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Author: yttire Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5084  
Subject: 2008 investing summary Date: 1/3/2009 11:01 PM
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This is a summary of our financial position at the end of 2008. This year has been the most brutal year in housing, stock, bond, REIT, foreign stock, small caps, mid caps, and large caps which I have witnessed. Despite the insane losses in the overall investment market, our overall portfolio (including contributions) is down 10% for the year. This places us almost exactly where we were 2 years ago with regards to net worth. (We were up 10% from the year before). Some REIT's lost 90% of their value. A number of the S&P 500 were delisted with 15 of them losing 85% or more for the year!

This is both heartwarming (worst financial disaster in history and only back 2 years) and heartrending (how is it possible to move ahead in such unstable capital markets?).

Sadly, the investment portion of the portfolio in domestic equities, REIT's, foreign stocks, and foreign and domestic bonds got hammered universally. The attempt to be diversified across uncorrelated asset classes failed miserably. This was not a failure due to lack of effort of being diversified across asset classes, but rather all asset classes fell at once. ON the bright side, heavily paying off the mortgage in an advanced way has guaranteed a specific return on a lot of assets, and for some reason the housing in our local area has not been impacted at all by the general decline in housing prices. (Or at least, minimally).

Mid way through the crash I yanked out all assets from the equity markets, partially having lost faith in the way our capitalistic society is being run. The general systemic failures of banks due to over exposed leverage, and the flailing attempts of the government to control the situation did not inspire confidence. It seemed certain at points that a large number of businesses would be folding imminently. Instead, a medium number folded and a number of others are being propped up with huge amounts of taxpayer cash. Layoffs are daily news at this point.

2009 will reveal the story of the number of businesses which fold as this drama unwinds.

Now we are back in with around 30% of the equity position. It isn't clear at all if it would be wise to be all in at this point,
or all out. It seems plausible it may take a number of quarter (6 or so) before the general economy sorts itself out and begins to consider growing again in a normal way. During this process we could see another huge collapse begin to unfold if businesses have trouble raising debt or a lot of banks begin to feel the pinch of the recession in a real way. The government may step in and stem these losses though by taking on even more debt. This seems to be their strategy and probably is the simplest to prevent civil unrest.

Thus it seems inflation is on the way in the medium term future due to the already huge injections of capital and planned spending on the government books.

How to invest in a highly inflationary environment?


It feels like one has to be an economic advisor to the president to know how to properly invest in this market situation. It seems like buying a rental unit may be a good mix into the current investing plan- this is like buying an REIT without taking on the huge debt load which will drive those into bankruptcy. Paying off the house completely seems like a likely course of action since it will not significantly dent our emergency reserves. However seeing the fourth quarter numbers at my own place of business would be nice before taking on this move (and seeing if layoffs are imminent).

Some other lessons that came out of this crash- a number of the most "conservative" investments burned brightly and vanished. A lot of dividend players in the banking sector and shipping business and REIT's all got heavily destroyed by the economic events that transpired. This casts into doubt an equity dividend retirement in some ways- dividend players tend to be exposed to large scale macroreconomic forces which can obliterate them.

Seeing that this same overlending, crash and burn, then recovery happens periodically (1873, 1929, 2008) in our own country and
also in other countries implies this will certainly happen again. It isn't clear the government has the understanding on how to properly regulate the capital markets, nor has the ability to due to injections of cash from the banks to get their own agendas in the legislation. This unfortunate reality may mean that investing into a stable growth society is simply not available, because such a society does not exist except in the dream world of Adam Smith.
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