The equity chart to the left is not pretty. Asset classes across the board have continued to spiral downward as the “subprime crisis” that began a year ago has blown into a credit crunch of epic proportion. The damage is far-reaching. As 401(k) and IRA balances dwindle, millions of workers may have to delay retirement. Families’ estate and college funding plans are in tatters, company pension plans will face massive funding requirements and charitable endowments have been slashed.

The blame game, of course, is well underway. Some point to the government’s Community Reinvestment Act which, it is claimed, initially encouraged lax lending standards. Many assert that investment banks and government sponsored agencies (Fannie Mae and Freddie Mac) are responsible for vastly expanding questionable lending practices. Credit rating agencies are under fire for being asleep at the switch. Wall Street executives have been upbraided for being oblivious to their firms’ own operations. Others point to derivatives (credit default swaps) as the culprit, or to their careless issuance or manipulation by purchasers. Security regulations are said to have been inadequate or poorly enforced. Now, the Fed and U.S. Treasury are under increasing scrutiny as attempts to reassure markets and get credit fl owing again have met with only mixed success.

All the finger-pointing obscures a larger concern/question, which is: Why have individual investors had to endure this bear market at all? The answer ultimately lies with a fiat monetary system. Our parent organization, AIER, has pointed out that the abandonment of the gold standard and the inevitable debasement of the dollar through monetary inflation has forced individual investors to embrace common stocks, and thereby become speculators. During the era of sound money, investors (as lenders) could purchase a long-term bond with reasonable assurance of earning a positive real return equal to the bond’s stated “coupon” interest rate.

This was possible because the bond’s interest payments and redemption value were repaid with dollars that had retained their purchasing power. On the other hand, common stock prices gyrated unpredictably, just as they do today, and as such were considered the province of speculators. Given the alternative of largely reliable real returns on bonds, stocks were not widely owned by households as a means of saving for the future.

Today, over half of U.S. households own common stock (directly or through mutual funds). We contend that this sea-change is not attributable to a growing desire among individual investors to embrace risk. Rather, rational investors have reluctantly accepted a higher risk/higher reward trade-off after several decades of a persistent debasement of the dollar. Common stocks have, over the long-term, provided returns that have well outpaced price inflation. This remuneration comes at a price: even an owner of a well diversified stock portfolio must endure periods of extreme volatility. The current bear market is a painful reminder of that reality.

All told, investors should still take comfort. There have been many improvements in information technology, data availability and advances in statistical reasoning. We can use these advances to help identify and isolate various sources of risk among financial assets, and evaluate the patterns of return they can be expected to provide. In this respect, today’s individual investor is far better positioned to construct and maintain a customized portfolio with prospects for maximizing real returns for a given level of assumed risk. It is our aim to help you do just that.

Also in This Issue:

AIS and the Bear Market: Where We Stand
Tax Swapping Time
Filling The Health Insurance Gap Between Early Retirement and Medicare
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles