Tough as Nails

Generally, markets are more remarkable for what hasn’t changed than what has. It’s interesting to look back at news articles about the stock or bond market, put your thumb over the date, and try to guess how recently they were published. More often than not, the thoughts and opinions expressed are reasonably timeless.

Which isn’t the case lately. In the past three months, great tectonic plates have shifted in the financial markets. What are we to make of all this? For most investors, it’s almost always a bad idea to bail out of a plunging market. Virtually every study out there suggests that people who try to time the market more often than not leave the biggest potential gains on the table when markets finally stabilize and start to see some growth.

Even though countless market experts are warning that “this time it’s different,” including Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke, I will continue to insist that investing is a long-term activity. Results should be measured over a period of years, not weeks, not months.

Is this to say that individual investors shouldn’t look carefully at their level of risk tolerance and, in particular, time horizon? Absolutely not. Current conditions could, in fact, extend the time needed to recover losses in some portfolios and restore their historic level of returns.

Market conditions such as these mean that money needed in the next year or two should be moved into less risky asset classes, including U.S. Treasury bonds and notes, top-tier corporate bonds, and only the most stable of U.S. stocks. Similarly, money invested in international markets—also reeling under these conditions—should be much more broadly diversified than before.

The key point here is that open markets ultimately are price discovery mechanisms, and that essential function does, in fact, appear to be returning to the market after a long absence. Two significant investments by Berkshire Hathaway’s Warren Buffett—one in General Electric and another in Goldman Sachs—and Wells Fargo’s bid on the open market for Wachovia are examples of large U.S. companies deciding that everything is worth something. Even at the worst moments, someone is going to step up and say, “That asset is worth X. I’ll buy it.” Fundamental values, even in stressed situations—Goldman and Wachovia, for example—do exist.

On the fixed-income front, some level of stability appears to be returning to the nation’s money market funds, with those pools of assets backed by federal insurance and guarantees. And in a continuing effort to restore stability to credit markets, both the Federal Reserve and the U.S. Department of Treasury have shown that they are willing to take extraordinary measures to provide liquidity and payment guarantees.

But the resilience that has preserved and ultimately strengthen- ed our markets in past crises will again prevail, and the policymakers and elected officials working on solutions to the problem—many of them gifted and experienced experts in financial markets—will steer the nation through these turbulent times.