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How to deal with the current slump in stocks

Local commentary

Posted: July 11, 2008 1:15 a.m.
Updated: September 11, 2008 5:02 a.m.
 

Wall Street just announced this week that we are in a bear market. I think this is old news. Anyone who works for a living, drives a car, has a mortgage or buys groceries came to that conclusion some time ago. For most of the past decade, stocks and mutual funds, the primary investment vehicle for most Americans, have been bogged down.

According to a report in U.S. News & World Report for the end of June, Wall Street is saying now maybe the worst is over and stocks are ready to roll. But others are not as sure. In the last extended bear market, from 1966 to 1982, annualized returns for the Dow Jones industrial average fell 7.9 percent, adjusted for inflation.

The current drop between 2000 and May 2008 is 1.6 percent, according to Ned Davis Research. Recessions and bear markets have been shallower and shorter in the past 25 years than during most of the 20th century, thanks to smarter economic policy and a more vigilant Federal Reserve. Following are some recent statistics about our economy:

n The cost to employers to provide health coverage for their employees is projected to rise more than 20 percent over the next two years (source: Price Waterhouse Coopers).

n Gross national savings as a percentage of our economy is 14 percent compared to Japan where the savings rate as a percentage of their economy is 29 percent. The global average of savings ratio to their economies is 24 percent (source: Business Week).

n Life expectancy of an average American has increased 5.2 years in the last 30 years. A newborn baby today has a life expectancy of 78.1 years (source: National Center for Health Statistics).

n Job losses since October 2007 have reduced workers on U.S. payrolls by 608,000 over the last 7 months. During the last official U.S. recession, the number of workers peaked in March 2001 and over the next 7 months fell by 872,000 (source: Department of Labor).

So the current slump in stocks may not last as long as the previous one. As noted in previous articles, stay calm, don’t panic and review your portfolio with your financial advisor. Hopefully if any adjustments or changes were necessary, you have already discussed and completed them. Your retirement portfolio invested in the market should be well diversified in a mix of stocks, bonds and cash.

Most pension, 401(k) and IRA plans have asset allocation models that offer lifestyle options that make it much easier today to have a good mix of investments with actively managed programs. These options usually offer the best balance to minimize risk.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment, which is located in Santa Clarita. His column represents his own views and not necessarily those of The Signal.

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