In a recent newsletter I received from Wellington West, this is the anatomy of a downturn, as described by Dr. Quincy Krosby, the Chief Investment Strategist of The Hartford, parent company of Harford Investments in Canada. Dr Quincy Jones has been observing the developments in the market and the massive credit crisis and by taking quotes from various media sources he has been able to describe the problem accurately and succinctly. If want to banter about the issues intelligently with your friends at the water-cooler, these tid-bits are the sorts of information you need to know.

Jan 4: “It’s (an increase in the unemployment rate) probably the most important link in the economic chain, and if this continues, we’re definitely headed for a higher risk of recession.”

Jan 9: “The Fed will continue to lower rates regardless of what they say about inflation. If this market continues to deteriorate and be underscored by a sell first and ask questions later mentality, the Fed may have no choice but to deviate from its gradual policy of rate cuts.”

Jan 11: “It’s becoming very moot as to whether we are in a recession. Companies are telling you, the bond market is telling you and consumers are telling you – it’s baked in.”

Jan 14: “What you don’t want to see is the psychological break, which may be happening right now. Right before a recession happens, you usually see a psychological break where you see CEOs cutting back on hiring and spending; and that creates momentum for a recession.”

Jan 17: “This is a market rife with rumour and will turn on a dime. It is very much a panic, and the fear is that panics can develop a life of their own.”

Jan 18: “Recent trading feels like the ‘death by a thousand cuts’ that typifies a bear market. Every day the market rolls a bit more into negative territory … and another group of leaders gets walloped.”

Jan 21: “You’re going to see bounces but overall it will be a big, big wave of selling. For the average investor, it is literally when you think you can’t stand it one minute longer, you don’t care what you lose, you call up and say ‘Get me out.’”

Jan 22 : “Today I would just basically sit back, turn off the TV and do something else. Basically what we’ve been telling our investors, and these are people who are saving for retirement, is to continue dollar cost averaging with a portfolio manager who’s got a good, good track record during volatile periods … The Fed is going to continue cutting rates. The economy is going to pick up. The financial crisis is going to heal itself. It takes time, it’s painful, but it will be done.”

Feb 15: “We’re still at the cusp of recession and this (tax rebates) is an effort to get money out there, throw it from the helicopters and marry it with low rates in order to avert a recession, or if we are in a recession, to make it as shallow as possible.”

Feb 18: “There’s an old adage that fortunes are made in bear markets, but you just don’t know it at the time. Investors should look for solid companies that are beaten down for no apparent reason and that will provide long-term opportunity.”

Feb 21: “People lose sight of the fact that this is psychology. The ultimate psychology is when you see people starting to horde. When you see people buying chickens and stuffing them into their freezer because they’re afraid that the chickens are going to be more expensive the next time they go to the market, that is the ultimate manifestation.

Mar 3: “It’s a treacherous market. Volatility spiked up today, and for our retail clients across America, we’ve been just telling them to adjust dollar cost average into this little by little by little, because they will make the inflection point when this market finally turns. But don’t write one big cheque and think you’re going to be a trader in this market. You will just be destroyed.”

Mar 12: “The Fed is being creative and audacious. Any move that can help get the credit market working again and help staunch the domino effect we’ve been experiencing is going to be helpful ultimately.”

Mar 17: “At the very heart of all this is a deteriorating housing market. And if they cannot get the values of the mortgages at least stabilized, the problems are just going to continue.”

Mar 20: “What we’re suggesting is to keep your eye on the financials because I think exactly the confidence is beginning to come back in. But is it one day, one week? We don’t know yet.”

The moral of the story: Pay attention to investment fundamentals, look for long-term opportunities and seek professional guidance

Is there a clear message in all these quotes? There is. In fact, there are several.

1. Part of investing includes the up and the downs – the reasons for the downs are less important then the reaction (which are typically irrational says Dr. Krosby). Sound investors tell us that every decline has historically been followed by an increase. Don’t loose yourself in irrational, reactionary actions, invest with the historical perspective in mind.
2. Recessions equal opportunities. When stock prices are weak, it is easier to see the opportunities, so if you are investing, jump on something solid, go for the stock that has every reason to perform – when the increases happen you will have made the right decision and bought at the right price.
3. Trying to predict the market is futile. The only way to realize you’ve hit the bottom of a decline is by observing the subsequent advance, by then, you missed your opportunity for gain. Wise investors (like Dr. Krosby) advice us not to take big risks during shaky markets, so don’t put all of your investment money into one place at one time, but instead regularly invest smaller amounts over a period of time, for the most reliable and intelligent way to take advantage of a downturn.
4. Beware the Domino Effect. Downturns do not restrict themselves to a single sector, pessimism usually affects the entire market, therefore diversify your portfolio to decrease your risk.
5. Invest 5-10% of your income. It is most important to do this in tough times, as a part of your savings strategy. Budget this into your month’s expenses to ensure that you have secured yourself and your family an additional asset to improve your net worth and overall wealth to help you achieve your goals. If you cannot afford to invest in stock, then start simple with mutual funds. Many of the same rules apply to mutual funds as do with other market investments – there are many choices, different types of sectors and different levels of risk.
6. Speak to a professional Investment Advisor (my newsletter suggests an advisor from Wellington West). The more uncertain times are, the more you should demand professional insight to keep you on track.

Quotes used are from the following sources: Dow Jones News Service, CNNMoney.com, Bloomberg, Financial Times, BusinessWeek.com, Cossacks Breaking News, Associated Press, CNBC, CNBC.com, Fox Business, National Public Radio, “The Hartford” is The Hartford Financial Services Group, Inc. and its subsidiaries, including Hartford Investments which is theManager of Hartford Mutual Funds and a wholly-owned subsidiary of The Hartford Financial Services Group, Inc. of Hartford, Connecticut.

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