The discussion of debt has haunted financial markets over the last weeks as investors reacted to the fight to raise the U.S. debt ceiling, debt troubles in Europe, and the downgrade of U.S. debt by Standard & Poor's Corp.  You might have noticed that the market fell yesterday...hard. Given the near hysteria in the media throughout the day, one could have come to the conclusion that life as we know it had changed forever. The fact is that the financial world took a severe blow yesterday and one that comes on top of other damage from last week. The impact of this meltdown is not insignificant but neither is it unprecedented or even to some extent surprising.

At times like these we need to put things into perspective so that we can more easily stick to our long-term investment plans. Here are some important points to consider in the coming days and weeks:

1. The fact is that panic moves like those of the last week are rarely rooted in some solid rationale. The mood shifts and suddenly everyone starts to head for the exit - even if they really don't believe the situation is serious. Nobody wants to be left holding the bag so mob mentality begins to take hold. There were those who blamed the S&P debt downgrade but the bond markets lit up yesterday as investors sought out a safe haven. If there is anything that should convince the multitude that bond rates are not all that relevant these days, that surge into treasuries less than 72 hours after a downgrade ought to tell them something. Other explanations for the drop ranged from loss of faith in political leadership, the troubles in Europe, the threat of another recession, the slowing growth in China, riots in the UK, drought in the US and somewhere there is somebody who sold off because they are bummed out by their team's chances this year. Investing is as much emotion as logic in times like these. 

Already today there are signs that markets are going to recover a little lost ground. As I write this, the major US market indecies are up.  Will it last the day or week and be the start of a recovery?...we'll see.

2.  So far it looks like we are going through a correction. US stocks gained 32 percent from last September to April of this year. US stocks are down 17 percent since the current decline began a few weeks ago. Periodically the stock market goes through corrections of 10 percent to 20 percent and then snaps back fairly quickly. That seems to be the most likely possibility this time (although it is not guaranteed - see below).

3. Last summer at this time we were in a very similar position. The stock market declined sharply from late spring through August and returns at this time were negative year to date, just like they are today. Yet a big rally before the end of the year left the S&P 500 index with a 15 percent annual gain.

4. What if this is more than a correction? What if it is 2008 all over again? That is possible, although the economic fundamentals and corporate earnings are better today than in 2008. In any event, a diversified investor by early this year had fully recovered from the 2008 decline, which was the worst since the Great Depression. Instead of taking a generation to recover, most investors were made whole and profitable again in about two years.

While we believe no one can predict the markets, we will make a partial concession for Warren Buffett. He has said he is betting against a double-dip recession. On Monday he made an offer to buy another insurance company and in the three months ending in June his company bought a near record amount of stocks.  His words of wisdom...

"I buy on the assumption that they could close the market the next day and not reopen it for five years." ~ Warren Buffett

WHAT SHOULD YOU DO?

1. At a minimum, if your portfolio is away from our target allocation because of the decline, we will be rebalancing the portfolio(s) and you will be systematically "buying low" those asset classes that were hit the hardest.

2. We urge you to sit tight. The downturn will run its course and a patient investor will recover from this dip and go on to reap more profit. We view this as a buying opportunity and certainly not a time for selling.