JFL Economic Update March 2009

2008 was a year most investors would like to forget. In 2008, stock market volatility set new records and the financial services industry underwent dramatic changes. Many companies were purchased, some went bankrupt, and Merrill Lynch, for example, was forced to sell itself to Bank of America. The stability of long-standing advisory relationships became a major concern of most investors. Unfortunately, the economic uncertainty that prevailed in 2008 has continued and the year 2009 has started off with turbulence.

During stressful times it is helpful to review the thoughts of some legendary investors. Shortly after the Wall Street Crash of 1929, John D. Rockefeller said, “There are days when many of us are discouraged. In the 93 years of my life, depressions have come and gone. Prosperity has always returned and will come again.”1

While there are legitimate reasons for anxiety, our clients can rest assured that just as in the past, we will continue to invest our time, energy and resources in pursuit of the best possible financial solutions. During these difficult times we have found it is best to both adjust your portfolio and also revisit how we can think clearly and positively about 2009 and beyond. Here are some suggestions:

First you need to assess your situation.
How has the financial crisis affected your vision of where you are now and where you want to be? If you’ve already labeled your financial situation with large and frightening terms like “horrible” or “catastrophic” or “hopeless”, take a deep breath and then assess where you really are right now.

Stay positive.
Look for role models among the people you know. Ask yourself: “Who do I most want to emulate? Who do I admire? Who seems to be keeping a cool head?” Be forward-looking, optimistic and hopeful. Maintain a positive energy (even if this means avoiding friends who are constantly negative). Try to concentrate on things to be grateful for, such as your health, for example. And smile! It will help your own outlook as well as that of those looking at you.

This crisis seemed to take almost everyone by surprise. Still, it’s important to put our troubled times into perspective. Geographically, you must remind yourself that even though our economy has entered a recession, we are still much further ahead economically than most other countries. Travel to a third world country to understand how the majority of the world operates. Most likely, you will come home grateful for what you have.

Historically, we know that many similar crises have come and gone, eventually leaving the economy better off than before. For example, let’s take 1974. The U.S. economy was in so much financial trouble that New York City was almost bankrupt. The country was in a mood of such profound pessimism that it was affecting people’s judgment. However, there were those who saw opportunity in the face of crisis. Microsoft was formed in 1975, and Apple in 1976. What is to be accomplished by discussing what we could have done to avoid this mess we’re in? Instead, don’t lose sight of your optimism and keep your mind focused on the future.

And finally, life may be hard right now, but it’s better than the alternative. Remind yourself, if necessary, how great it is to be alive!

Acknowledge your emotions.
Are you feeling confident or helpless? Optimistic or anxious? Grateful or resentful?

Try to understand your feelings and how they impact others. For example, are you maintaining good relationships with your family, or has your stress caused you to snap at your spouse or yell at your family members? Have you been displacing your negativity onto others? If you catch yourself doing this, take a break, walk around the block and cut the negative attitude.

Concentrate on the positives and on any things you can do to improve your situation. Try to keep busy. This will help you avoid some of the negative information and distract you from dwelling on negative thoughts, putting you on the path to being more confident and positive.

Revisit your basics and essentials.
Try to use rational thoughts during this crisis and focus on strengthening the things that you can control:
• Start exercising more.
• Eat right and get enough sleep.
• Have a sense of purpose.
• Protect your confidence.
• Communicate regularly with friends.
• Start a new hobby.
• Stop watching the news on a regular basis. Remember that bad news usually sells better than good news. You’ll usually hear much more about the negative things on Wall Street than about any positive events that occur.
• List the specific duties and responsibilities that other people believe you have. • Schedule a family meeting to review your concerns and how this might affect
your finances over the long run.
• Be proactive when attempting to solve problems that are within your control. Ask for input from family members, and at the same time gain a better sense of how other people are holding up in this current environment.

Think about your past.
When a crisis like this occurs, draw on any past experiences that may be similar to what you are experiencing at this time. Most of us have experienced other financial crises, such as the stock market crash of 1987, the 1973-74 oil embargo and the technology bust in 2001, just to name a few. We survived those times and we will survive this current one as well!

The key is to figure out how you got through those tough situations in the past. Make a list of the resources you had at that time and see how you can apply that to today’s environment. Take time each day for self-assessment and remind yourself that things will be ok. Remember – it is not the event itself, but your reaction to the event that is really critical. If you think rational thoughts, you are going to feel rational. You will most likely make more appropriate decisions, end up having more appropriate feelings, and in turn, you probably will behave more rationally.

Stay true to your values.
Think about various guiding principles that help you get through each day. List the personal values that are not negotiable for you, such as taking care of your family; being a good spouse, parent or friend; being a good citizen in your community; being true to the values of your faith. It’s easy to forget the simple things that are important to you unless you get into the habit of reminding yourself. Make a list of concrete things you can do to keep your focus on what matters the most to you. For example:

• Talk to your spouse
• Reconnect with your friends
• Identify what helps keep you grounded
• Play with your children or grandchildren
• List the various skills that you have acquired over time and how they have helped you through your lifetime
• Start making long-term goals that get you excited, such as going on a trip (this does not have to be expensive!)
• Stay true to yourself and your values
It is possible to take fear out of the equation. When you accept change as a natural part of life, you will find it easier to move forward. Now is the time to get clear, get focused, and get results.

Review and cut costs where possible!
This is something we can help you with. This is just one concrete action you can take to feel more in control of your situation. List all of your expenses. Determine which ones can be cut entirely from your budget. See if you can find ways to reduce the cost of necessities and other expenditures you don’t want to give up (for example, buying some things in bulk, or switching to a lower-cost generic medication). For some other expenses, it may be possible to save by doing things less often, like adding in an extra week between haircuts, or eating out once a week instead of twice. If possible, reduce the percentage that you are withdrawing from your investments, especially IRAs, so that more of your account can stay invested, with the potential to grow if the market rebounds suddenly. Remember – the more money you take from your IRA and have on hand, the more money you usually spend!

Keep “value” in perspective.
So many of us worry about the declining value of our accounts and investments, but the value of anything is simply what another person is willing to pay for it at any given time. Take your house, for example. If someone knocked on your door today and offered you 40% less than what you believed was your home’s value, what would your reaction be? Would you sell right away or would you slam the door in their face? Just because other investors are thinking and behaving irrationally, it doesn’t mean you have to! Remember your mom’s favorite saying—“If all of your friends jumped off a bridge, would you do it too?”

Focus on goals that you set originally.
Do you remember your original financial goals?

Perhaps they were things like keeping pace with inflation, retiring at a certain age, or paying for college. If these goals have not changed, you might still want to review your portfolio’s diversification, but there is no reason to make major changes at this time. Think about it – if you were on a cross-country flight and you encountered turbulence at 30,000 feet, would you jump out of the plane to avoid the rough ride?

America has weathered times of financial turbulence before, and the market recovery after many of these events was strong, swift, and unexpected. (Of course, the market may not perform in a similar manner under similar circumstances in the future.) Don’t try to time the market. Such attempts are usually worse than fruitless—they often result in the investor missing out on some of the best gains of the recovery.

Some people take a historical view just to dig up similarities between our current crisis and the Great Depression. The CNN/Opinion Research Corporation poll taken on October 4th-5th tells us that 60% of Americans now believe that the U.S. economy is somewhat or very likely to fall into a depression. It is true that the economy is not strong and our financial system is not as healthy as it needs to be, but it appears that we are incredibly far away from the types of economic difficulty seen in the depths of the 1930’s.
(Please look at Table 1.)

The employment situation is much better today than it was in the 1930s. The peak rate of
unemployment during the depression was 25% for all workers and 37%2 for non-farming
workers, which is about 3 times our current estimated rate of approximately 8%. The current
employment environment doesn’t feel good to many people who are unemployed or who
worry that they are at risk of losing their jobs, but these unemployment rates would have to
increase dramatically to match those of the Great Depression.

On March 9, 2009, legendary investor and billionaire Warren Buffet stated that although times
were tough he felt that over time, “Everything will be all right. We do have the greatest
economic machine that man has ever created.”3

So, what can you do?
1. First, you can try to reduce your exposure to the negative headlines and news shows.
2. Next, you can start to work on tightening your family budget, if possible.
3. Then you can call us to revisit your portfolios and determine if there are any specific
changes we can make to help.
Finally, we can discuss strategies to hopefully help keep you sleeping best at night in an
uncertain market.

We have the resources to help. We look forward to our next meeting with you. During
confusing times like these, we thank you for the opportunity to assist with all of your financial
needs.

Sincerely,
Jerry Lynch CFPâ„¢, CLU ChFC

P.S. During these confusing times, if you know anyone who you would like us to add to our
mailing list please call Pam Karkenny @ 973-439-1190