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Economic Myths and Other Tall Tales

By Dr. Shelby Smith
of The Retirement Pros

Investments in the stock or bond markets are down considerably from one year ago. The economy is now officially in recession, joblessness has begun to rise in earnest and holiday sales are looking bleak. If you’ve been caught with market losses, you’ve probably talked to your broker and been advised to stay put and wait for the coming market rally. Isn’t “the coming market rally” a forecast? If your broker could forecast accurately, he or she would have warned you about the meltdown before it happened. So, they don’t have a clue about where the market is headed, and neither does anyone else. Forecasters are simply rationalizing that “in the past, the market has come back, so no doubt it will this time too”. But what if it doesn’t? Let’s review some of the myths and other tall tales about the economy.

First, the average length of a recession in the post WWII period has been ten months; therefore, we’re not far from recovery, because the current recession started in December 2007. Ever heard the story of the fisherman who drowned in a river that averaged only six inches deep? The longest economic recession lasted over a decade, and the associated bear stock market dragged on for 25 years. So do not count on recovery in 2009, because no one knows – not even the government – when the recession will end or whether or not it will develop into a full-blown depression. Your broker may tell you that in the “long term” the market will recover, but exactly how many months, years or decades is the “long term”? Also, can you wait for the “long term” or will you need your money sooner? If you now have a 50% loss from the market meltdown, simple arithmetic says you’ll need a 100% gain to get back to where you were. If investments grow 10% annually (brokers tell you to expect this amount), you’ll be ten years away from break even… before accounting for inflation.

Second, the stock market starts recovering about six months before a recession ends. Maybe and maybe not! Even if true, no one knows when the stock market might start heading higher. Granted, there are lots of forecasts for the arrival of good times, but they’re by the same people who failed to foresee the meltdown. If an economic recovery is on the way, what could derail it? How about a major terrorist attack, the failure of an industry like automobiles, if China or Japan stop buying U.S. Treasury debt, if oil stopped flowing from the Middle East or several other things less dramatic.

Third, a 1930’s-type depression could not occur again, because the government would never permit it. Mounting evidence indicates that government policies caused the housing bust, which fostered the collapse of Wall Street that has now spilled into Main Street. At some level we know the government is not the answer, yet we continue to hope they’ve got it right this time with the bailouts, handouts and financial engineering. The jury is still out on the outcome!

Fourth, the housing slump, rising unemployment and reduced consumption will lower prices which in turn will lead to a robust recovery. While constantly falling general prices may appear to be a good thing, things get complex if the trend lingers. For example, constantly falling prices will lead to lower wages, reduced earnings and smaller profit margins. These developments make fixed obligations like mortgages, car payments and other debt harder to meet. In the past deflation, constantly falling prices, has lead to a downward spiral into economic oblivion.

If you can’t afford the market losses you now face, or if you do not have a “long term” for the market to recover, the answer is “make changes”. It is time to take stock and see if what you have left will provide an acceptable retirement. If so, you might want to consider bailing out of the market to safer places, or at least hedging your predicament by moving some of your money to higher ground. By all means, learn as much as possible about other safe options for your money and then engage the services of a financial professional to guide you – not the stock or bond vendor that got you into trouble, but a professional that knows how to help you. Search for the right financial advisor just like you do when buying a car, home or new TV. In the meantime, keep your fingers crossed for an economic miracle.

Shelby J. Smith, Ph.D. of The Retirement Pros



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