In August concerns over the economy’s well being began to pick up steam as manufacturing growth has weakened, home sales continue to fall and there was no net jobs created in August. Underscoring the poor economic news, GDP growth for the second quarter was revised down to 1.0%. Economists have now cut their estimates for growth for the year to 1.6%, and project unemployment will continue to be above 8.5% through the end of next year.
Investors have reacted to the gloomy economic picture by exiting risky assets and jumping into fixed income as Treasury yields have fallen to lows last seen in the 1960s. Equities meanwhile have fallen precipitously since the end of July with global equity falling over 7%. While many may see an uncertain economic future and falling equity values and head for the sideline, one prominent investor is not. Warren Buffett invested $5 billion of his Berkshire Hathaway investment company into struggling Bank of America in August. The bank’s shares had fallen 43% this year before his purchase. Mr. Buffett stepped in in a similar situation in the throes of the credit crisis. In September of 2008 he invested $5 billion with Goldman Sachs. The market hadn’t hit bottom yet and continued south until early March, however the market had already dropped significantly and sentiment was very low when he made the investment. He sold his Goldman position this past spring earning roughly a 70% return on the investment.
We do not know if the market is at or near the bottom, but equity markets have clearly taken a significant loss over recent months and many investors have moved out of stocks. While others are panicking and moving out of an asset class it is often the best time to move in. Establishing asset class targets and reducing or increasing your holdings based on how far the investments move from these targets can automatically take advantage of market fluctuations. If stocks are down they will become a lower percentage of the portfolio and drop below their target, and thus requiring you to buy more. If they are performing well they will likely move above the target requiring a portion to be sold to bring the asset class back to its target level. Thus, you are buying lower and selling higher. Having these rules in place can help check emotions at the door and increase the likelihood of long term success for your portfolio.
Index Performance August YTD
US Large Cap Stock (Russell 3000) -6.00% -2.32%
International Stock (FTSE AW ex US) -8.59% -6.02%
US Broad Bonds (BarCap Aggregate) +1.46% +5.88%
US Short Term Bonds (BarCap Gov 1-5 Yr) +0.72% +2.91%
Municipal Bond (BarCap 1-10yr Muni) +1.44% +5.54%
Cash (ML 3Month T-Bill) +0.02% +0.10%
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