Michael Coleman, Ph. D.

Retirement Income Specialist

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“The Perfect Storm”

October, 2002

The movie The Perfect Storm tells a true story about how three different storm systems came together to create a storm that was “perfect” in its devastation. This is what we are experiencing right now in the stock markets. First we had the collapse of the technology bubble in 2000 and 2001. When the economy seemed to be recovering we had the 9/11 terrorist attacks. Within six months of the terrorist attacks we had accounting scandals and high profile bankruptcies such as WorldCom and Enron. Just when we thought it couldn’t get any worse… it did. Now we have a high probability that we will be going to war with Iraq. All of these events together have created a “Perfect Storm” in the financial markets, leading to three years of negative yields that are greater than any we have seen since 1941.

What the markets hate the most is uncertainty. The possibility of war combined with a distrust of companies’ accounting has lead to widespread uncertainty. Next the markets hate losses, particularly losses that seem to be unending. This is the climate we are in right now. Just as Greenspan warned us quite presciently against “irrational exuberance” in December 1996, so I would like to warn you against “irrational despondency” right now. Let me remind you once again that this is what it feels like to buy low. It is never fun. This is the time to add to your stock market investments, not a time to abandon your strategy.

We have built in “safety features” to all of your accounts. For all accounts we have used professional management, asset allocation and diversity. Depending on your goals and your risk tolerances we may have also used tactical allocation, guaranteed income features, and/or fixed rate annuities. In every stock portfolio we oversee, even our most aggressive, we are doing better than the market averages. This does not mean we have made you money recently; it only means that you have been losing less.

In just this last quarter, the Dow Jones Industrial Average fell -17.9% and the S&P500 Index went down -17.3%. These results made the Third Quarter of 2002 the worst equity markets have experienced since the crash in the fourth quarter 1987. ^[1] Year to date the numbers are even more sobering: the Dow is down -23.1%, the S&P500 down -28.1%, and the Nasdaq down -39.7%.

Investors categorically dumped securities, as U.S. Equities plunged across all sizes and styles, along with International Equities, REITs and High Yield bonds. Only Domestic and International Fixed Income could provide a safe haven for investors, with the Lehman Aggregate Index up 4.58% for the quarter. (See chart below.)

Source: Security APL. Past performance is no guarantee of future results. Investors cannot invest directly in an index.

In the face of so much bad news, it’s only human to feel frustration and fear. It’s only natural to consider making an emotional decision about your investments. Many investors have understandably considered stepping to the sidelines – just until markets seem to return to ‘normal.’

Before you abandon your strategy, consider the following market illustration from the 1973 – 74 bear market: ^[2]

The value of $1,000,000 invested in the S&P500 Index on January 1, 1973:

6 months later… 12 months later… 1 year, 9 months later…

$896,310 $853,450 $573,780

In October, 1974, as we are now, investors were faced with back-to-back losing years, and the worst bear market in decades. And like now, many investors considered stepping to the sidelines until markets returned to ‘normal.’ This illustration emphasizes the importance for long-term investors of time in the market rather than timing the market.

Value of $573,780 removed from the Market on 10/1/1974 and invested in a 5% CD		Value of $573,780 invested in the S&P500 Index on 10/1/1974
6 months later: 1 year later: 2 years later: 5 years later: 10 years later:	$588,130 $602,470 $632,590 $732,300 $934,620	6 months later: 1 year later: 2 years later: 5 years later: 10 years later:	$771,570 $792,620 $1,034,040 $1,247,680 $2,444,370

Past performance is no guarantee of future results. Investors cannot invest directly in an index.

Many market analysts now believe the equity markets to be substantially undervalued.^[3]Does this mean a turnaround is coming soon? Not necessarily. Just as markets overreacted on the upside in the late 1990s, they now appear to be overreacting on the downside. As your financial advisor, we offer our experience and our support, and our advice to adhere to your disciplined investment strategy.

We remind you that ‘staying the course’ does not mean inaction – the Portfolio Strategists and Investment Managers directing your investments are constantly evaluating current market conditions and re-validating their assumptions to ensure your portfolio reflects the very best thinking these institutions have to offer.

^[1]Wall Street Journal, October 1, 2002

^[2]Salomon Smith Barney Consulting Group, “When the Going Gets Tough, The Tough Hang In There”

^[3]Including Litman/Gregory Asset Management, PanAgora Asset Management, UBS Global Asset Management, and Morgan Stanley Investment Management in their respective Third Quarter 2002 Portfolio Strategist Commentaries.