Saturday, February 7, 2009

Recessions, Painful but Healthy

There has been a lot of news lately about a change in America’s attitude toward saving and becoming more fugal.  Americas have gone from a negative savings rate to a positive one.  It is now common place to hear people talk about how they are trying to save money on purchases.  This change in the savings rate and attitude was brought about by the recession.  Going back years you could read about how disturbing it was to financial professionals that we were at a negative savings rate.  People did not change their behavior until they had to. 

Recessions happen because we stray to far from the basics or fundamentals.  This time both individuals and companies over extended by borrowing or leveraging to much.   We ignored the fact that allowing individuals to borrow 100% or more with closing cost to purchase a home is a fundamentally flawed practice. At some point something has to give.

Take a look at the auto industry.   The companies that have been more efficient like Toyota, Honda, and Ford are doing much better than General Motors or Chrysler.  Without government intervention both GM and Chrysler would have failed and other auto makers would have become more profitable.  All the companies, even with the bailout are currently being forced to become more efficient. I am not trying to start a debate about the auto industry’s bailout, but most economists believe that a bailout only prolongs the economic cycle. In the end the recession will bring about long needed change in the auto industry.       

So what has changed for investors this time, nothing!  It really never does.  If you stick with the fundamentals and have time to wait out the corrections you will do well.  The hard part is turning off the noise coming from the talking heads.  Here is a question to ask if you are paying for managed money.  Did your advisor, trust company, broker etc. do any better for you than the market itself?  It will be hard to get a straight yes or no, but the answer will be no the majority of times. 

The fundamentals of investing are simple but hard to follow. 

Keep expenses low. 

Stay diversified.

Do not chase returns, like technology in the nineties, real estate this last go around and gold/commoditiess now.

Pay attention to taxes.

Buy good companies with good management and hold on to them.

Tune out the noise.

I do not know when the recession will be over, but it will end.  Those who follow the fundamentals will soon see profits again.


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