right, roughly once every three-and-a-half years (assuming 50% recovery of lost value between declines), the Dow has lost at least one-fifth its value.

Yet each time such a downturn occurs, it understandably upsets investors. Moreover, the sharper drops often elicit claims that this time the selloff is different or worse than those that have come before. As previously noted, maintaining perspective while watching an account balance shrink is not easy. but remembering that downturns are a fairly normal occurrence can help place short-term market events in a broader historical context.

Having that historical perspective can strengthen your resolve to stay invested, which can be a key to long-term success. After all, pulling out of the market at a high point and buying back in at the boltom is almost impossible to do once, let alone more than a half dozen times during your life as an investor.

4. Recognize the potential harm of sudden movements.

A recent survey by financial research firm Dalbar determined that over the 20 yearsended December 31, 2009, the average stock investor's return trailed that of the broader market by nearly 5% per year.  Put another way, if the market gained 10% annually, the average investor's portfolio realized only a 5% gain.

Much of this differential stems from investors who, for the reasons discussed previously, sold at the boltom of the market and, if they bought back in, did so once the market had already begun to recover. Market turnarounds often happen suddenly and unpredictably; being on the sidelines when a reversal occurs can rob investors of significant return.

In fact, a hypothetical investor in the unrnanaged Standard & Poor's 500 Composite Index who wasn't invested on the index's five best days during the lO-year period ended December 31, 2009, would have realized an annual return nearly 4% lower than someone who remained invested the entire time. Of course, past results are not predictive of results in future periods.

5. Think like a contrarian.

Warren Buffett once offered the following bit of investing advice: "When others are greedy, be fearful; when others are fearful, be greedy." A more delicate rephrasing might be: Amid adversity, there is often opportunity. Volatility of the kind that marked 2008 and early 2009 often punishes good and bad investments alike, as some investors succumb to the stress and opt out of the market entirely.

Though coetinuing to invest when markets are declining can be difficult, if you believe that stock and bond funds are a good way of meeting long-term financial objectives - which has been the case historically - then making purchases during a downturn is often like buying investments at prices below their longterm average. That's because as markets become less emotionally driven, stocks and bonds generally return to something closer to their long-term average, and investors who "bought on the dip" can benefit. While regular investing doesn't ensure you'll make money, staying the course through thick and thin can help increase your share balance, which can increase your portfolio's ability to provide income.

6. Check in with your financial adviser.

No one would set out on a Himalayan trek without enlisting a guide who knew how to navigate the most perilous stretches. So it goes with investing.

Your financial adviser can be a steadying presence when market conditions get tough. Whether reviewing your investment plan, providing perspective on what's happening in the market or placing current conditions in a larger context, your adviser is an important ally and sounding board.  Maintaining open lines of communication can prevent you from taking steps that could undermine your long-term goals.

Indeed, you might think of an adviser as a kind of co-pilot. Much like Sullenberger and Skiles, you can manage the crisis more effectively together - by systematically working through your checklist with the goal of achieving a belter outcome.

The preceding article appeared in the Investor Magazine provided to shareholders of American Funds, a mutual fund company whose various funds are used by Jersey Benefits Advisors and John Kaighn to assist clients in meeting their investment objectives.

Jersey Benefits Advisors Winter 2009 Newsletter

MARKET WATCH

Trying to ascertain a realistic assessment of the current economic situation is tenuous, at best, as we begin 2009. Finding a balance between the people who believe we are actually experiencing financial Armageddon, and those who perpetuate that fear for political advantage, is where I find myself at this point in time. History is always a good place to look to determine if a financial panic has some precedent we can use to guide our decisions.

The US economy has been in recession since December of 2007, according to the National Bureau of Economic Research, and unemployment will continue to increase well into 2009. This recession could be the worst since the 1973-75 and 1981-82 recessions, and possibly the worst since the Great Depression. If you look in the right column , there is a historical list of various recessions and their duration. While not attempting to downplay the severity of the current economic slump, it is quite evident we have not reached the depths of the Great Depres-sion, despite sensational media reporting.

Below is a list of recessions, since 1926 and their duration.

1929-1933, 43 months in duration (Great Depression).

1981-1982, 16 months in duration.

1973-1975, 16 months in duration.

1937-1938, 13 months in duration.

1926-1927, 13 months in duration.

2007-2008, 13 months in duration.*

1970, 11 months in duration.

1948-1949, 11 months in duration.

1960-1961, 10 months in duration.

1953-1954, 10 months in duration.

Government response has been intense. Whether the stimulus planned can jumpstart the economy remains to be seen. There are many who believe government stimulus is a waste of taxpayer money, that it will go to family members, and friends of the politicians who sponsor legislation, and our children will be left with European style taxes for generations. It seems that the taxpayers in this country are psychologically wrestling with the choice between free market capitalism and the safety net of increased socialism.

As I mentioned earlier, I tend to look for balance between the multitude of opinions, so I think we will avert disaster, but the price will be more government and a period of slower growth. It is not possible for us to have low taxes and deficits of a trillion dollars for very long. For now, however, even people who believe in free markets realize the government does have a role to play when panic grips our financial system. This is especially true when government policies, such as "affordable housing initiatives" and Corporate Average Fuel Economy (CAFÉ) standards have exacerbated problems for certain industries. The cost down the road will be high, especially as taxpayers weigh the option of further nationalizing the health care system.

The markets have been humbling to many money managers this year, and as you know from the end of the year statistics, quite dismal. The Dow Jones Industrial Average ended 2008 at 8,776.39, which is a decline of 33.84% from the 2007 close of 13,264.82. The S&P 500, which reflects the broader market, was down 38.49% from its 2007 level of 1,468.36 and closed at 903.25. The NASDAQ index dropped from 2,652.28 to 1,577.03 to end 2008 with a 40.54% loss.

In the next article, I discuss ways to survive and thrive in this market. The next year or so is a buying opportunity!

INVESTING DURING THE RECESSION

I stated in Market Watch that the markets humbled many money managers in 2008, and with this downturn comes the chorus of concerns about not being able to make money in the stock market, because it is too volatile. At first glance, the argument seems plausible, because if you look at the indices, and their returns to date, they are abysmal. In fact, on November 20, 2008, the S&P 500 fell to a low of 752.44 not seen since the 754.72 close on April 15, 1997. At that point the S&P 500 was 51.92% lower than the high set in October 2007. From November 20 through the end of 2008, the S&P 500 gained back 20%.

There is no doubt the stock market has been a real roller coaster ride, and the 2008 lows will probably be tested in 2009. When you analyze the numbers, and understand how rapidly the market can recover, you begin to understand knee jerk reactions are not the best responses to this volatility. In fact, I am of the opinion the only way those of us who work for a living have a chance to build wealth is to continue to save and stay invested during this roller coaster ride.

Furthermore, while it is true there was a market low of 51.92% in the S&P 500 in November, those of us who kept their investments didn’t realize that loss, except psychologically. These gains and losses are temporary paper fluctuations that are only realized when you sell. Variable annuities can protect future income, if you are concerned and close to retirement.

With the markets off more than 30%, every share you buy in your 401k, 403b, ROTH IRA, IRA, 529 plan, brokerage account or mutual fund is being purchased at a discount. I feel this buying opportunity will continue for at least 6 months and possibly longer. When the markets recover, as they always do, all of your old shares, plus the new ones you purchase will bring your account to a higher level than it was before the recession.

Click on the graphic to make it larger if you have difficulty viewing it!



It is true nobody has a crystal ball to tell us exactly when the markets will recover, but once again history is where I usually go to help me understand what we are experiencing and how best to survive and thrive. The graphic above helps put some of the current conditions into perspective. The first graph depicts the recent job losses. While the 2,589,000 jobs lost in 2008 were the most since 1945, the percentage of jobs lost was only 1.88%. This compares favorably with the 2.34% of jobs lost in the 81-82 recession.

The second graph shows that unemployment peaks some months after a recession has ended. The recessions are noted by the shaded areas and the line depicts the unemployment rate. Since trying to time these trends is an inexact science, it is my opinion patience, discipline and calm are the keys to building wealth.

PROTECTING YOUR ASSETS IN A DOWN MARKET

Many of you have invested in the Transamerica and MetLife Annuities, so I want to remind you, once again, about the Guaranteed Minimum Income Benefit. This rider protects the assets so your account will continue to grow in a down market. Look for the line item GMIB, Income for Life or Managed Annuity Program to ascertain this value.

While the market value reflects the turmoil in the stock market, the beauty of these products is their insured value during times of market upheaval. These products help to protect your assets and are an especially good investment for retirement assets. They are great for anyone who wants some insurance on their investments, especially if you are going to be drawing income in the near future. Contact me for an appointment or more information.

John Kaighn

Jersey Benefits Group, Inc.

Investment Advisory Services offered through:
Jersey Benefits Advisors
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Http://www.jerseybenefits.com

Securities offered through:
Transamerica Financial Advisors, Inc.
A registered Broker/Dealer
1150 S. Olive St. Suite T-25
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800-245-8250
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Third Party Administration and Insurance Services offered through:
Jersey Benefits Group, Inc
P.O. Box 1406
Ocean City, N.J. 08226
Phone: 609 827 0194
Fax: 609 861 9257
Email: kaighn@jerseybenefits.com
Http://www.jerseybenefits.com/

All opinions expressed in this newsletter are solely those of John Kaighn & Jersey Benefits Advisors, formerly known as Kaighn Financial Services.