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Chapter One
What Happened?? What Happened!!
When The Little Book That Saves Your Assets first appeared in 2008, how little did any of us anticipate the steep and scary roller-coaster ride that was about to be experienced by economies, companies, financial markets, banks, governments, savers, workers, and retirees! Throughout 2008, crashing markets, widespread layoffs, loan losses, asset value write-downs, accelerated news flow, and extreme volatility severely tested the nerves, resources, patience, sanity, and resolve of investors, regulators, CEOs, politicians, and mainstream citizens in the United States and all over the world.
And in March 2009, just when it seemed as if the global economy was about to plunge even deeper into the abyss, governments acted, markets rallied, and economies stabilized somewhat. A back-and-forth, halting, faltering resuscitation began, although quite anemic compared to previous recoveries. Even today, disagreement persists as to whether a final bottom has been reached and a multiyear secular bull market can begin to unfold. Such a scenario appears unlikely until: (1) debt and leverage are brought down to manageable levels; (2) politicians cooperatively and central bankers resolutely pursue policies to address imbalances (of savings, consumption, deficits, indebtedness, societal entitlements, and currency values); (3) outmoded patterns of thinking and behavior adjust to the new realities of technology, globalization, and demographics; and (4) meaningful structural reforms begin to be implemented.
At times during the past several years, it has seemed as if the wheels were coming off the car of the global economy. Throughout this tumultuous, trying, turbulent period, I have received a great many e-mails, handwritten letters, and telephone calls (as well as in-person visits and faxes!) from anguished, distressed, even emotionally destabilized investors and financial advisors seeking solace and guidance. Quite a number of these communications, however, bore a different message. These missivesâfrom, for example, a 70-year-old widow in Boston, a retired executive in San Antonio, a young couple in Orlando, an agribusiness owner in Brazil, and a biotechnology entrepreneur in Californiaâexpressed relief and thanks for The Little Book That Saves Your Assets having helped protect their portfolios and limit damage during the recent bout of financial carnage, and having prevented readers from giving up in despair just as a cyclical upturn was about to unfold. In their own, highly personal ways, these individuals recounted how they had understood, internalized, and applied the three major messages of this book to avoid disaster and then live to fight another day. These bedrock principles are: (1) adequate portfolio diversification (through having assets that truly zig when others zag); (2) judicious rebalancing (of asset weightings back to strategic asset allocation targets after dramatic price moves); and (3) active risk management (through defensive actions such as having extra cash or reducing exposure to economically sensitive assets, and offensive actions such as increased allocations to assets such as high-quality fixed-income securities).
It is indisputable that investors had to navigate extraordinarily volatile financial market conditions during the years 2008, 2009, 2010, and 2011. This four-year time period featured, in 2008, enormous financial system instability, bankruptcies, bailouts, and governmental rescues (see Exhibit 1.1 for selected key events).
Exhibit 1.1 Key Events in 2008
| Sunday, March 16, 2008 | Government-assisted rescue of Bear Stearns |
| Friday, July 11, 2008 | Bankruptcy of IndyMac Bancorp |
| Sunday, September 7, 2008 | Conservatorship of Fannie Mae and Freddie Mac |
| Sunday, September 14, 2008 | Bank of America acquisition of Merrill Lynch |
| Monday, September 15, 2008 | Lehman Brothers bankruptcy |
| Tuesday, September 16, 2008 | Federal Reserve capital injection into AIG |
| Tuesday, September 16, 2008 | Reserve Primary Fund money market mutual fund suspension of redemptions |
| Thursday, September 25, 2008 | Office of Thrift Supervision seizure of Washington Mutual |
| Monday, September 29, 2008 | U.S. House of Representativesâ rejection of Troubled Asset Relief Program (TARP) bailout by a vote of 228 to 205, leading to a one-day decline of 8.8 percent in the S&P 500 index, to 1,106 |
| Friday, October 3, 2008 | Congressional passage of the TARP bailout |
| Sunday, November 23, 2008 | Special government rescue package for Citigroup |
| Wednesday, December 10, 2008 | Revelation of Bernie Madoff Ponzi scheme |
The following year, 2009, brought massive fiscal and monetary stimulus by the United States and China, altered accounting rules for banksâ assets, stress tests for large financial institutions, and quantitative easing (money printing) by the U.S. Federal Reserve (see Exhibit 1.2 for selected key events).
Exhibit 1.2 Key Events in 2009
| February 17, 2009 | Passage of $787 billion fiscal stimulus package in the United States |
| February 25, 2009 | Announcement of stress tests for 19 U.S. banks |
| March 18, 2009 | Federal Reserve Quantitative Easing plan |
| March 23, 2009 | Approval of $585 billion fiscal stimulus package in China |
| April 2, 2009 | Financial Accounting Standards Board (FASB) draft proposal on mark-to-market accounting rules for financial institutions |
| April 30, 2009 | Bankruptcy of Chrysler Corporation |
| June 1, 2009 | Bankruptcy of General Motors Corporation |
| October 20, 2009 | Revelation by newly elected Greek government that its budget deficit is 12.5 percent of GDP, not 3.8 percent |
| November 25, 2009 | Announcement by Dubai World of its proposal to delay debt repayments due to financial difficulties |
In 2010, investors faced financial rescue packages for Greece and Ireland, the creation of a multi-hundred-billion-dollar European stabilization fund for Eurozone countries, the oil well blowout in the Gulf of Mexico, a âflash crashâ in U.S. stock prices, a second round of Federal Reserve quantitative easing, and the passage of further fiscal stimulus measures by the U.S. Congress (see Exhibit 1.3 for selected key events).
Exhibit 1.3 Key Events in 2010
| March 24, 2010 | Congressional passage of landmark health care legislation |
| April 20, 2010 | Blowout of Macondo oil well in the Gulf of Mexico |
| May 2, 2010 | Eurozone and International Monetary Fund (IMF) agreement on a âŹ110 billion, three-year Greek rescue package |
| May 6, 2010 | âFlash crashâ in U... |
