Third Quarter 2007

The Markets and the Economy

What was the Third Quarter if not volatile? Up a thousand, down a thousand, up a thousand - I'm glad elevator signs say UP and DOWN instead of SOAR and PLUMMET. The news media is fond of soar and plummet and other extreme words. The Dow Jones Industrials, the most popular index of U.S. stocks, closed at 14000 on July 19, 2007, then dropped to close at 12845 on August 16, 2007, finally trading back to 14087 on October 1, 2007. What does this up and down, up and down rollercoaster ride mean? My answer is: Not much. A one thousand point move means that the Dow Jones Industrials traded within a range of about 7%. That's all. My guess is that in twenty years this recent up and down and up again movement of the Dow Industrials Index will look like a small wiggle on the chart.

Twenty years ago, on Monday, October 19, 1987, The Dow Jones Industrial Average fell 508 points, a loss of about 22% in a single day. The 1987 stock market Crash, a horror show on Wall Street that day, now looks like a small dip on today's Dow Jones Industrials price chart. For you market history buffs, one of the primary reasons for the '87 event was the installation of computer-driven "portfolio insurance" programs which were widely distributed all through the investment community. Pre-programmed orders were designed to automatically sell a specific stock or index whenever it dropped by a certain amount. It worked somewhat like the stop-loss orders individual investors use for stocks. The problem with machines then as now is the fact that they are not people. They can't make thoughtful reasoned decisions. Computers can only do what they're programmed to do. On 10/19/87 the market started heading down in the morning. The computers kicked in with massive sell orders and kept selling. Just like Mickey Mouse in the Sorcerer's Apprentice, the market could not stem the tide of cascading sales. Mercifully the market closed at 4:00 PM.

Today the '87 market event is a dim memory. Those who sold out, and stayed out over the last 20 years, missed a gain of some 11784 Dow points. It's too late to get back those 11784 points. You can't invest backward in time. You have to invest today for the unknowable future. Today the Dow is about seven times higher than it was on October 19, 1987. Of course, past performance is no guarantee of future results because there's no way of knowing the future. With an understanding of how the economy, the markets and human nature work and with a basic knowledge of market history, it is possible to create an investment plan that is compatible with one's age, time horizon and risk tolerance. A portfolio of securities that's suitable for each investor can be constructed based on the forgoing variables. In my experience it is investor behavior more than investment performance that determines the long-term success of an investment plan. I try to help my clients avoid making a big mistake, like selling out at a market low or buying too much of a single stock relative to the overall portfolio. Having 50% of your portfolio in one or two stocks, regardless of what your great-grandfather said about the companies, is too risky in my opinion. My clients do not use margin (debt) to buy stocks. They are encouraged to build a sound financial plan.

I believe in free-market capitalism and our constitutionally guaranteed rights, including our right, not privilege but right, to own private property. I share my optimistic view of the future with my clients and with them I am also investing for the future. Investing is different from saving. I consider saving the short-term accumulation of cash for a specific purchase. I consider investing the lifetime accumulation of wealth for a lifetime of living expenses. It is my goal that all of my clients shall NOT out-live their money.

A brief look at both the securities and real estate markets over the past decade reveals the boom and bust bubbles in each of these two asset groups. As stocks reached all-time high prices in early 2000, the so-called dot.com bubble burst. Stocks of high tech companies started down first. Then the rest of the market followed, quickly heading lower. America was hit with the Sept. 11, 2001, Islamist Terrorists' attacks, corporate corruption (Enron, World Com, etc.) and a host of economic and political events which motivated many owners of stock to sell their shares. The Dow Jones Industrials hit a low point on October 9, 2002. Stocks then began moving back up in the usual zig-zag way all markets move. During the years of stock market declines and recovery many investors, having shunned stocks, bought real estate because they believed that, unlike the stock market, real estate was a "sure thing." Many who bought too much property with too little money down, at the height of the real estate market, financed with a variable or interest-only mortgage and the belief that within only a few months or years they could flip this house, discovered that real estate is not a sure short-term thing and flipping is best done with hamburgers.

Now the good news: All bear markets have been temporary. The stock market has gone down about three times every ten years or so for over eighty years. Real estate has down markets as well. Real estate and stocks go down from time to time, not always at the same time. They don't stay down. We are currently in a housing bear market. Should you sell your house now only because it is worth less than it was two or three years ago? And do what? The same reasoning should apply to securities markets. Those who know and understand the history of investing know that volatility is an opportunity not a calamity. The best time to have added to your equity investments in the past twenty years was on October 19, 1987, the day the Dow closed at 1738. The news media tell you to panic whenever prices drop. I tell you that your stocks, mutual funds and real estate are running a sale. Load up your shopping basket. Investing is for your lifetime. Saving is for short-term purchases. The real risk is not a temporary drop in prices. The real risk is running out of purchasing power after you stop working and earning a living.

Our ever glib politicians are spouting "I'm in it to win it" in this season of political humility. We all know how sincere these vote-hungry folks are. And it's true. They are in it to win it. Many of them have put their own money where their mouth is - in TV ads, in the newspapers, with bulk mailings, etc. When the counting is over, (quickly and chad-free we hope), only one person will win each seat in Congress, their State House or the White House. The others also ran, but did not win. Some potential investors think like the politicians - that investing is a win or lose proposition. It's not exactly like that. It's more of a do or don't do proposition. Invest or don't invest. Some of the parts of a portfolio will be better performers than others. These are the assets which have increased in value at a faster rate than the other assets. When sold they become the "realized gains." The assets you sell for an amount less than you paid are the "realized losses." Our tax laws allow an investor to offset gains with losses and vice versa. Be sure to check with your tax preparer about gains and losses. Keep records of your transactions.

For the day traders, short sellers and short-term players, one thousand point swings offer opportunities for speculation by trading either long or short. A long investment position is one that is bought and paid for in cash with the goal of achieving a profitable result. This is the traditional investment strategy of BUY LOW - SELL HIGH. Long positions are not necessarily owned long-term (over one year). Long-term for tax purposes, refers to the length of time the investor owns the security, specifically, more than one year. Investments held for one year or less are short-term investments for income tax purposes. A short investment position is one that is not owned but is borrowed, then sold in a margin account with borrowed money, with the intent of making a profit by later buying it back at a lower price. I don't participate in this type of speculation personally or for my clients.

The secret password for crazy up and down market behavior on Wall Street is volatility. You know this as risk. Risk commonly means your account value can go down the day you need the money and sell. If you don't need to take the money out, volatility (risk) is an undulating wave under your fishing boat. You go up. You go down. Up and down. Eventually, if you don't panic and jump overboard to swim to shore, your boat could come into port, full of fish. Too many people go out in their investment fishing boat and quit if the wind blows and the waves become choppy. Some take on too much risk (they speculate) and their boat sinks under them. Some don't take enough risk (they play it too safe) and their boat goes nowhere and they end up with few fish. Strong tides and swirling currents of increasing costs of living drive their boats further from their destination, Financial Security Marina. Of course, if they start out with a big enough boat and enough fuel, they can afford a very long, low risk cruise.

During the last quarter of the year I remind my clients to look at each of the following aspects of their financial and legal plans.

Annual Financial Check List

As we enter the fourth quarter of the year, I'd like to remind you to take inventory of the components of your financial plan. Here's a checklist for your review. Please call me if there's anything that needs attention.

_________ Up-to-Date Will
_________ Up-to-Date Trust
_________ Current Durable Powers of Attorney
_________ Health Proxy or Living Will
_________ Adequate Health Insurance: Hospitalization/ Major Medical
_________ Adequate Long-Term Disability Insurance
_________ Adequate Long-Term Care Insurance
_________ Adequate Property/Casualty Insurance: home, car, umbrella coverage
_________ Adequate Professional Practice/Business Owner Insurance
_________ Adequate Life Insurance
_________ Review Beneficiary Designations on IRAs, Retirement Plans, Annuities, and Life Insurance Policies.
_________ Annual Charitable Contributions Made Before Year-End
_________ Annual Gifts Made to Family Before Year-End
_________ Collect Cost Basis Information on Sold Securities/ Real Estate for Income Tax Filing
_________ Portfolio Review
_________ Portfolio Adjustments to Minimize Taxes
_________ Timely Contributions Made to Retirement Plans
_________ Required Minimum Distributions from IRAs for clients over 70.5 years of age before December 31st.
                   Distributions should be taken well before the December 31st annual deadline.
_________ Tax Planning with Your Tax Advisor Before Year-End
_________ All Those "Other" Things You Meant To Do Before Year-End

I work for people who need and want help with their financial planning. If you know of others who need help, have them call me. I'll be happy to meet with them in person or on the phone to answer questions or make referrals to other professionals as appropriate.

Sir John Templeton said: "The best time to invest is when you have the money." Stay invested. Add to your portfolio when you can. Make an appointment to visit with me at least once a year. Call any time with any questions. Our answering service operates 24/7. Save for short-term expenditures. Invest for the rest of your life.

Wishing you success,

Robert W. Brimmer, CFP™

BRIMMER FINANCIAL
rbrimmer@nationalsecurities.com
59 Finlay Road - P.O. Box 2806 - Orleans, MA 02653
tel. 508-240-0320 fax 508-240-2309 toll free 800-237-9322
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Securities offered through National Securities Corporation, Member FINRA/SIPC.
Investment Advisory Services offered through National Asset management, Inc., a Registered Investment Adviser and affiliate of National Securities Corporation.
Accounts are carried by National Financial Services LLC, Member NYSE/SIPC, a Fidelity Investments Company.