Questions and Answers About the Economic Downturn

The economy and investment markets are troubled, unlike any downturns since the early 1970s and 1930s.  We receive hundreds of questions from our clients, from many prospective clients who are in a quandary, and from newscasters and reporters.

Please allow us to share with you the most common questions and our responses.

Where are the investment markets going? How far can they fall? Can they go to zero!?

The equity markets have fallen, from the top of the market last year to now, about 50%.  That rivals or surpasses the steepest downturns in the last century.  Only the 1930s offered a more severe decline.  

While no one knows the extent of the current fall in value, it would be hard to make a case for an economy similarly cataclysmic to that of 1929 – 1932.  An objective study of history would not support that doomsday conclusion.  So let’s look at some of those previous downturns to try to determine magnitude and duration for this decline.

First, no market declines took values to zero.  While individual companies may have gone bankrupt, it is very unlikely that diversified and asset allocated portfolios of equities would become worthless.  Further, few of our clients are 100% in equities, so the balance provided by the fixed income portion of clients’ portfolios further hedges that unlikely and historically-unsupported risk of total loss.

Other downturns were less severe, if we can term -14% and -20% as such, yet they still caused great consternation.  And all of those lesser downturns recovered value within a year.

So are we as vulnerable as we were in the 1930s?  Most economists and investment managers would say we are not.  The dire predictions by some, in our opinion, fringe commentators of recovery occurring in the next decade could only prove true if this downturn were worse that that of the 1930s.  It’s not even close.

Are we on a par with 1973-75?  We would say yes.  While no one can predict the future, history would indicate we are looking at an economic recovery occurring in the next couple of years.  But here is an important point.  The investment markets lead the economic recovery.  So the stock markets could begin to recover much sooner.

But isn’t this time different?  We’ve never had a global downturn like this before?

Sorry, no, it is not different.  It is only packaged differently.  And we have had many global downturns.  The 1930s Depression was global, the devastation after World Wars I and II was global.  The Oil Embargo of 1973 was global.  The recession spawned by the collapse of Asian economies was global.  The technology bubble burst throughout the world. 

This one is different only in that it came about from a global misuse of credit markets by some investment bankers, mortgage brokers, insurance companies and hedge funds.  The banking and insurance company crisis that has occurred is different in context than other downturns.  But it is no different in its international implications than the onerous Versailles Treaty imposed on Germany after World War I that caused world-wide inflation or the international flu epidemic afterward that killed more civilians than did the world war.  Both events were devastating to the world’s economies.  The economic despair that occurred after World War II was global.  The world was in ruins, except for the United States, which was bankrupt and saved only by the Marshall Plan.  And that was a global solution.

The argument that this is somehow different than other crises of equal or greater magnitude is lost on us.  But, maybe we’ve been reading too many history books.

Will the various stimulus and rescue plans work?  The political parties seem to be at war over the right way to address the crisis and the media talk about those differences constantly.  I just don’t know if the plans will work and get us out of this.  Help!

There is legitimate disagreement over the right way to guide our country out of the malais.  The two major political parties are following their respective ideologies in their responses to the administration’s plans.  The broad middle of both Democrats and Republicans are, in our estimation, repulsed by the extremists at both ends of the liberal and conservative spectrum.  The American public wants our political leaders and representatives to find a set of solutions and administer them in an unbiased manner that promotes the public good and does not serve a politically biased agenda.  Those not accomplishing that should, and hopefully will, be voted out of office.

The most analogous circumstance to this debate and these recovery plans is the debate and implementation of the Marshall Plan after World War II.  The United States was bankrupt and in debt.  We had no hope of restarting our production plants as there was no demand from Europe or Asia as they lay in rubble.  Millions of service personnel were returning with no job prospects.  It took nine months of the very same wrangling we are now experiencing in Congress and within the administration to enact the Marshal Plan bill and several more months to begin to implement the recovery plan.  But it ushered in two decades of unparalleled prosperity for the U.S., allowing us to pay off our war debts and rebuild our country and others. 

The current recovery and bail out plans have not yet begun to be implemented.  And the most important component has to be the removal of toxic financial assets from the banking sector.  This clog, if you will, in our major financial arteries is what is holding back the recovery, in our opinion.  The right solution will be found, just as it was in the savings and loan system failure of the 1980s.    It likely won’t be the same solution, but a solution nonetheless.  Once implemented, the credit markets will regain functionality and the investment markets will react accordingly and with strength. 

As we have said in the last several publications, watch the recovery and rescue plans.  Once they are functional, you are likely to see favorable results in the markets, we believe.

Also, the media does a terrific job of keeping us informed, and that is sincere.  It also does a great job of keeping our arteries constricted.  Competing news media with differing ideological points of view are also healthy, but can be confusing.  We suggest absorbing concrete data and considering various opinions.  Problems often arise, however, when the listeners and readers confuse data and opinion without differentiation.


Why don’t I just sell all of my investments and wait to get back in when things look better?

That sounds like a logical approach.  The problem is that it usually doesn’t work.  No one knows when to get back in.  By the time that you have finally concluded that things are better, a large part of the markets’ recovery may have already occurred.  We have no choice, in our opinion, but to stay invested in a well-allocated portfolio until the market bottoms out and begins a recovery.  Getting out only solidifies the loss and lessens the chance of participating in the rally and recovery that has always happened in every downturn in history.  And those recoveries have always been of greater magnitude and longer duration than the preceding downturn.  We have no guarantees of the future, but we do have the comfort of knowing the consistent actions of the past.  And, we would add with some degree of grimness as well as certainty that, if the markets never recover, it will not only be the first time in history that has happened, it won’t matter where your money is invested.  If you own treasury bonds or have your cash under the mattress, nothing will have value.  So, if you truly believe that is possible, you must stock up on vegetable seeds for planting and buy a cow.

It’s all well and good to talk of an eventual recovery, but I need income from my portfolio now to live.  What can I do?

The balance and asset allocation of your portfolio should have reflected your need for income in good times as well as now.  That means that you have interest and dividend income from your portfolio as well as the potential for modest growth geared to offset inflation over time.  As long as the portfolio is adequately diversified, that income is still being generated.  The key is to adjust living expenses to coincide with the realities of that level of income.  If after adjusting expenditures as much as circumstances allow, there is still an amount of principal needed to live, so be it.  That is why you saved and invested all of those years. 

We will do hypothetical projections for you to see how long that can be sustained by your portfolio and many clients have been relieved to learn that their situation isn’t as precarious as they first thought.  Serious maybe, but not ruinous.  So talk with your advisor here now to perform that exercise if you have unaddressed concerns over your money lasting and meeting your needs.  One caution is to project based on reasonable and historically supportable recovery assumptions.  If you premise that the markets will continue to decline for years, no projections will prove adequate.


I have major expenditures scheduled in the months ahead that can’t be postponed, like tuition payments.  What if the portfolio does not recover in time to meet those needs?

That is a valid financial planning consideration.  We can evaluate that and recommend alternatives for portions of your portfolio structured to address those specific needs within the allotted time frames.  Speak to your advisor here to discuss the particulars of your situation.

How is Fragasso Financial Advisors doing and can we count on you to still be there for us?

We have had this question posed by many clients who truly care about us and want to be sure we will be here to assist you for decades to come.  Thank you for your concern for us and for the complement you pay us in wanting us to assist you in the future.

Our firm is financially secure.  We manage our cash flow and expenditures with great attention to detail.  We budget and adhere to our budget.  We are certainly budgeting for diminished expectations in 2009 and have cut much expenditure that would have been funded in better economic times.  Any well managed business must do that today. 

However, we have not cut productive activities.  We still maintain all of the research resources that our Portfolio Management Department needs to do a good job for you.  We have not and do not ever intend to lay off our skilled and experienced work force.  We will continue to lecture at area universities, businesses and professional firms as that activity forces us to remain current in our investment management thinking and serves as an excellent public relations outreach.  We will continue to support our clients’ and employees’ established charities, but won’t add new ones this year.  We will continue to bring educational and informational opportunities before our clients.  But we will not waste money, thus helping to assure our ability to guide our clients for the next 40 years as we did during the last forty.

We have been contacted by many more prospective clients than ever before as they seek unbiased guidance during these trying times.  We welcome that opportunity to help even more people survive this downturn and eventually recover and thrive.  We welcome the referrals that many of you have brought to us of family, friends, neighbors and business associates.  We also have had many referrals to company retirement plans and charitable endowment funds which are equally stressed over their portfolios.  We believe we have been instrumental in helping those folks and the institutional trustees who you have referred to us.  We thank you for that vote of confidence in our ability to assist.

And we will work long and arduous days on behalf of our clients to help protect and enhance their investment portfolios.  So please continue to contact your advisors here with your individual planning and investment management questions.  We are here to help you and your families.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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