Bears and Bulls Battle It Out Into the Fourth Quarter

Bulls Still Clinging to 4.2% Margin As Year Heads Into Final Weeks

November 24, 2007       Leave a Comment
By: Jerry Cole - Retirement, Investment

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It's the fourth quarter and the Bulls are clinging to a slight 4.2% lead over the Bears in the Super Bowl of markets - the Dow Jones Industrial Average. Despite all the cheer-leading put on by the national media, the Bears have not been able to defend against the inevitable advance of the Bulls.


However, using their secret weapon developed for this year's game, the Bears have shown unusual strength in the third and half-way through the fourth quarter. Employing the secret weapon, the ominous subprime loan, to its fullest in the third quarter, the Bears not only stopped the Bull's advance, but managed to score significant points themselves.

Many of the partisan crowd have changed their seats and have retreated to the relative warmth of the club house. Some have left the stadium completely. Many have chosen to stay in their seats with the hope the Bulls will persevere and win this year's game.


Whatever the outcome, this year's game has been a hard-hitting and rocky affair. Friday's action saw retailers and financials gain. Financials were boosted by reports that banks were moving forward with plans to create a superfund aimed at cleaning up some of their off-balance-sheet mortgage-related holdings. There was optimism for retailers as Black Friday started the holiday shopping season. Early signs from big retailers hinted that shoppers might have been undeterred by the credit worries and record-high fuel prices.

It is difficult to remain sanguine in the face of recent portfolio losses. But indeed it may be a time when making portfolio adjustments is both necessary and wise. Market turmoil always scrambles valuations and at the same time creates opportunities. It is also a good time to evaluate your risk tolerance.

You have to understand the influence of emotions on your investment behavior. It is a critical component of investment selection and risk management. Whether you can define it or not, all investors have a risk budget. They place a limit on the amount of uncertainty or loss they are willing willing to tolerate in the pursuit of a return. If you believe strongly in the goals you have set out at the beginning of an investment plan, risk management is the tool that helps insure those goals can be met.

You manage your risk through asset allocation, investment selection and re-balancing. You have to balance your portfolio for risk, return, cost and taxes. This is a difficult process and the average investor will need assistance in establishing the proper mix. Without re-balancing, your portfolio may drift far from its target asset allocation. You have to be careful you don't skew towards what is recently a successful asset class, but one which may not achieve your long term goals.

For example, emerging markets shares have been on a tear for the past five years. They have shown returns of up to 30% in both 2005 and 2006 and are performing above market averages this year. But their share prices have raced ahead of economic growth and that isn't sustainable over the long run. Another example is real estate trusts. They have been an outstanding investment during the current decade, notching seventh consecutive years of market-beating gains. But the winning streak came to an end this year with some REITs getting dinged for double digit losses. However, some REITs may be a bargain. Those that buy apartments, offices and warehouses and then rent them out are currently yielding around 5% with the potential for growth in the underlying asset.

So whatever you choose to do - leave the game completely for this year, go to the relative comfort of the club house or stick it out - remember to keep your risk within your tolerance and keep ahead of inflation.

I invite your questions.

(The opinions expressed are solely those of the author and not Gen worth Financial Securities Corporation.)

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Jerry Cole - Retirement, Investment
Jerry Cole has been a Financial Planner for almost 30 years in the Tri-City area and holds and MBA from USC. More from Jerry Cole - Retirement, Investment

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