The long and the short of it - NO

Now is not the time to panic and bail. If you were investing money for the long-term (3 years or more) then you must close your statements and continue on. If anything, see this as an opportunity to buy quality companies relatively cheap. If your monies are needed within a 3 year time frame they never should have been in the market to begin with. So stay calm and stay put.

So what happened? 

Basically the cost of borrowing money became cheap and Wall Street found a way for everyone to benefit from it. They came in and packaged up all the risky mortgages and sold them to investors all over the world. It can be summed up as simply as this; greedy aggressive lenders took advantage of uninformed borrowers. And as history has shown, the market eventually punishes greed.

So let’s go back a bit. 

Over the past few years too many Americans were buying homes that they really could not afford. Interest rates were at an all time low and the housing market was booming. Basically money was cheap to borrow and readily available. As a result, demand for borrowed money grew. Mortgage companies took advantage of this need and started lending to everyone, even to people who couldn’t afford to pay it back. They basically gave uninformed Americans high interest rip off mortgages. When interest rates were low the payments were somewhat manageable but as interest rates slowly crept upward, the cost of borrowing this money became too expensive. Many are now facing the reality that they cannot afford their higher rate mortgage payments and will lose their homes.

This is what is being referred to as the sub-prime mortgage debacle. In a nutshell, mortgage companies were approving mortgages to financially unstable borrowers who did not qualify for conventional prime rate mortgages. And the losses do not end here. These mortgage companies didn’t want to bare all the risk associated with the sub-prime mortgages and so they bundled them together and sold them off as big ticket investments to large firms. When rates climbed and people stopped making mortgage payments everyone was affected.

 So what is being done today? 

I am sure you have all been hearing the R (recession) word being thrown around. By the time the data comes available that actually proves whether or not the US is in a recession they will most likely be half way out of it. What President Bush and the Federal Reserve are trying to do in the meantime is to take action now that will stimulate growth in the US economy. As announced on January 17th 2008, President Bush will be looking at tax cuts and the Federal Reserve will continue to lower interest rates (potentially to a level that would make these sub-prime mortgage payments affordable again).

So why did the markets take such a drop? 

Markets are emotionally driven. As key economic indicators were released (dropping retail sales) and big companies reported enormous 4th quarter losses due to their involvement in the sub-prime mortgage mess investors panicked and started selling. Panic leads to more panic and the selling continued all week. Markets took a beating.  Are we at the bottom? Well no one ever knows for sure when the bottom has hit, however, many feel we are getting pretty close.

So should I be selling?

Absolutely not. As I said before, this is not the time to panic and bail. If you were investing money for the long-term (3 years or more) then you must close your statements and continue on.
 

Rhonda Sherwood, CFP. FMA
Wealth Advisor
www.rhondasherwood.com
www.itsHERmoney.com