Market Volatility Commentary

Yesterday, (Thursday, May 6th) the market gave us a harsh reminder of the hard lessons we learned in 2008 and 2009. It reminded us of its volatility, its vulnerability, its global nature and the lasting concerns over the sustainability of the recovery. Starting around 2:00 pm Eastern time[i] the Dow started a precipitous drop losing over 1,000 points in less than one hour - a record single day decline. Less than an hour later, the trend had reversed and the index regained 640 points to close the day down by 3.20%.
The reasons behind this yo-yo effect are complex and perhaps troubling if the sell-off was indeed caused by trading error. The news-drama has little practical value to us though. Instead, we see this as a harsh reminder of the lessons we learned in the steep drops and climbs of late 2008 and early 2009. A reminder is not a rebuke - it is not a reason for drastic reversal of direction or strategy. A reminder though is a warning - a warning that the lessons of 2009 are still very relevant. Those are the lessons that should guide our judgment and our decisions as we observe and react to the reality of the economy and the markets. We paid a lot for those lessons - let's remember them together:

[i] Yahoo Finance -Dow Jones Price Information

· Markets are very volatile - Modern financial markets are intertwined around the globe, much like the economies around the globe are tied in one vast system. They are linked together electronically, billions and perhaps trillions move fast from one market to another and one security to another creating tremendous ripple effect. The result is a fast, almost instantaneous reaction to news throughout the globe and the resulting steep drops and gains.

· The modern economy is global- The global market is reflective of a global economy where crisis in one economy is affecting all others. We can no longer look at the economic conditions of our country as immune or isolated from the problems (or prosperity) of other countries. The global nature of the markets only adds to the complexity of the economic model as it has to factor the geo-political climate across the planet.

·  Overreaction is the worstreaction - Many fortunes were lost in the panic of early 2009 and perhaps much was lost yesterday. A portfolio that participated in the selloff of Thursday afternoon potentially lost 10% in a single day - a disastrous result. We need to always remember the goal behind each and every portfolio and every financial plan and make decisions with the time horizon of that goal in mind. Waiting passively is perhaps not the best course of action. However, abandoning ship at the first sight of waves is perhaps worse.

·  The myth of the "smart money" is just a "myth"- We all hear the stories of the "smart money" - the legendary mavericks who somehow can profit from every situation. Yesterday, it seems that the smart money pushed a B (for billion) instead of M (for million) and caused hundreds of billions in combined effect[i]. What is worse, other smart money followed by initiating a domino effect of program trading (computerized trading algorithms. The "smart money" had names like Goldman Sachs, and Bernard Madoff, etc. - a combination of profiteering from clients, making bad decisions and pure criminal behavior. We are not mavericks - we believe in planning and making well thought out decisions together with you - our client.

·  Adequate liquid reserves are important - In a volatile environment it is even more important to remember that maintaining adequate liquid reserves for living expenses is very important as generating short term income is more difficult when the market moves in such wild swings. Generating income is something that we look to help you with and one of the main services we provide for our retired and pre-retirement clients.

[i] NY Times Magazine - "High Speed Trading Glitch Costs Investors Billions," May 7, 2010

These five words - volatility, global, overreaction, myth, reserves have become our mantra and we hope they are yours as you watch your favorite news network reflect on the events of yesterday. As you are reading this -the market may be up or down, a lot or a little. We don't know which. What we know though is that through careful planning and well thought out strategy we can make better investment decisions and avoid the mistakes of panic and overreaction.