photo by cliff1066

Today I read an article in BusinessWeek called, “What’s Selling? The Great Depression.” This is an interesting headline. The media and politicians have talked about us going into a “depression” for so long, it is becoming popular. Here is a clip from the article.

“With pundit after pundit predicting the worst downturn “since the 1930’s,” perhaps it was inevitable:  The Great Depression is making a cultural comeback, resurrected at social gatherings, on fashion runways, and, perhaps, in the future marketing plans of some companies.

In New York City, twentysomethings are throwing Depression parties, where the clothes are ’30s vintage and the playlists favor Big Band numbers and Dust Bowl ballads. Evite, the online party-invitation service, says such bashes are on the rise nationwide (table)…”

Written by Nathan White, CFA

photo by epicharmus

What should you do as an investor when financial markets become so gripped by fear and negativity that it seems the selling will only get worse? When everyone is so focused on the bad news and negative prognostications their attention focuses on protecting downside risk. I’ve mentioned this in previous articles, but what about the risk of an upside move?

When the markets get this volatile and everyone is getting a good beating the nervous investor sells and goes to cash. Because they were not allocated according to their risk tolerance they find out the hard way they can not withstand the volatility. I have often seen how an individual in this situation becomes so averse to losses that they run to CD’s or a low-yielding government bond. They have now effectively locked in their loss and capped their future return.

Why is it so important to stay invested in the current negative market enviornment? Because if you miss out on the rally that will inevitably come after the current sell-off you may end up missing out on the majority of the gains that will come for some time. Our economy has become so addicted  to credit that it takes $3.50 of credit for every dollar of GDP growth. We kept taking on more and more debt to get more growth and realizing diminishing marginal returns from each increase in credit. Now take away the effect of credit as is now occurring and the future growth potential of the economy is severely diminished.

Written by Nathan White, CFA

photo by species_snob

Where do you stand in this environment?

Are you overextended and unable to take advantage of the bear market or are you in a sound financial position? If you are in a sound financial position, regardless of the outcome of the current crisis (for bad or good) you will be on a stronger financial condition than most people.

Remember, the market can stay irrational longer than you can stay solvent. Don’t bet the farm - do it in increments.

During August and September of this year we increased our cash position in our conservative portfolio, Managed Income, and reduced the risk profile of our holdings in Paragon’s growth portfolio, Top Flight, by holding more defensive sectors such as Biotech and Healthcare.

Our short-term model is extremely bullish suggesting a possible strong trading rally while most of our long-term models still indicate to remain invested. Our intermediate models however are mixed with many flashing caution or moving in that direction. We monitor these on a constant basis and will act accordingly.