In 2008-2009 we had a financial crisis with banks and insurance companies threatened with collapse because of the bad assets they were holding. The situation in Europe now looks more like what we had in the U.S. three years ago.
What we have now in the U.S. is primarily a crisis of confidence. People are worried about the economy and they have lost faith in the government to set us on the right course. These concerns are exacerbated by the fact that we have ever-faster computers that conduct trades at lightning speed and send the market up or down faster than we experienced in the past. Investors who are not among those lightning fast traders are best served by holding on tight and waiting for the dust to settle.
The stock market always has come back in the past and I see no reason to think this time will be different. That is based on the premise that we as a country will find a way to deal with our debt problem. If you believe that we aren’t going to get our act together, where are you going to put your money? Holding Treasuries or cash doesn’t make sense long term if you really believe that we are going to inflate our way out of debt or default on our obligations. In either of those scenarios, the dollar could be decimated. Think the bank is safe? FDIC-insured bank accounts not only pay less than the rate inflation, but government insurance ultimately depends on the government standing behind its obligations. In my view, institutions and individuals have to turn to stocks if they are going to earn enough to keep pension funds afloat and fund individual retirements. Right now fear is washing over the market. At some point greed will return.
One thing the current crisis should cause us to review is whether we have the appropriate allocation in our portfolios. Now is not a good time to discover that your appropriate allocation is 25% stock and you were at 75%. Find the right allocation for you and be prepared to stick with it.
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Tags: crisis, Debt, Europe, Investments, stock market
