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Best of Times:Worst of Decisions

Some years ago I was just staring as a credit-auditor for a top-25 bank just after the S & L Collapse that brought on a real estate credit crunch. I had been risk-rating real estate loans, the process of assessing the risk of continued performance on a loan. The worse the probability of performance the higher the rating, with 10 being total loss, 9 probable, 8 Doubtful, 7 possible, .....1. T-Bills etc. These classified loans would then be stratified by rating, totaled up and a % reserve against loss would have to be established. I would go before the Chief Credit Officer (CCO)to justify my ratings weekly and the loan loss it required.

What sticks in my mind from that experience is something the CCO mentioned one week during presentations. He said "the Worst Loans are always made during the Best Times." Specifically, when all is going well do not relax credit standards or allow undue risk.

Well, these are the best of times in the stock market. The past 7 years have seen steady growth sustained over the longest period in history and valuations have been soaring on the expectation of high growth. The life expectancy of this sustained growth may be years longer, but there will be the inevitable retraction in the markets and economy. Late Term Investors need to take heed at this point to reduce (not eliminate) exposure to volatile markets and high growth stocks and focus on building cash reserves for the early years of retirement. This is not the time to make bad decisions, ones you may ultimately regret because you were hoping to squeeze another % out of your entire portfolio. You don't want to retire in the middle of a recession and be unprepared.

If you are taking distributions out of your portfolio, then chances are you are liquidating shares and losing any future capital gain or dividend they would ever produce. Over time this share depletion, particularly where there are automatic withdrawals, exacerbates the impact of market corrections. If you continue to find yourself in market-based investments as the foundation of your retirement, take whatever profits you've made and build a liquid reserve capable of sustaining your lifestyle without touching your investments for a 24-month cycle. The good thing is you will likely have time to both build a cash reserve and participate in the market if you start immediately and in many cases reduce fees.

As Joseph said to Pharaoh, "Better stock up now!"

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