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Staying Honest With Losses


Admit to yourself, yes, you lost money today but hang in there and over the long term you will be rewarded.

I still can't believe what I am going to tell you. Emotions are running hot but I will try to maintain my objectivity. I have promised my son I won't throw my shoe at the TV set again.

I happened to be watching financial television Thursday last, shortly after a pretty dreadful day in the market for most investors. The story of the day of course was the problem many banks were having and the difficulty of marking to market their vast derivative portfolios. This in turn was forcing many financial institutions to come clean and admit that their portfolios were worth significantly less than previously thought. More evidence appears this morning as Citigroup (C) writes off another $ 10 bln.

Now I understand it is important for the media to remain upbeat. Nobody wants a Gloomy Gus at the party always bringing up the negative. However it is the responsibility of journalists to paint a fair and balanced picture of current conditions.

Featured that day was a noted journalist whom I've met several times and while it was rare for us to be in agreement I always respected his opinion. This is a free country and he is entitled to be wrong.

On this day he said something that caused me to fall out of my chair. He reached out to viewers, telling them that despite the 362 point drop in the Dow investors hadn't lost anything. As long as you haven't sold you haven't lost money. Now, mind you, the topic of the day was the beating banks and other financial institutions were taking for not properly valuing their securities.

Let me take it a step further. Does that mean recent investors in Crocs (CROX) who are now down over 30% haven't lost anything because they haven't sold? In his defense, the journalist was probably referring to mutual funds but even if he was the concept is absurd and potentially dangerous. Even more frightening, because he stands on a high pulpit many investors may actually believe it and live with a false sense of security.

If you want to educate investors and tell them not to sell their funds just because the market takes a beating I applaud the effort but be honest about it. Admit to yourself, yes, you lost money today but hang in there and over the long term you will be rewarded. Saying losses don't exist just because you haven't sold is not only wrong but deliberately misleading.

Capitalism is based on the value of assets at a given moment in time. It is the basis of every financial transaction that takes place. The turmoil that has existed for several months in our markets is being driven by a lack of price discovery at our largest financial institutions. The value of your assets, whether it is your home, car, boat, or the mutual funds in your 401k, is determined by the markets. What is a buyer willing to pay?

Managing your money is serious business. We all get a report card at the end of each month when the statement arrives. Should you panic because short term performance has been compromised? Of course not. If your strategy is sound little change may be necessary. However if you are going to navigate this journey successfully you must always know what you own and know where you are.
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No positions in stocks mentioned.
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