The Ides of September

Yesterday was a rough day. I know because for the first time this year, I heard panic in some voices. I am not talking about clients, but sophisticated investment professionals who sounded like rank amateurs. This is not to dismiss the magnitude of what has occurred this year or even over the weekend, but typical of Wall Street, the focus was so misplaced that it made me nuts. Let’s start with some important points.

1) What does this mean to the average investor? Many investors are wondering whether they should pull out of their investment accounts and wait until the storm passes. The answer for most of them is NO. This is one of the most difficult concepts to grasp, but assuming that you are a long-term investor and do not need to access your money for 5-10 years, you should guard against the emotional pull of the mattress. Going through bear markets is the price you pay for being a long-term investor. If you pull out, you risk not participating in the recovery and although the current situation is difficult, it is good to remember that the economy and markets move in cycles—for every “down” cycle, there has been a subsequent “up” cycle. In fact, the most dangerous part of going to cash is that rarely do investors have the wherewithal to get back in. As an example, if you bailed out in October 2002, you probably missed 2003-2007, when stocks returned 12.8% annually. If you are using a retirement plan, you are buying stocks at a 20% discount to where they were almost a year ago.

2) Yesterday I discussed Securities Investor Protection Corporation (SIPC), but today I want to speak to those folks who have accounts at Merrill Lynch. The purchase of Merrill by Bank of America should not affect you financially. There is likely to be a re-branding of ML into “Merrill Lynch Wealth Management” and down the line, Merrill customers may actually have increased access to BOA banking functions. If your ML broker is smart, he or she will stay put, because there are not too many jobs on Wall Street right now!

3) Will this affect the broader economy? Until this point, the non-financial part of the US economy has been pretty resilient. The pullback in energy prices should continue to help and the nationalization of Fannie and Freddie have already helped mortgage rates drop, which in turn should help stabilize housing. While nobody knows what the future will bring, I am hopeful that this dramatic weekend will come to symbolize the point of maximum fear. After which we can repair the frayed nerves of investors and the economy as a whole.

Finally, a note to my friends on Wall Street: as usual, you believe that the world revolves around you. There is more to the US economy than the financial sector and although I am sorry to see anyone lose a job, why is a job at Lehman Brothers more precious than one at Ford or GM? It’s time to recognize that when you party too hard, the hangover is going to be substantial. Get out your Tylenol and prepare for a serious headache.