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MAKING CENTS OUT OF THE NEWS
Blog #13
(October 9th, 2008)
FLIGHT - OR FIGHT?
By Tom McAllister, CFP™
Scientific research is pretty clear that, when we are under severe stress, our brains aren't interested in reality, only in survival. The fight-or-flight response, first discovered in 1915, describes the body's natural response to danger. Heart rate increases, vision narrows, muscles tense, perspiration increases, hearing becomes more sensitive, adrenaline rushes to the nervous system. All these symptoms occur quickly and without thought; all are meant to protect the body from life-threatening physical danger. That kind of fear can be a helpful response, because it prepares us to act swiftly to either flee or engage in combat to save our own lives.
This week, with news coming at us every few minutes about a worldwide credit crisis, an economic crisis, and an investment crisis, the natural tendency for ordinary investors is to fall into exactly this sort of fear syndrome. It's my important task, as a forty-six year veteran investor and financial planner to cry "Stop! Look! Listen!" It's my task to explain that this is no time for our fear syndrome to take over - quite the contrary! The fight-or-flight syndrome is meant to protect our bodies from harm. When our physical existence is threatened, the brain needs to "turn off" and get out of the way so the body can act swiftly to take us away from the danger. That's not at all what's happening now. Our financial survival depends on our power to reason and discern.
As a Certified Financial Planner® it's my task to cry, "Look!" The credit crisis in the United States economy has produced literally hundreds of opportunities for stock and bond investors. This is a time for our brains to enter the fight! This is a time for our brains to think beyond the mixture of fact and factoid being streamed into our consciousness by the mainstream media, a time to think beyond the fearful chatter of neighbors and friends, a time for us to move rationally to take advantage of what's going on now so we can reap the benefits later. Remember, the fear response narrows vision; instead, we must broaden it.
Here are just a few of the strategic investment options to consider (I'll be discussing some of these in greater detail in upcoming blogs and in my One Man's Opinion newsletter):
High quality municipal bonds: Tax-free bonds normally yield 80%-85% as much as taxable bonds; today tax-frees yield more than similar maturity taxable U.S. government bonds!
High quality preferred stocks: Many preferred stocks have current yields over 10%, and tax on their dividends is capped at 15% until the year 2010.
High quality, high yield common stocks: Many are available with yields over 6%!
Distressed stocks in the financial sector: The big financial companies that have survived are all looking cheap, including Citigroup, Wells Fargo, Bank of America.
Exchange-traded Funds: These mirror the Standard and Poor's or some other index.
(Based on forty-six years of observation, through other very difficult times, I would say a rebound is in order. Will we see lower prices before that happens? Very possibly, but to me that means many other bargains will be evolving.)
Psychologists explain that, in modern life, it is rare for humans to encounter emergencies that require extreme physical responses, yet our biology still provides for them. The result is that our stress response is inappropriate and actually does harm to our bodies without helping the situation. The fight-or-flight syndrome is characterized by mindless response. It's my task to be to invite you to be "mind-full" now. Your brain will be your best ally as you "fight" for your own financial future. Stop, look, and listen; the opportunities are out there!
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