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August 10, 2011

Percentages, Not Points

Don’t be duped. Monday, after Standard and Poors downgraded the nation’s debt, for what seems to be highly political reasons instead of financial ones, the Dow Jones Industrial Average declined 634 points. The headlines the next morning in the Wall Street Journal read, “Downgrade Ignites Global Selloff”. Of course, there were similar headlines around the news-scape.

Now if you read these headlines with little to no context, you might be ready to cash in your 401k and bury your money in the back yard. You’d reason, “634 points?!?! The sky must be falling. Better get liquid!” In fact, I know some of your financial advisors have even advised you to move your long-term money to cash. Excuse me but this is really awful advice, especially for your long-term funds.

Context is what is needed. Although a 600+ point drop is significant, it hardly matters. The drop on Monday represented a 5.5% decline. That is not even close to making the top 20 percentage drops in the DJIA’s history. But the headlines would have you believe otherwise. It's percentages that matter, not points. The market, as a rule, goes up and down… daily. From 1926 to 2002, the S&P 500 was up 52% of the trading days and down 46%. There was little change the other 2% of the trading days. Like I said, up and down. Deal with it.

Your asset allocation decisions are important when it comes to managing the volatility in your portfolio. I won’t get into that much in this post except to say, your long-term money should typically be in stocks. Your short-term money should typically be in bonds and cash (treasuries). If you have that squared away, volatile days like these last few are buying opportunities and a chance to make money. Not sell out of misguided fear and lock in unnecessary loses.


Market:

"20 Largest Percentage Losses in DJIA History" by FoxBusiness.com

"The Revenge of the Rating Agencies" by Jeffrey Mann; New York Times


Portfolio:

One year chart of eBay (EBAY) vs. the iShares S&P 500 ETF (IVV)

"Stocks at 'fire sale' prices after bloodbath" by Hibah Yousuf; CNN Money


Life:

CrossFit Sports Series WOD-SUP Queens by CrossFit, Inc

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August 09, 2011

The Debt Cieling, The Tea Party and Fuzzy Math

Father and daughter change the oil
source: Gamma Man

The Debt Cieling, The Tea Party and Fuzzy Math

"Where the tea party is wrong" by Jeanne Sahadi; Cnn Money

"Reactions to the Debt Deal" by Justin Lahart, Wall Street Journal

I could end the deficit in five minutes. You just pass a law that says that anytime there is a deficit of more than three percent of GDP all sitting members of congress are ineligible for reelection. - Warren Buffett

"'46% in U.S. don't pay taxes' only half the story" by Joe Garofoli; San Francisco Chronicle

"Spending AND Taxes Got Us Into This Mess, And Only BOTH Can Get Us Out" by Chad Brand; Peridot Capitalist

To counter one of the most common rebuttals to this conclusion (that taxes are too high) consider that federal taxes today are at their lowest point since 1950 (again, as a percentage of GDP). In order to balance the budget, we need to close an annual deficit of $1.4 trillion, the product of $3.6 trillion in spending versus just $2.2 trillion in tax collections. If we do not raise taxes at all, government spending would have to be cut by that $1.4 trillion figure, which would be a cut of 40% (and is impossible).

Portfolio:

"Has Starbucks had enough of laptop loungers?" by Chris Matyszczyk; CNET News


Life:

"The Six Levels of Trust" by Carol Kinsey Goman; Forbes

"Jay-Z and Kanye West's 'Watch the Throne': Track-by-Track Review" by Erika Ramirez; Billboard

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About Brick Financial Management, LLC

Blogged by Brick Financial

51 JFK Pkwy, 1st Fl. West
Short Hills, NJ 07078
973-486-9860
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Brick Financial Management, LLC is a Registered Investment Advisor specializing in providing investment management services to individuals, families, organizations and institutions. We implement highly focused stock, bond, and balanced portfolios using an investment approach commonly referred to as value investing. Disclosure

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