This blog is written weekly by Dock David Treece, a registered investment advisor with Treece Investment Advisory Corp. It is meant to share insight of investment professionals, including Dock David and his father, Dock, and brother, Ben, with the public at large. The hope is that the knowledge shared will help individuals to better navigate the investment world.

Wednesday, June 2, 2010

Riding Out the Storm

After months of inexplicable sluggishness in the markets, things have finally started to move in recent weeks. While this is not in the form of a bull market run, which many would like, things are developing in the market, and they are doing so very quickly.

Even though we are currently undergoing a serious correction, we are thankful that the market seems to be behaving much more rationally. Many will recall that we’ve been calling for a healthy correction for months now, and we are thankful that it has finally arrived.

It is regrettable, though, that it will likely be more violent than necessary, because of how unreasonably long the market rally extended (nearly 14th months with very little break). However, after such a substantial rally, both in duration and in magnitude, prices had simply reached levels that were unjustified by the little economic recovery that has so far occurred, and therefore unsustainable.

Now in our 5th or 6th week of this downturn, it is possible, if not likely, that this correction is not quite over yet. However, it is our firm belief that this correction – which we have been waiting for – is going to create some fantastic buying opportunities in the market, but only in select sectors.

Because of this correction, many investors will undoubtedly flock from the world’s equity markets to more traditionally ‘safe’ investments, simply out of fear. This reaction with likely prove to be both careless and expensive.

Consider the current alternatives to equity investments:

Bonds, the typical choice for fixed income, have yields still near generational lows. Those investors who buy now for safety will see their principal deteriorate severely once interest rates begin to rise. More importantly, many government bonds – long-thought safest of the safe investments – currently face a real risk of default.

As we wrote nine weeks ago in “Defending Dividends,” investors who are seeking safer investments and relatively stable income are strongly urged to look at high-dividend paying stocks rather than debt instruments.

Instead of bonds, a good deal of investors will likely turn to insurance as another haven of safety. Many are lured in by those ads that claim investors have never lost money. In response, we would challenge those investors to try to get their hands on their money. Then they’ll really see how much they’ve lost thanks to penalties and fees.

It is our opinion, although not entirely unbiased, that most investors who purchase insurance products really don’t understand what it is they’re buying, or the potential implications of getting into life insurance or annuity products.

The vast majority of these ‘investments’ – they are insurance products, not securities – have extensive find print outlining lock-ups, as well as fees or penalties associated with early withdrawals. In most cases, it can cost clients a significant amount of their invested assets to get their money out ahead of schedule.

Therein lies the rub: While the stock market might look fairly grim right now, and many investors may be discouraged and thinking about shifting out of equities, the question they need to ask themselves is whether they honestly think that they want to take their money off the table for an extended period of time, perhaps even the rest of their life.

Unless someone can say with certainty that they don’t ever want to invest in equities again, insurance probably isn’t a good option, certainly not for an entire portfolio. Investors under 50 don’t even need to ask themselves this question. They simply shouldn’t lock their money up in insurance products. The market will come back – roaring back; in fact, we think some of the market’s brightest days are ahead in the not-too-distant future – and it’s important not to apply a long-term solution to a short-term problem.

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