Roadmap to

Recovery

An 8 Step Plan to Rebuild Your

Finances After the Shock

By John T. McCarthy CFP®

McCarthy Grittinger Weil Financial Group

Your Anxiety Removal TeamSM

Roadmap to Recovery
An 8 Step Plan to Rebuild Your Finances After the Shock

Roadmap to Recovery is written in response to the unprecedented financial,

economic and market storm that has battered investment portfolios, cracked nest
eggs, derailed financial and retirement plans, shaken confidences and left investors
uncertain how to proceed. This compact guide is full of timely and practical
information and direction on how to survive, succeed and move forward in this
unsettled economic climate.

All Rights Reserved

About the Author

John T. McCarthy CFP® is the founder and managing principal of McCarthy

Grittinger Weil Financial Group and a 25-year veteran of the financial planning
industry. John is the author of three books. The financial life planning book
Embrace the Journey—Stories of Life and Finance (2008), The New Millennium
Guide to Managing Your Money (1998), and Financial Planning for a Secure
Retirement (1991, 1996). He is a graduate of the Business School of Marquette
University which he attended on an Evans Scholarship. John resides in
Wauwatosa, Wisconsin, with his wife Cathy, and their three children.

About Us

McCarthy Grittinger Weil Financial Group, LLC is an independent SEC registered

financial planning and investment advisory firm based in Milwaukee, Wisconsin.
Established in 1995, we hold ourselves out as Your Anxiety Removal TeamSM and
serve some 250 individual clients. A firm specialty is advising clients facing
financial and life transitions.

Contact Information
McCarthy Grittinger Weil Financial Group
One Honey Creek Corporate Center
125 S. 84th Street, Suite 130
Milwaukee, WI 53214-1498
Phone: (414) 475-1369
Fax: (414) 475-0613
Website: www.mgfin.com

DOWN THE ROAD -- AN INTRODUCTION

For the past year there has been no place to run, no place to hide, from an historic
market collapse. We have suffered a dreadful shock to our financial lives, eerily
similar to an earthquake. The initial shock has been quite an awakening. Tremors
are still being felt in its aftermath, and there is fear of aftershocks to come. While
this economic, financial and market disaster has been severe, it now appears to
have been something short of calamitous.

Spring has finally replaced the long, hard winter and with it brings the promise of
renewal and a fresh start. On almost a daily basis, increasing evidence indicates
the economy eventually will pull out of this deep and protracted recession and the
stock market escape the claws of a particularly brutal bear market. Just recently,
President Obama spoke of seeing “glimmers of hope” in the U. S. economy.
Federal Reserve Chairman Ben Bernanke has spied “green shoots” sprouting from
the barren financial landscape. Economic advisor and former Fed Chief Paul
Voelker sees the economic downfall leveling off. After months of declining,
consumer confidence levels have begun to rise. The stock market has rallied some
30% and demonstrated resiliency and lower volatility since reaching a bear market
low of 6547 on March 9, 2009.

As of the end of May, the S&P 500 has managed to climb back into positive
territory for 2009, boosted by a 5.3% gain for the month. Its three-month gain of
25% was its biggest three-month rise since August 1938. The tech-heavy Nasdaq
is up a reassuring 12.5% year-to-date. Global markets have also recovered some
from the severe hits they suffered during 2008. A welcome change of tone has
lifted the veil of gloom and doom over the past several weeks, suggesting, just
maybe, the worst is behind us.

In the fall of 2008, there was prevalent a very real fear the entire global financial
system could collapse, throwing us into the depths of another Great Depression.
With every passing day, it appears more likely such a full-blown nightmare
scenario has been averted. This welcome realization has been accompanied by a
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collective sigh of relief. No matter how faint, there is light at the end of the tunnel,
the unknown factor being the length of that tunnel.

There is universal agreement we have been living through a financial crisis of

historic propositions. For a better understanding, it might be beneficial to briefly
recap how we came to find ourselves in this quagmire.
The first problems surfaced in 2007 when the subprime mortgage market
imploded, precipitating a widening credit crisis. The collapse of the housing
market, coupled with rapidly rising energy costs, pushed an already weak economy
into recession and panicked the stock market.

Despite a recent welcome relief rally, Dow stocks are still some 40% below their
all-time peak of 14,164 reached on October 9, 2007. This high-water mark was the
culmination of a five-year bull market run. It will take time for equities to again be
valued this highly. No one can know with certainty, but knowledgeable forecasters
suggest it could well take seven years, until 2016, before we get back to record
high valuations.

As consumers, investors, and participants in the overall economy, we have been

operating in a financial daze since Monday, September 15, 2008. On that fateful
day, major investment bank Lehman Brothers collapsed, the Dow lost 500 points, a
massive federal bailout of insurance giant AIG was instituted, and a forced sale of
Wall Street brokerage titan Merrill Lynch was hastily arranged with Bank of
America. In the frightening days that followed, institutional money market
Reserve Fund fell in value below a stable dollar, Indy Mac Bank failed and had to
be rescued by the FDIC, and mortgage heavyweights Fannie Mae and Freddie Mac
broke down, forcing a bailout by the federal government and taxpayers.

The economy literally seemed to fall off a cliff, so sudden and swift was its
demise. Consumers, business owners and corporate managers were emotionally
frozen. The economy tanked, unemployment lines swelled, corporate profits
disappeared, and home values dropped, while foreclosures rose. Perhaps most
telling, American icon GM now is in bankruptcy.

During the first quarter of 2009 the economy continued to slide deeper into
recession. Consumers at all income levels cut back sharply on spending, and job
losses continued to increase exponentially, further slowing our consumer-driven
economy.

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Personal net worth has shrunk precipitously over the past year-and-a-half from the
double-whammy of a hit to values of both our homes and our investment
portfolios.
There is more than enough blame to go around for this colossal mess. Take your
pick from among any or all of the following culprits: greedy investment bankers,
unscrupulous mortgage brokers, hedge fund speculators and inept government
regulators, asleep-at-the-wheel rating agencies, spend-and-not-save consumers and
politicians of both parties. Whatever the contributing factors, it is not fruitful to
look back with angst. Rather, renewed energy should be focused on picking
ourselves off the floor, dusting ourselves off and moving forward to restore our
financial equilibrium.

With the ferocious financial and economic storm having mercifully subsided, or at
least paused in a lull, now is the time to develop strategies to recover from our
losses, rebuild battered investment portfolios and regain net worth.

As we search out a path forward, it may be helpful to review parallels to the

anxious period following the stock market crash in October of 1987. On Black
Monday, October 19, 1987, the Dow suffered a history-making one-day loss of
22.6%.

The November 29, 1987 issue of the New York Times financial planning guide
accurately describes the dilemma facing many individuals in that post-crash era:

The enormity of the October 19 collapse has shaken most of the assumptions
that guided individuals’ investment decisions and shaped their economic
outlook. Today, no one is entirely sure what new assumptions should
prevail. The one certainty seems to be uncertainty itself. People are uncertain
about how sound the economy is, uncertain about where the markets are
going, and uncertain about how to plan or what to assume in an investment
strategy.

Like then, the big question now is where we go from here. To navigate the
turbulent seas we have been facing, it is helpful to seek the wisdom and
perspective of seasoned skippers on how best to survive these difficult waters and
safely reach our financial life-planning destinations.

One such individual is the late John Templeton. This legendary value investor,
founder of the Templeton mutual fund group, and noted philanthropist died at the
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advanced age of 95 in 2008. Templeton used to say that adversity is a great
teacher. There are always lessons to be learned, mistakes to be avoided and
opportunities to be exploited. This is especially relevant and valuable today in the
midst of what is perhaps a once-in-a-lifetime economic storm.

To guide us, we have developed the following 8-step plan. This roadmap is
characterized by an emphasis on hope, simplicity, common-sense rational
behavior, real life examples, historical perspective and tried-and-true strategies for
success.

Step 1. Keep Hope Alive

Step 2. Keep It Simple

Step 3. Don’t Give Up on the Stock Market

Step 4. Retool Your Financial Plan

Step 5. Fear & Greed and Irrational Investing

Step 6. Refocus Your Investment Plan

Step 7. Avoid the Big Mistakes

Step 8. Look Up and Out To The Year 2020

Step 1. Keep Hope Alive

At our independent financial planning and investment advisory firm, we hold

ourselves out as Your Anxiety Removal TeamSM. To say this current environment
has been testing would be an understatement. In seeking to help our
understandably nervous clients cope with this unprecedented tsunami of a market
and economy, we recently teamed up with professional psychologist Robert M.
Dries, PhD, to co-lead a series of client education sessions. At our April 2009
program, with evidence the financial world is not coming to an end, the theme
shifted from the sky is falling to one of it’s safe to lift one’s head and climb out of
the bunker.
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As victims experiencing this storm, we felt vulnerable, unprotected, and lacking in
control. What is called for is adopting a psychologically healthy mindset. This is
accomplished by focusing on bounce-back resiliency, fostering hardiness, and
creating hope. Hope is the most important, even an essential attribute to possess,
in order to start the recovery process. Bob Dries urged attendees to look at the
glass as being half-full, see light at the end of the tunnel, have conviction that
positive beliefs will come true, and think this period may well be the narrowest
part of the hour glass.

Experienced investors know, “this too shall pass and good days
will come back. They know there is hope.”
Forbes
November 10, 2008

John Templeton shared a trait with other successful individuals and investors— a
confident and optimistic view of the future. He was consistent in being
characteristically upbeat about the long-term outlook for ownership in stocks.
Templeton was firm in his conviction that technological advances would continue
to spur profit-making opportunities here and throughout the world.

It is inspiring to learn that Sir John Templeton (knighted by Queen Elizabeth in

1987 for his philanthropic work), remained optimistic to the end of his long life. In
2007 he wrote, “Throughout history, people have focused too little on the
opportunities that problems present in investing and in life in general.” He left us
with this comforting view: “The 21st century offers great hope and glorious
promise, perhaps a new golden age of opportunity.”

Many investors sorely miss the calming influence and unbridled optimism of Louis
Rukeyser, who died in 2006. His nationally acclaimed program ran for 32 years.
In times like this, we could use a dose of Rukeyser’s steadfast optimism about the
promise of America and his core belief that stocks will continue to grow in value
over the long-term and the U.S. economic system will continue to compete and
prevail. Over the many years of his program, Lou always dismissed rampant
pessimism and derided overly bearish sentiment by adopting a glass-half-full
optimism.

Had cancer not ended Rukeyser’s life, it is likely he would still be on the air,
reassuring us and emphasizing the good news of the market. Sitting in his large
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leather chair, it was his custom at the conclusion of his popular weekly TV show to
sign off with his trademark wink that signaled to nervous investors, “Keep the
faith.”

One high profile executive keeping the faith and looking forward with confidence
is Boeing Chairman and CEO Jim McNerney. Despite seeing Boeing’s profits,
orders and stock price plummet this past year in what McNerney referred to as a
“once-in-a-lifetime” slump, he told shareholders at the annual meeting in April he
is quite optimistic that the airline manufacturer’s fortunes will recover and soon
soar again.

Accomplished author and Reagan speechwriter Peggy Noonan addressed the cloud
of pessimism and crisis of confidence that hangs over America in her December
21, 2008 Wall Street Journal column.

For seasoned counsel and perspective in this article, Noonan called on former
Secretary of State George Shultz. She asked the 88 year old statesman if there is
reason to be optimistic about America’s fortunes and future. His reply was
unequivocal. “Absolutely,” he said, “there is every reason to have confidence.”

A former economist and university professor, Shultz defended his optimism,

noting “the ingenuity, the flexibility, and the strength of the national economy.”

In this same column, Noonan states it is unlike Americans to believe the best is
behind us. Despite the current sorry state of the economy, she forcefully reminds
us, “We are the largest and most technologically powerful economy in the world,
the leading industrial power of the world, and the wealthiest nation in the world.”

Both Noonan and Shultz are fully mindful of the difficult challenges we face as a
nation. On the economic front, however, Noonan points out, “we are building
from an extraordinary, brilliant and enduring base.”

Shultz, who served as both Secretary of Labor and of the Treasury, spoke the hard
truth by observing that as individuals and as a government we have been living
beyond our means. He feels we should view this current crisis as “a gigantic
wake-up call.”

America has experienced 13 economic recessions in the last 80 years, yet

resolutely fought back each time with 13 economic expansions. In the long history
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of the economy in general and the market in particular, optimism has been
rewarded far more often than pessimism. The inimitable Winston Churchill gave
us this valuable insight: “An optimist sees an opportunity in every calamity; a
pessimist sees a calamity in every opportunity. I am an optimist. It does not seem
too much use being anything else.”

To be a successful investor requires a confident view of the future. Glenn

Hutchins, co-chief executive of technology investment firm Silver Lake, is
someone who gives us reasons to be optimistic and believe. In a recent issue of
Fortune, Hutchins makes the sunny case that Americans will be led forward to a
bright future by scientific advances, innovation, and entrepreneurship, fueling a
quarter-century of prosperity. He writes: “The way out of the doom and gloom of
the 1970s—a period much like today—was a wave of technology innovation that
spurred a generation of company formation, job creation, productivity gains,
wealth accumulation, and GDP growth. Today’s opportunities are just as big if not
bigger.”

Hutchins and other futurists point to exciting breakthroughs on the cusp in green
energy technologies, biotechnology, cloud computing, stem cells and
nanotechnology, among a crop of fertile fields ripe with growth and innovation.

Former GE corporate titan Jack Welch and his journalist wife Suzy put out a
weekly column in BusinessWeek. In a recent article, they presented this optimistic
assessment of the future. “Look, we’re not Pollyannas. It’s human to view your
own difficulties as the worst of times. But this painful but necessary correction
will result in a healthier, deleveraged society with a renewed focus on productivity,
innovation, and better governance. The end is not here. A new beginning awaits.”

Step 2. Keep It Simple

Much of the blame for the colossal financial and credit crisis in which we find
ourselves mired is due to complex financial instruments such as the widespread use
of CDOs (collateralized debt obligations). In the wake of the turmoil, it is now
abundantly clear that too few fully understood the underlying risk of these exotic
investments, suffered severe losses, and as a result, ignited this crisis.

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A case in point close to home involves the pending lawsuit where five school
districts in Southeastern Wisconsin are suing an investment firm and international
bank to recover $200 million they invested in collateralized debt obligations. The
lawsuit alleges the investment firm misled the school system into making, what is
now referred to as complex investments, that have since suffered massive losses.

“As a general rule of thumb, the more complexity that exists in a

Wall Street creation, the faster and farther investors should run.”

…David Swensen
Chief Financial Officer Yale University

Vanguard founder John Bogle has been on a crusade to bring simplicity and
common sense to investing over his entire career. In this courageous battle, he has
been a loud and fierce critic of Wall Street and the investment management
industry as a whole for aggressively promoting, manufacturing and distributing
complicated, costly and underperforming investment products on gullible
investors. At age 79, and with his transplanted heart of 13 years starting to fail
him, Bogle nevertheless continues with his motto to “press on regardless” on his
bold mission. The events surrounding the worst bear market and economy he has
ever seen only serves to increase his zeal and conviction.

To quote from Bogle’s book, Common Sense on Mutual Funds, in a section titled,
“When All Else Fails Fall Back on Simplicity,” Bogle says, “Never underestimate
either the majesty of simplicity or its proven effectiveness as a long-term strategy
for productive investing. Simplicity indeed is the master key to financial success.”

In keeping with the simplicity theme, we recommend you limit your stock
investments solely to quality no-load, low-expense mutual funds and ETFs
(exchange-traded funds). Yet, in the wake of the massive stock market meltdown
of 2008, there will be a chorus from those naysayers who say that mutual funds
don’t work and are a failed strategy. The truth is stock mutual fund investors were
savaged like everybody else, as there was no place to hide or escape from this
brutal market. However, it would be a major mistake to abandon these simple but
effective investment vehicles. At our investment advisory firm, we are sticking
with the tried-and-true and building and maintaining our clients’ portfolios using
mutual funds and ETFs for the equity allocation. There exists no better or proven
prescription than mutual funds for restoring sick portfolios to health.

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Diversified mutual funds provide a crucial risk-reduction mechanism when
compared to the single-issue risk inherent in individual stock ownership. This is
valuable when you realize that over a quarter of all stocks in the universe suffered
a startling loss of over 75% in 2008, and for scores of stocks, including financials,
homebuilders and mortgage companies, the loss exceeded 90%. According to
research firm Lipper, stock mutual funds on average sank almost 40% in this
dismal year. While it is true you can and will bleed with mutual funds, despite the
advantage of diversification, you won’t get killed as is possible with individual
stocks. Mutual funds are sometimes derided as being boring and unsophisticated.
All true, but there is elegance in simplicity.

A legitimate knock on funds as compared to individual stocks is the inability to

control taxes on gains. One silver lining is the bear market has resulted in virtually
all stock mutual funds carrying unrealized losses. Coupled with the substantial
tax-loss carry forwards that have been or could be harvested from taxable equity
portfolios, the taxable gains may not be an issue for a number of years.

One of the scary chapters in the epic 2008 financial nightmare was the Madoff
(appropriately pronounced made-off) scandal. Bernard Madoff masterminded a
giant, long-running Ponzi scheme that stole an astounding $50 billion from scores
of supposedly sophisticated investors, snaring in a wide web the rich and famous,
institutional investors, pensions, hedge funds and Jewish charities.

In the wake of the year-end market crash, there have been reports of dozens of
similar schemes, including scams by other hedge fund managers, though on a
smaller scale than Madoff.

It is said when the tide goes out you discover who has been swimming naked. It is
feared the market meltdown will spawn a whole slew of illegal get-rich-quick
schemes aimed at separating naïve and impatient investors from their money. The
old lesson bears repeating that if something sounds too good to be true, it probably
is.

As Don Phillips, managing director at Morningstar adroitly points out, although

investors lost a lot of money in mutual funds, the transparency of fund holdings
protected investors, and outright fraud was not an issue. Further illuminating his
point, Phillips states, “There remains no better-lit playing field in finance than the
United States fund industry.”

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At our firm, we follow two simple rules that have served our advisory clients well
and that have kept us from getting snagged in the net of a scheme.

Rule number one is we don’t invest in anything unless we have a basic

understanding as to the risk involved and potential downside.

Fabled mutual fund manager and Fidelity Vice Chairman Peter Lynch in his book,
One Up on Wall Street, wrote, “I’ve never bought an option in my entire investing
career, and I can’t imagine buying one now. Actually, I do know a few things
about options. I know that the large potential return is attractive to many small
investors who are dissatisfied with getting rich slow. Instead, they opt for getting
poor quick.”

Rule number two has us investing exclusively in traditional marketable securities

such as publicly traded mutual funds and ETFs, along with ultra-safe, federally
insured CDs and direct Treasury obligations, such as United States Treasury notes
and bills.

With a registered mutual fund, unlike a hedge fund or alternative investments, you
can readily buy or sell shares on any trading day, as well as determine current
market value. Contrast this plain vanilla approach we have successfully employed
to those venturing into the more exotic world of unregulated hedge funds and
exclusive and selective private equity placements.

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Hammering this point home, the Milwaukee Journal Sentinel reported May 22,
2009 a respected Appleton-area financial advisor has been accused by federal SEC
regulators of engaging in fraud and accepting kickbacks. According to this front
page story, investors were directed into illiquid, unregistered securities and misled
by the advisor as to the underlying risk. Losses could possibly amount to tens of
millions of dollars.

Another thing to learn from the Madoff mess was that this clever crook produced,
falsified and mailed out statements of accounts directly to his clients. Unlike the
tragedy surrounding the Madoff scandal, our investment advisory firm does not
take possession, known as custody, of even one dollar of our clients’ assets.
Rather, their money is safeguarded and held in custodial accounts through brand-
name custodians Schwab Institutional and TD Ameritrade. If someone doesn’t
have possession of your money, they can’t steal it.

Robert Bartley, former editor of The Wall Street Journal, lost his life to cancer in
2003. A colleague of Bartley at the Journal, Daniel Henninger, sought to explain
the source of this brilliant man’s success. “Indeed, simplicity, to use one of Bob’s
favorite words, was his lodestar.” Henninger’s article reintroduces us to the
fourteenth-century English philosopher William of Occam, who posited the
principle that the best and sturdiest solution to a problem is often the least
complicated.”

John Bogle is also a disciple of Occam’s Razor. Clearly, by their actions, major
brokerage houses are not. A telling example is their promotion of auction-rate
securities (ARSs). Brokers at these firms routinely pitched these little-known and
little understood instruments to security-conscious investors as a cash equivalent,
similar to a money fund in terms of safety and liquidity, yet boasting higher yields.

Auction-rate securities are in fact complex financial instruments, prone to

illiquidity and to credit market crises and the risk of being drastically marked down
in value. What is troubling is that salespeople (brokers/advisors) did not
themselves understand these exotic investments, believing them to be super-safe
and as liquid as cash.

It is wise to heed this piece of advice written by Katie Benner in the April 28, 2008
issue of Fortune magazine, under the heading “The Money Trap,” in reference to
the auction-rate securities mess. “The lessons of this sad tale; Beware of buying
any Wall Street product you don’t fully understand; don’t accept a broker’s
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assurance that something is ‘as good as cash;’ and no single-investment can ever
be high-yield, liquid and safe.”

Wall Street burned thousands of investors with so-called structured products that were supposed
to provide healthy profits and limit losses. Brokers, hoping investors memories are short, are
pushing these high-fee products again with safety as the big selling point.

Structured products are distant cousins to other derivatives such as credit default swaps and
collateralized debt obligations that helped sink the world financial system last year. The
Norwegian government last year banned selling structured products to individuals, reasoning
they were too complex for people to understand the risks.

Larry Light
Wall Street Journal May 27, 2009

To conclude, we recommend that you not purchase any financial product you don’t
understand. Doing so would not only steer you away from CDOs and ARSs, but
also adjustable rate mortgages, variable life insurance products, aggressive tax
shelters, equity-indexed annuities and even convoluted credit card offers.

Step 3. Don’t Give Up On the Stock Market

Over the last ten years, the Standard & Poor’s 500 Index has produced annual
returns of a negative 2%. This marks one of the worst 10-year periods in stock
market history. The 2008 stock market collapse was the most dramatic in the past
80 years. This sorry performance in the equity markets has been labeled the lost
decade. Many investors feel so bruised, battered and bitter about stocks they have
sworn off equities completely. Having been burned in the bear markets of 2000-
2002 and then again in 2008 and first quarter of 2009, they are darkly pessimistic
about future prospects and refuse to believe in the promise of stocks.

To give up and abandon stocks now is a mistake that would seriously impact your
financial well-being and retirement security. Similar to professionals who are
charged with managing investment portfolios for pensions, foundations and
endowments, success in realizing your own long-term financial planning goals
dictates an appropriate allocation to stock ownership. Now is the time to
reposition your portfolio for the long haul.
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For investors, the long run is precisely the thing to focus on. Keep in mind the
market never goes in just one direction. If you despair today, tomorrow is often
brighter. As former Wall Street Journal personal finance columnist Jonathan
Clements reminded us, “Stocks will be a great investment over the next 30 years –
if we can just get through tomorrow.”

We find it of interest that home values have dropped some 15%, 25%, or even 50%
in some parts of the country from their peak of just a couple of years ago. Yet,
these same homeowners, unless they plan or need to put up their home for sale,
aren’t overly inclined to dwell or panic on news of this substantial markdown.

Unlike with a stock or mutual fund, real estate as an asset does not have its value
listed in the financial section of the newspaper or on the internet, nor does it appear
on an account statement that arrives each month. Investors routinely let the daily
drama of the stock market influence their actions. It is quick and easy to sell out of
a losing stock or mutual fund or even to bail out of an entire stock portfolio.

Smart homeowners rationalize that current housing prices are not relevant, since
they don’t intend to sell at this time and are confident values will rise again over
the coming years. Stock investors would be wise to be of the same mindset and
continue to take a patient, long-term approach.

A commonly held, negative belief in this severe bear market is that stocks will
never come back. In this extremely pessimistic view, think of the stock market as
an egg that has splattered to the floor. Permanently grounded, it will never
recover. But, history has proven the stock market better resembles a tennis ball.
Once dropped, it bounces back and rebounds to new heights. If you flee the stock
market for the safety of currently low-yielding (.05% - 3.0%) money funds and
CDs, it will take forever to rebuild your investment nest egg.

It is important to remember that the stock market conforms to the classic risk-
reward tradeoff. Respected newsletter writer Mark Hulbert, writing in The New
York Times on January 24, 2009, puts this tumultuous market into perspective.
“Periods like the last quarter [fourth of 2008] are an inherent part of equity
investing. Painful as they are, their very existence helps explain why stocks, in the
long run, have outperformed safer investments. Without a risk premium, investors
wouldn’t endure stocks ups and downs.”

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Reflect on the message about the risk of stock ownership put out by James B.
Conant: “Behold the turtle. He makes progress only when he sticks his neck out.”

Professor Jeremy Siegel is a recognized authority on the stock market and author
of Stocks for the Long Run. He has been particularly active of late, speaking with
conviction his belief that stocks are still an oasis. Siegel counsels us not to lose
faith in the superior, long-term, double-digit-return capability of equities.
According to this distinguished academic, “History is definitive that once investors
have suffered this much pain, subsequent returns will be very rewarding.”

Siegel points to research by Gene Epstein published March 9, 2009 in a Baron’s

article that finds that following periods of underperformance, stocks can be
expected to perform better than average going forward. This same research also
suggests that over the next five years, stocks could average a return of 2 ½% more
than the median of all five-year periods.

Rather than look back at the dismal performance turned in by stocks over the past
decade, a period matched only by the Great Depression years ending in 1938, we
should instead look forward with an optimism fostered by historical precedent to
the next ten years. While you can’t change what’s already happened to your
15
portfolio, you can surely influence what will happen over the next five, ten or 20
years. To their detriment, too many investors are shortsighted in times of
challenge, failing to focus on their long-term financial objectives. It helps to think
of investing as more of a marathon than a sprint.

Backed by research data, Fran Kinniry, head of the investment strategy group at
Vanguard, suggests investors in stocks should be rewarded over the next ten years
for accepting the risk inherent in equities by realizing close to a double-digit
(9.5%) annual return.

John Bogle is someone never hesitant to provide straight talk on investing. So, it is
encouraging that he now believes stocks could well return 10% a year for the next
decade. “I don’t think that’s a pipe dream,” he has said as a point of emphasis. As
Fortune points out, this is from a man who until just recently was calling for
subpar, mid-single-digit returns going forward.

Christopher Davis is a rising star in the investment management field and someone
whose perspective and insights bear listening to. Davis rates it a “near certainty,”
that stock performance over the next decade stands to be appreciably better than
the disappointing returns of the previous ten years. “If you look at every ten-year
period (when the S&P 500 was negative), and then look at the next ten years, the
average annualized return was about 13%, and the worst was 7%. The idea that
equities will underperform risk-free alternatives is a very low probability. People
are paying an irrational premium for the perception of safety.”

“Even during the Great Depression, the best investment results

were earned, not by the people who fled stocks for the safety of
bonds and cash, but by those who stepped up and bought stocks
and kept buying on the way down.”
…Jason Zweig
Wall Street Journal October 7, 2008

This quote from Edward Hall, Director of Investment Research at Managers

Investment Group, nails it: “The market has always proven its resiliency,
compensating the steadfast long-term investor regardless of the crisis du jour, no
matter the magnitude of the issues and problems.”

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Step 4. Retool Your Financial Plan

After the shock of a natural disaster, affected homeowners need to assess the
damage, pick up the pieces, and make plans to repair and rebuild and generally get
on with their lives. The first step in any recovery plan is to identify the current
status or condition. From a financial planning standpoint, this involves putting
together a net worth statement. Also referred to as a statement of financial
condition, it can be thought of as a snapshot of your financial condition as of a
given date.
The net worth figure is critical in a personal financial analysis because it provides a
quick and clear read on your overall financial health. Personal net worths have
declined substantially over the past 18 months for anybody with a stake in the
stock market and or ownership of a home. Retirement nest eggs and estate values
are alarmingly lower.
The other essential financial document is the income statement. Unlike the net
worth statement that measures your worth as of a given day, an income statement
charts cash inflows and outflows over a calendar year. Displaced workers are
especially affected by the change in cash inflows. It is said that if your neighbor is
out of a job, there is a recession going on. If you or your spouse is unemployed,
there is a depression.
On top of poorer financial conditions, many individuals in this tough economy
have faced a sharp drop in income. One of the tough facts of life this economy has
exposed are those folks who were living beyond their means, meaning the outgo
(spending) exceeded income. No one can hope to enjoy real financial
independence unless spending is kept well within the limits of income.
Ed McMahon made a fortune as Johnny Carson’s sidekick on The Tonight Show,
and a highly paid pitch man on commercials. So it was surprising to hear about
foreclosure proceedings on his multimillion-dollar Beverly Hills home. McMahon,
talking on CNN’s Larry King Live, told how he got himself in such a pinch. “If
you spend more money than you make, you know what happens. You know, a
couple of divorces thrown in, a few things like that. And, you know, things
happen.”

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In order to recover and prosper in the years ahead, we recommend you follow a
simple four-pronged approach to improving your financial condition as measured
by increased net worth. Basically, this involves rigorous saving, careful spending,
working diligently to lower debt, and intelligently investing these dollars in an
appreciating asset, such as diversified mutual funds or real estate.
Benjamin Franklin was an early advocate of the virtues of thrift, saving and
avoidance of debt. Writing in Poor Richard’s Almanac, this brilliant inventor,
scientist, printer and statesman gave us a wealth of common-sense admonishments
that are relevant today. “If you would be wealthy, think of saving as well as
getting.”
An essential part of a recovery security plan is to save and save aggressively.
Accumulating savings is a prudent necessity if you are to reach your financial
goals, and its importance cannot be overemphasized in planning for retirement
security, funding an education, or building an estate. Economically speaking,
saving is income that is not spent. The key to accomplishing a savings goal is to
exercise careful spending and tight budgeting.

“We all make mistakes in life, but saving money is not one of
them.”
…Thomas A. Edison

The absolute best step you can take today to improve tomorrow is to boost your
rate of savings. Instead of saving 10% of your income, strive through more careful
spending to save an additional 5% — a 50% increase. This sum can then be
converted into an appreciating asset at today’s attractive prices for stocks, bonds,
and real estate in your drive to rebuild your net worth. It helps to think that you are
planting seeds with the fund shares you are purchasing. These seeds will grow and
yield abundant fruit if you take a patient buy-and-hold approach.
Speaking of being patient and allowing your investments to grow, prominent
economist and college textbook author Paul Samuelson has this solid advice. “You
shouldn’t spend much time on your investments. That will just tempt you to pull up
the plants and see how the roots are doing and that’s very bad for the roots.”
Planning for retirement is the equivalent of saving for retirement. If you are
serious about resurrecting your dream of a financially secure retirement, save like
crazy. A great vehicle to get you to this goal is to fully maximize your retirement
18
savings plan, such as a 401(k). For those over the age of 50, utilize the aptly
named “catch-up” provision to put more away in tax sheltered retirement plans.
Another good idea in your pre-retirement accumulation period is to budget to live
on 75% of your current net income. Thus the remaining 25% can be funneled into
a rigorous saving program. You also gain the benefit of learning to live
comfortably on just three quarters of your income. After all, as old-time comedian
Art Buck told us, “If you’re only making ends meet, you’re running in circles.”
What is called for is a sense of urgency and a change of mindset from a
consumption model to one of diligent savings. As a nation, we would be wise to
mirror the personal finance characteristics of the greatest generation, those who
were children of the Great Depression and came of age living, serving and
sacrificing through World War II. This group routinely delayed short-term
gratification for long-term financial security. They scrimped and saved and learned
how to do without. Early in their lives they put away some rainy day money and
developed the habit of regularly squirreling away something for the long winter of
retirement. Sadly, as the World War II and greatest generation passes on, this
institutional memory is rapidly vanishing.
Our 83-year-old client Herb has practiced thrift and frugality and lived on an
austerity budget his entire life. When queried as to what advice he would have to
help the younger set control its spending, he quickly replied, “Stay out of
Starbucks.”
Whenever possible, practice PYF (pay yourself first) and DCA (dollar cost
averaging) by dialing in your saving program on automatic pilot.
Paying down debt solidifies your balance sheet and improves your financial
condition. Debt is a cost and obligation as well as a financial burden. Be loath to
take on additional debt. If you finance your mortgage, consider a shorter 15-year
term and be cautious about assuming home equity, car or student loan debt.
Paying off expensive 15%-24% credit card debt is a no-brainer and the surest
return on investment you can realize.
Every dollar put toward reducing debt, be it a mortgage, home equity loan, car note
or credit card balance increases your net worth by a dollar. Excessive debt and
leverage has put financial institutions, homeowners, corporations, and individuals
in financial distress, leading to bank failures, foreclosures and bankruptcy. Federal
regulators have recently “stress tested” major banks to determine their capacity to
operate soundly under economic uncertainties. As a result, certain banks were
ordered to shore up and strengthen their balance sheets.
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As individuals facing the same economic uncertainty, it is a smart move to
improve our own financial condition. Basically, this involves increasing the ratio
of assets (what we own) to liabilities/debts (what we owe). This is a simple matter
of decreasing debt levels and aggressively saving and intelligently investing.

Step 5. Fear & Greed and Irrational Investing

Legendary investor and Warren Buffett’s mentor, the late Benjamin Graham,
rightfully observed, “Individuals who cannot master their emotions are ill-suited to
profit from the investment process.”

Two primary emotions drive investing: fear and greed. Clearly fear has been in
the driver’s seat during this current deep and extended bear market. The human
instinct, after all, is to get out of harm’s way. When the market is falling as it has,
the fear is it will continue to drop and wipe out your accumulated investment
cache. Consequently, there is a strong urge, sometimes even panic, to sell in order
to protect and preserve what is left.

On the other hand, during bull market runs such as the tech-fueled boom of the late
nineties, or the five year climb to an all-time record-high for the Dow in 2007,
foolish investors turn greedy. They throw money at the market and barrel on to
what they see as the train to sure riches and wealth. “There’s nothing like a bull
market to make everyone think they’re a genius,” says professor of economics
Robert Strauss.

Benjamin Graham is the author of The Intelligent Investor. In this classic he left us
with a wealth of time-tested, enduring investment principles including this
observation, “The investor’s chief problem – and even his worst enemy – is likely
to be himself.”

You might notice Graham’s focus on the male gender. Researchers found that
there is, in fact, a gender difference in investment bias and that testosterone is at
least partially responsible for men’s wild investment impulses. Men tend to be
overconfident in their investing abilities, which causes them to trade too often,
chase performance, and try to time the market. Women are more patient and
disciplined investors, more likely to learn from their mistakes, and more open to
seeking financial advice.
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The most familiar and simple mantra of intelligent investing is to buy low and sell
high. Yet, investors by their actions routinely choose to ignore this most basic
piece of advice. Instead, we do precisely the opposite, buying at the top (high) and
selling at the bottom (low). The thundering herd tends to head for the exits during
downdrafts and rush to get in after periods of rising markets. This buy low, sell
high tug-of-war plays out in every market cycle.

It helps to remember Warren Buffett’s sage observation on fear and greed, “Be
fearful when others are greedy, and be greedy when others are fearful.”

Frank J. Williams, a renowned early twentieth-century investor, had much the

same admonishment, saying, “The market is most dangerous when it looks best; it
is most inviting when it looks worst.” Pessimists (bears) view the glass as half
empty while optimists (bulls) see the same glass as half full.

The time to recoup losses from a deep bear market is significantly longer for
anyone who has pulled out of the market and then was unable or unwilling to get
back in soon enough to benefit from a quick rebound. Shelby Cullom Davis, a
renowned investor and grandfather of Christopher Davis put it best: “You make
most of your money in a bear market. You just don’t realize it at the time.”

Stocks tend to rise in value about 70% of the time and offer a superior long-term
average return potential of some 10%. In order to enjoy this advantage requires an
intelligent approach to investing. Investors need to possess the ability to withstand
and ride out the inevitable storms that occasionally batter the market. Volatility
signals fear and fear leads to bad decisions. This tests the mettle of even the most
seasoned investors.

Master investor Ralph Wanger says the only defense against any sort of market
jitters is to think like a long-term investor. “If you stare the monster down with
focus, patience, and a calm eye, you will be rewarded in the end.”

Attempting to time the market by jumping in and buying before the market heads
upward – and getting out by selling before a downturn – proves irresistible to far
too many misguided investors. This has proven to be a futile exercise and a risky
proposition at best. The patient buy-and-hold and ultra-successful investor Buffett
constantly warns us not to be foolish and think we can outsmart the market by

21
timing. As he famously quipped in a CNBC interview, “The market timers’ ‘Hall
of Fame’ is an empty room.”

Investors are prone to give up, throw in the towel and sell low during deep bear
markets such as we have been experiencing. The cruel irony of investing is that
the worse the stock market performs, the higher its future returns will be. It is
simple mathematics that is proven true time and again, but somehow human nature
urges us to bail out before things get better. As the saying goes, the darkest hour is
just before the dawn. The market can turn when you least expect it.

David Dreman, veteran fund manager, Forbes columnist, and author of the new
book, Contrarian Investment Strategies: The Next Generation, believes it’s time to
buy. “If you don’t, you’ll miss one of the great buying opportunities of your life.”

In the April issue of his column “The Contrarian,” Dreman makes the case that
with stock prices at their lowest levels in decades and the likelihood looming of
higher inflation, a diversified portfolio of stocks will do well over time. “Stocks
have done well in preserving and even increasing purchasing power during
inflationary times. Even if stocks drop another 15% to 20%, they are likely to at
least double from their current levels over the next five years. Trying to catch the
market bottom is a loser’s game.”

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According to research put out by T. Rowe Price, some of the best investment
opportunities occur in the troughs of bear markets. Fueled by the Arab Oil
Embargo, stocks bottomed in September of 1974. One year later, stocks had
rebounded 32%. In the bear market ending in July of 1982, stocks recovered a
robust 51.8% in the following 12 months. When the stock market crashed in
October of 1987, it managed to gain back 18.8% by November of 1988. More
recently, the market hit bottom in a brutal three-year bear market in September of
2002. Yet, one year later, it had appreciated a solid 22.2%

John Rogers, founder and chief investment officer at mutual fund firm Ariel
Investments, and a close personal friend of President Obama, has turned positively
bullish and finds opportunity knocking for the stock market in 2009 and going
forward. “When the stock market goes from confidence to pessimism, it tends to
overshoot. Maximum fear breeds maximum opportunity if you are rational and
long-term in your outlook.”

Step 6. Refocusing Your Investment Plan

Ralph Wanger contends the most important survival skill for stock investors is to
stay level-headed. As a result, investors need to “have a strategy, a way of looking
at the world of stocks.” Unfortunately, most investors do not and their portfolios
end up as a “haphazard collection of stories,” all because they have no plan or
discipline, chasing whatever is the latest fad, and following the advice of some
guru, buying at the top and fleeing in panic at the bottom.

Make no mistake about it, investing is a tough, challenging pursuit, made more
frustrating and ineffective if not pursued with basic investment sense. Stock
ownership should be a patient, eyes-open, long-term proposition. Patience has
been sorely tested in this nosedive, but it will prove yet to be the best response to
the risk of volatility.

In the seemingly bewildering and complex world of investment management, the

consensus solution lies in the surprisingly simple concept of asset allocation. The
roots of asset allocation lie in Modern Portfolio Theory, built on a solid foundation
of Nobel prize-winning economic analysis.

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Modern Portfolio Theory has convincingly demonstrated the asset mix of a given
portfolio (percent allocated to stocks, bonds and money market cash) is the primary
determinant of investment return. In fact, studies have shown that more than 90%
of investment performance is a direct function of how one allocates assets. The
essence of successful investing is simply to seek to maximize (pushing up) return
on one hand, while minimizing (pushing down) risk (volatility) on the other. By
blending asset classes in a proper allocation, higher returns are possible, along with
some management of risk.

Modern Portfolio Theory uses statistics to demonstrate that asset classes behave
differently. In layman’s terms, bonds are likely to be zigging while stocks are
zagging. Research shows that you can actually achieve a lower overall risk and
higher return potential by adding a usually riskier asset class, such as international
or small cap stocks to your portfolio.

As a result of the stock market meltdown of 2008, there has emerged from the
shadows a loud and boisterous minority who proclaim that asset allocation, like
diversification and buy and hold, is a failed strategy. They claim because it didn’t
work in this crisis, it should now be relegated to the trash heap.

In its place, they put forward a variety of little understood, complex, market-timing
schemes. This is an unproven experiment that places you and your nest egg in
jeopardy. In all probability, this reckless course of action will prove costly and
ineffective. It is better to stick with the tried and true.

In a recent column of “The Patient Investor” Forbes columnist John Rogers of

Ariel Investments had this to say,

I am beginning to hear investors say that the best way to beat this
volatile market is by trading —anxiously moving in and out of
securities as the market ebbs and flows. In my view there is no surer
path to the poorhouse. Long term investment success is not about
making little decisions. It’s the big decisions that matter.

The past 18 months have had the effect of the proverbial 100 year flood on
investment portfolios. While it is true that asset allocation did not protect
portfolios from the deluge this past year, it was far more of an anomaly than the
norm.

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How you mix your assets (asset allocation) is the big decision referred to by
Rogers. In this context, big means how many cents of your investment dollar
should be placed in potentially higher return, but more risky equities (stocks).

Most experts continue to come out firmly for asset allocation as an effective long-
term approach to investing. If we accept that the weighting of stocks balanced
with more stable bonds and money markets is the key decision, then asset
allocation becomes the starting point for designing a personal investment policy.

Peter L. Bernstein is the acclaimed author of the investment tome Against The
Gods. In his considered opinion, the ideal allocation is 60% stocks mixed with
40% bonds/cash, generally referred to as 60/40. To Bernstein, this particular mix
represents the center of gravity and is “a good compromise for the long-run
average balance between maximizing return and minimizing risk.”

At McCarthy Grittinger Weil Financial Group, we typically start off the investment
plan design process by centering on this same 60/40 overall allocation. From
there, we customize according to our clients’ personal circumstances, such as age,
health, investment expectations, income requirements, and risk tolerance (stomach
for losses). Of note, if you look at the allocation of institutional portfolios, such as
pensions or endowments, that are held to a strict fiduciary standard, it is likely to
be in the general neighborhood of 60/40, for the very reasons Bernstein suggests.
The range of our clients’ weightings in stocks tends to go from 80% on the top to
20% on the low end. For the most part, we do not recommend or manage all-stock
or no-stock portfolios.

Bonds are a necessary portfolio ingredient to dampen the inherent volatility of

stocks. A bond component acts like a shock absorber, adding stability and leveling
the ups and downs in the market. Stability in turn helps investors with nervous
stomachs hang on when the going gets rough.

We advise you to stick with diversified bond mutual funds and avoid completely
individual corporate or municipal bonds. There is the real risk of default,
bankruptcy or financial distress resulting in a severe markdown when owning
individual non-government bonds. Just ask the bondholders of once sterling credit
GM, now in bankruptcy. Additionally, stay with low-expense, no-load, plain
vanilla bond funds. Bond funds that tried to push the envelope and enhance returns
fared terribly in the 2008 credit crisis.

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For our retired clients coping with this volatile bear market, we counsel that any
money projected for expenses over the next five years should not be invested in the
stock market.

Take the example of 78-year-old John, whose health has deteriorated to the point
where he needs expensive assisted living. Assume the cost for this level of care
will reach $100,000 a year. Over five years this amounts to $500,000 in expenses.
At a minimum, this portion of his nest egg should be invested in money market
cash and more stable bond investments. Stock fund investors should be concerned
about depressed fund prices only for that share of their wealth they plan to use
soon. Historically, this five-year period of time offers stocks adequate time to
recover and rebound.

The insightful Bernstein chooses to emphasize the important psychological or

behavioral aspect of investing and investors. “In my real-world experience,
investors with smaller allocations to stocks and some anchors (bonds and cash) to
windward have been the ones most likely to be the winners over the long haul.”

It is instructive to realize that a broadly diversified portfolio with 60% in stocks,

including 15% in international and 40% anchored in bonds, was able to withstand
the brutal three-year bear market of 2000-2002 without losing value. Yet, the 2008
bear market was so extreme (the 100-year flood phenomenon), this same portfolio
was swamped with a 24% loss for the year.

Investors with any exposure to stocks in this extreme bear market suffered
mightily. A portfolio with 100% in stocks was marked down a full 50% in round
numbers from top to bottom, while a balanced 60/40 mix slid a substantial 30%.
Even a conservative portfolio with just 20% in the market saw a double-digit 10%
decline. On a million dollar portfolio, this relatively modest decline was a
significant $100,000 loss.

Assuming a $100,000 portfolio value in late 2007, a 60/40 mix would have had
$60,000 allocated in equities and $40,000 in the bond and cash component. From
top to bottom, stock portfolios lost about 50% of their value in this perfect storm.
On the low point of March 9, 2009, the original $60,000 in stock value would have
been cut in half and be worth just $30,000. Assuming the $40,000 in bonds did not
change in value, a reasonable expectation, the total portfolio had been devalued to
$70,000, a painful 30%, $30,000 loss.

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The asset allocation at the low point was then $30,000/$70,000, or 43% in stocks
and $40,000/$70,000, or 57% in bonds, for a reconfigured mix of 43/57. At this
point, investors with the courage and discipline to buy low and rebalance would
purchase $12,000 of stocks and sell off $12,000 of bonds to bring the new depleted
portfolio of $70,000 back to the targeted 60/40 asset allocation plan.
$42,000/$70,000 (60%) stocks
$28,000/$70,000 (40%) bonds
Total (100%)

In real life there exists natural resistance to this common-sense buy low and sell
high fix, because it means adding money to what is perceived as risky stocks that
have been hemorrhaging losses, and taking away from bonds that have at least
been holding their own.

The focus needs to be on looking forward, not back. A shrunken $70,000

investment portfolio will require approximately seven years, to 2016, to recover to
$100,000, if the investments average a pedestrian 5% average annual return. If
instead, you could work the portfolio a little harder, and manage closer to a 8%
average annual return, the $100,000 recovery level could be reached sooner,
perhaps in four plus years, or late in 2013.

Looking out over the long term to the year 2020, a portfolio that now stands at
$70,000, is conservatively invested and averages a 5% annual return, is estimated
to grow to about $120,000. Investing instead with a reasonable risk and a balanced
60/40 portfolio, it could conceivably average 8%. The $70,000 nest egg could
grow to a projected $163,000 in 2020. There is a substantial $43,000 potential
difference over time.

Step 7. Avoid The Big Mistake

To succeed and survive financially, it is vital to avoid the big mistakes that can
jeopardize your long-term financial security and independence. Academic
research has found individuals tend to make, on average, two to three whopper
financial mistakes over the course of their investing years.

Chief among these mistakes is vainly trying to hit a home run by placing all your
bets on a single stock, concentrating on a small number of hot names, or an
27
industry sector. We do know that home run hitters are also likely to strike out.
You don’t need the long ball to win the game.

Not diversifying when investing amounts to speculating. This is an unacceptable

form of gambling. The best you can do is to always adhere to the most pronounced
risk-reduction technique and diversify, diversify, diversify.

John Bogle staunchly reinforces diversification as a proven time-tested strategy.

“For all the inevitable density in the fog of investing, there is much that we do
know. We know that specific security risk can be eliminated by diversification; so
that only market risk remains (and that risk seems quite large).”

Make no mistake about it, broad-based diversification across investment sizes

(large and small capitalizations) and styles (value and growth), geographies (U.S.
domestic, international east and west) and asset classes (stocks, bonds, cash)
remains the very best long-term investment strategy. Effective diversification can
be achieved and risk mitigated by assembling a portfolio of mutual funds that
cover the whole investment spectrum.

The market crash of 2008 indiscriminately took down every asset class and
industry grouping with the sole exception of super-safe, and now paltry-yielding,
treasury securities. Since no one can say what the future holds for the markets,
your best bet, in fact the only prudent plan, is to cover all the bases with broad-
based diversification. As an investment committee, we hedge our bets by making a
responsible allocation to a commodity-type fund and REITs (real estate investment
trusts) where appropriate. On the fixed income side, we would consider and utilize
investment-grade corporate bond funds, tax-exempt municipal bond funds,
GNMAs (government backed mortgages) along with high-yield bonds and TIPS
(Treasury inflation protected securities) funds when suitable. We believe in
keeping the safe portion of a portfolio truly safe and fill this space using insured
CDs, direct U.S. treasury obligations and money market funds.

One of the unfortunate fallouts from the stock market crash of 2008 will come
from those misguided and ill-informed voices who reason that since diversification
obviously didn’t work to protect investors this time from massive losses, it is a
discredited strategy and shouldn’t be relied on going forward. This would be a
terrible blunder. Abandoning diversification could seriously sabotage and reduce
the likelihood of restoring battered investment portfolios and be back on track to
achieving financial independence and security.
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Let there be no doubt, diversification is a critical and indispensible part of the
investment process precisely because it reduces risk. Just because a house was
badly damaged in a category five hurricane, doesn’t mean that you don’t rebuild to
code and put on storm shutters. Put another way, because some football players
get seriously hurt is a stupid reason to discard helmets or other protective gear.

A valuable lesson to take from the events of the 2008 financial debacle is that no
market strategist, industry guru or vaunted economist possesses a crystal ball. A
lot of very smart people lost a lot of money. There always is a small group who
emerge from the shadows claiming to have foreseen how the economy and markets
would play out. Even if they made the right call, it was probably luck, and they
haven’t earned the credibility to offer guidance on the future.

Understandably, human nature being what it is, shaken investors are hungry to hear
near-term outlooks for the market. They also yearn to learn when the economy
will finally turn around and grow again.

The fact is, predictions on the direction of the stock market and general economy,
issued with much confidence by industry pundits and economists, in retrospect
have been consistently off the mark. The lesson to be learned is the futility of
short-term forecasts. None of us can see around corners, and no one can say with
any assurance what will happen next. This succinct quote from Niles Bohr that
appeared in Forbes says it well: “It is difficult to predict, especially the future.”

It is telling that the grossly overcompensated stock analysts and investment

strategists employed at Citigroup, Merrill Lynch and Bear Stearns failed miserably
in foreseeing the nose-dive in the stocks of their own companies. Far from it, they
were actually quite bullish (positive/buy ratings) on the prospects for their own
company stocks, even as each one started to crater and went on to implode.

Think about the record. For the most part, the so-called experts failed to warn us
the bubble was about to pop on tech stocks in early 2000, the housing values in
2007, and commodity prices and financial services stocks in 2008.

One of the most popular cable TV shows on the stock market today is Mad Money,
hosted by former hedge fund manager Jim Cramer. Cramer rants and raves on this
regrettably successful show, accompanied by campy sound effects. Among his
dozens of terrible calls, this so-called expert screamed at his viewers to buy
29
Wachovia stock on September 15, 2008, touting its CEO Bob Steel as: “…the one
guy I trust to turn this bank around, which is why I’ve told you on weakness to buy
Wachovia.” Just two weeks later, Wachovia came close to collapse and was forced
into hasty takeover by Wells Fargo. Anyone that followed Cramer’s confident
recommendation to buy Wachovia stock that day saw share values lose half their
value by year end.

In mid-summer 2008 gasoline prices surged nationally to over $4 a gallon. There

was consensus it was just a matter of time before the price at the pump would hit
$5. Instead, starting last fall, gas prices started dropping sharply and went below $2
a gallon by the end of the year. Oilman T. Boone Pickens confidently predicted on
June 20, 2008: “I think you’ll see $150 a barrel [of oil] by the end of the year.” At
that time oil had risen to $135 a barrel. By Christmas of 2008, the price had
dropped like a rock to around $40 a barrel. Virtually no one saw this beneficial
economic surprise coming.

While it seems counter-intuitive, the prospects for the economy and the stock
market do not always march in tandem. The esteemed economist, the late Milton
Friedman, would regularly remind us, “The economy and the stock market are two
separate things.”

Warren Buffett is considered by many to be the greatest investor of all time. It

seems only wise, but comforting to listen and learn from the 78-year-old
investment legend. In his widely followed Berkshire Hathaway investment
holding company annual report to shareholders, the Oracle of Omaha states that in
the 44-year span of this stock, 2008 was the worst year both for his performance
and that of the S&P 500 Index.

In his latest letter, Buffett offers a realistic assessment of the economic woes we
face. He soberly predicts, “The economy will be in shambles throughout 2009—
and, for that matter, probably well beyond.” Echoing Milton Friedman, Buffett has
repeatedly said that even he is right on the economy, it bears no relation to whether
the stock market will rise or fall. He points out that neither he nor long-time
partner Charlie Munger can predict “winning and losing years in advance.”

Despite his dour economic outlook, Buffett is actively buying into this rocky
market, confident it will turn around, just not knowing when. “I can’t predict the
short-term movements of the stock market. What is likely, however, is that the

30
market will move higher, perhaps substantially so, well before either sentiment or
the economy turns up.”

Buffett is far from prescient, and he readily admits to making his share of
investment blunders. He made a major investment in GE October 2008, only to
see his stake lose half its value in early 2009. He has suggested he does not view
this investment as a mistake. Rather, as a patient value investor, he was just early.
Buffett has said after he makes an investment he would be unconcerned if the
market for that stock closed for ten years. Contrast the long-term outlook of this
successful investor to that of frenetic day traders.

John Lowenstein’s best-selling book, When Genius Failed, recounts the dark side
of the hedge fund industry. It is a chilling tale of the spectacular rise and fall of
Long-Term Capital Management (LTCM). LTCM boasted two Nobel laureates in
economics among its brainy partners; hence, the book title’s reference to genius.
For a couple of years, this high-octane hedge fund posted tremendous returns. It
did so by employing a black box computer model that spewed high-risk, leveraged
strategies. Its phenomenal success attracted billions from investors eager to share
in this seemingly sure thing.

This massive fund failed spectacularly, losing 92% in value between October 1997
and September 1998. In fact, in a precursor to the emergency intervention in the
markets in 2008, The Federal Reserve Bank of New York hastily stepped in and
arranged a massive bailout by a consortium of large banks. Federal regulators
then, as last fall, were very concerned about the shock to the global financial
system that could result from a failure of this magnitude. Investors and regulators
should have learned from the debacle of LTCM recounted in the book.
Unfortunately, despite a string of blow-ups and dozens of fraud cases, a myth
continues to shroud hedge funds, making them alluring to certain investors who
believe they hold the secrets to rich rewards. These unregulated and hugely
expensive funds, like LTCM, were supposed to be the holy grail, and make money
in both up and down markets. This promise was not kept. The risk/reward tradeoff
is fundamental to investing. Failure to follow this most basic investment premise
exposes your portfolio to peril.

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When considering investing in hedge funds or any alternative to mutual funds with
a certain cachet, keep in mind a favorite John Bogle maxim: Caveat Emptor, buyer
beware.

Step 8. Look Up And Out To The Year 2020

Now that the economic forest fire that at times looked like it might engulf us and
radically alter our financial lives has mercifully burned out, it is high time to step
out and renew the forward looking planning process. Rather than look back at the
past 10 years and dwell on the damage done to portfolios, nest eggs, trusts and
estates, it is psychologically and financially healthy to look out to the next 10 years
and the year 2020.

Everyone is familiar with what is meant by 20/20 vision for eyesight. Borrowing
from this theme, at McCarthy Grittinger Weil Financial Group we suggest you
look forward to the next decade with what we are calling a VISION 2020 financial
life plan. Time really does seem to fly. How else to explain how quickly time has
flown since the year 2000 and the millennium? Do we really think the year 2020
will arrive with any less speed?

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At our financial planning and investment advisory firm, we have adopted the
emerging industry movement emphasizing life planning. Life planning is more
holistic in scope than pure “crunching the numbers” financial planning and much
more encompassing than a narrow focus on investing. In practical terms, life
planning balances the management of one’s wealth with the hopes, dreams and
values that go into making a happy and productive life.
Life planning is the qualitative (soft) side of planning, as contrasted with the
quantitative (hard) side. It is the heart of the planning process and overlaps the
investment, tax, estate, and retirement planning areas.

From our perspective as advisors, marrying life goals with financial and
investment planning pays off in a richer and more rewarding life. There is
transformative power in the financial life planning process that – along with the
richness of family, friends and good health – makes life worth living.
Procrastination and inertia are two of the biggest obstacles to success, both in life
and in finances. According to Steven Covey, author of the perennial bestseller,
The Seven Habits of Highly Effective People, the number one habit is being
proactive.

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Covey goes on to describe definiteness of purpose, taking initiative, and making
things happen as other valuable habits in the pursuit of success.
Individuals by nature are reactive rather than proactive, especially when it comes
to personal financial planning. Many express frustration when discussing their
personal finances, often describing themselves as feeling lost, on a treadmill,
spinning their wheels, or slipping backward. A good road map (financial life plan)
would assist these procrastinators greatly in reaching their hoped-for destination or
goal.
“If you don’t know where you are going, every road will get you
nowhere.”
....Henry Kissinger

Financial planning often revolves around individuals dealing with major life events
and change, be it the happy events of marriage, the birth of a child, and traditional
retirement, or the sad challenges such as the loss of a job or a loved one, a divorce,
or declining health. In addition, planning is often multigenerational in scope.

One recent industry study showed that over the course of a lifetime, approximately
55 potential triggering events may need addressing from a financial standpoint.
Each event has an impact on net worth, making some change to either the asset or
liability column and/or the income statement.

In the aftermath of this epic financial, economic and market storm we have
experienced, Your Anxiety Removal Team at McCarthy Grittinger Weil
Financial Group has instituted a discovery process for our clients and interested
potential clients. In this proactive meeting, we evaluate where you are, where you
want to go, and from there chart a course of action and the best route to reach that
desired destination.

This discovery process involves analyzing the financial statements, reevaluating

the investment plan, running the numbers and modeling the future. We continue
by setting priorities, identifying obstacles, rehabilitating the portfolio, and then
proceed to put the plan in motion.

Planning deals with the uncertainty inherent in the future. The act of planning or
strategizing the future provides us with a comfortable sense that we are exerting
some control over that uncertainty. Strategic planning is a necessity in achieving
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the desired outcome of any worthwhile pursuit. When done effectively, planning
is an important tool to increase the probability of achieving one’s financial
objectives.

“In life as in chess forethought wins.”

…Charles Buxton

What is called for is a bias toward action. James Stowers is founder and chairman
of mutual fund firm American Century. His philosophy for success is to just get
started. According to Stowers, “The best time to plant an oak was twenty years
ago. The second best time is now.”

Think VISION 2020 and start to focus actively on life issues and financial
planning for the climb to the years and the decade to come.

“Live your life each day as you would climb a mountain. Climb
slowly, steadily, enjoying each passing moment; and the view
from the summit will serve as a fitting climax for the journey.”

…Harold V. Melchert

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On The Way Back – A Summary

Look at this shock to the financial world similar to when someone suffers a serious
heart attack; survival offers an opportunity to reevaluate the situation, hopefully
learn some valuable lessons from the experience, and make the necessary changes
to lifestyle that will lead to a long and healthy life.

In order to successfully recover and move forward from this monumental financial
and economic meltdown, it is wise to model one’s behavior, and take direction
from successful and seasoned investors, noted academics and economists, and
great historical figures.

During these challenging times for our nation, economy and the financial markets,
it is comforting to look back to Abraham Lincoln for hope and inspiration. As
America celebrates 200 years since Lincoln’s birth, it is only fitting that we turn to
arguably our greatest president to lift us up.

In Team of Rivals, Lincoln biographer Doris Goodwin eloquently charts the genius,
travails, and successes of our 16th president. It is safe to say no American political
leader faced darker, bleaker times than did Lincoln. During the many dark hours
of the Civil War, Goodwin describes how Lincoln, acutely aware of his own
emotional needs, called on his reservoir of hope to sustain him. She chose to quote
from the work of Daniel Goleman in his book, Emotional Intelligence, to describe
Lincoln’s psychological approach: “Having hope means that one will not give in to
overwhelming anxiety, a defeatist attitude, or depression in the face of difficult
challenges or setbacks. Hope is more than the sunny view that everything will turn
out all right; it is believing you have the will and way to accomplish your goals.”

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There are plenty of clouds on the investment horizon to shake one’s confidence,
including the ever-present possibilities of higher interest rates, rising inflation,
further weakening of the economy, persistent unemployment, mounting deficits,
tax increases, or a drop in the value of the dollar. Reading the headlines about the
nuclear ambitions of rogue regimes North Korea and Iran and radical extremists
closing in on Pakistan’s arsenal is downright scary and enough to keep us up at
night. Nonetheless, to be a successful long-term investor takes courage as well as
a confident view of the future.

T. Rowe Price prepared a chart to illustrate that the stock market has witnessed
disastrous events through the years, both at home and abroad. Yet patient investors
with a long-term perspective, capable of overcoming short-term anxieties, have
been able to prosper in the market.

We tend to forget the collective trauma that befell America in the days, weeks and
months following the horror of September 11, 2001. As a nation, we were braced
for another terrorist blow, the stock market actually closed down for two weeks,
airplanes were grounded, and tremendous uncertainty hung over the prospects for
the economy. Yet, we did rise triumphant from the ashes, and the economy and the
markets recovered in remarkable fashion to new highs.

In the spirit of Lincoln, there is this hopeful message from his famed biographer,
Carl Sandburg: “Always the path of American destiny has been into the unknown;
always there arose enough reserves of strength, balances of sanity, and portions of
wisdom to carry the nation through a fresh start with ever-renewing vitality.”

Warren Buffett seconds this optimistic viewpoint, telling his shareholders: “Our
country has faced worse travails in the past, and without fail, we’ve overcome
them. America’s best days lie ahead.”

Harley Schwadron is a veteran Michigan-based cartoonist who possesses the talent

to capture, in a single frame, the essence of common-sense investing. In our
favorite cartoon, Harley draws a pinstriped, bespectacled, briefcase-toting middle
aged investor, looking up to the all-knowing guru sitting cross legged on the
mountain top. He is asking incredulously if the eternal truth is really that simple,
basic and straightforward. “Buy low, sell high, stay diversified. That’s it?”

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Investment legend John Templeton was widely quoted saying, “I believe that
successful investing is mainly common sense.” Regarding the prudent necessity of
broad-based diversification, it was said of Templeton that he wore a belt as well as
suspenders.

Listen to what famed investor Peter Lynch has to say about market timing. “I’m
always fully invested at the market top and at the bottom. I don’t try to time the
market. When (the market) comes back, it comes back fast. So people who are out
for the bad months, are out for the good months. I personally suffer the bad
months along with the good months, and have been very happy with the results.”

When it comes to investing, John Bogle believes that investors foolishly try to
make things more complicated than is necessary. This is to our detriment and ends
up costing us plenty. To counteract this negative tendency, Bogle preaches us to
return to simplicity. “The great paradox of this remarkable age is that the more
complex the world around us becomes, the more simplicity we must seek in order
to realize our financial goals.”

Following a simple path has us sensibly setting an investment plan and asset
allocation mix and then staying on a disciplined course. Reining in emotions is the
most difficult task in managing a portfolio. A patient approach strikes many as too
38
prodding and boring, but attempting a short cut or racing down a treacherous back
road could well deter you from safely reaching your financial destination. We all
know in the race between the tortoise and the hare who is the winner in the end.

To benefit from and earn the double-digit, historical average return of stocks, it is
necessary to ignore the short-term movements of the market and focus on
prospects for the long-term. Keep in mind this admonition from Walter Elliot.
“Perseverance is not a long race; it is many short races one after another.”

It is wise to move beyond the trauma of the past 18 months and force yourself to
look out to the next decade and the year 2020. Recall that money manager and
Forbes columnist Ken Fisher had this stark observation: “Stocks are cheaper than
they’ve ever been in your adult life.” To put it into the context of investment
opportunities, he added, “That’s a simply stunning statement looking forward.”

There will be those voices who claim this extraordinary economy and stock market
environment calls for turning your back on the traditional and embracing the
revolutionary. In response, we would remind you of what Louis Rukeyser, the
most trusted financial and economic commentator of his time, was fond of saying.
“The four most dangerous words in investing are: This time it’s different.”

In the wake of the current stock market crash, expect to see a flood of newfangled
investment products, all claiming to be able to withstand a repeat of the 2008
market meltdown. Wisely, Nobel Prize winner in economics Daniel Kahneman
told a group of financial advisors that “we would all be better off if we made fewer
financial decisions.”

Following this precept, Your Anxiety Removal TeamSM at McCarthy Grittinger

Weil Financial Group will continue to use strictly mutual funds to design, construct
and implement investment portfolios. Tried-and-true, plain vanilla mutual funds
alone provide diversification, daily pricing and marketability, transparency, low
costs, regulation and a reputation for integrity.

One area where our advisory firm exerts some measure of control is on
investments costs. Costs really do matter. Any money expended on investment
costs directly reduces both current yields and overall returns. As John Bogle
reminds us, “Never forget that costs, like weeds, impede the garden’s growth.”
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Long ago, the always-perceptive Benjamin Franklin also weighed in on costs:
“Beware of small expenses; a small leak will sink a great ship.”

We are also highly conscious of taxes when managing an investment portfolio.

This is an area where by being sensitive to taxes and active tax planning we can
add real value. It is widely expected that tax rates will rise in the coming years,
and it will be even more important to be alert to ways to legitimately reduce the tax
burden. According to one of the most influential twentieth century economists,
John Maynard Keynes, “The avoidance of taxes is the only intellectual pursuit that
carries any reward.”

Root causes of much of the financial crisis include the construction of risky,
complex financial instruments and the widespread use of derivatives. There is this
to store and remember from the late John Kenneth Galbraith, at a gawky 6 feet, 8
inches tall, a giant literally and figuratively in the field of economics. “The study
of money, above all other fields in economics, is one in which complexity is used
to disguise truth or to evade truth, not to reveal it.” Galbraith’s The Great Crash
1929, originally published in 1954, is the authoritative text on that subject.
Readers have run this book up the bestseller list, anxiously searching for parallels
to today.

With the promise of economic recovery beginning to surface, we must get past
procrastination and inertia and start down the road to rebuild our portfolios and
plan for the year 2020. Look to the accomplished author of such American classics
as The Adventures of Huck Finn and the Adventures of Tom Sawyer who has sound
advice on success in reaching this goal. Mark Twain observed, “The secret of
getting ahead is getting started. The secret of getting started is breaking your
complex, overwhelming tasks into small manageable tasks, and then starting on the
first one.”

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 Restart Revitalize

Rebound Recharge

RECOVER Revive
Reinvigorate Rejuvenate
RESTORE Restart
Renew
Replenish
Reprogram
Rehabilitate
Restructure Rewind

RETOOL Refocus
Refresh Rediscover

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The Next Step

Thank you for taking the time to read Roadmap to Recovery. We sincerely hope
you found it of interest and helpful in addressing your unique circumstances.

Your Anxiety Removal TeamSM at McCarthy Grittinger Weil Financial Group

invites qualified* individuals to take this limited opportunity to schedule a no
charge, no obligation discovery meeting with one of our partners and senior
investment professionals.

This 60-90 minute confidential discussion would take place at our Honey Creek
Corporate office. The goal would be to assess your personal financial situation,
review your investment portfolio, and identify your primary financial objectives
and concerns. At the conclusion of this discovery process, we would be in position
to inform you if and how we could be of value in helping you to realize your
financial life planning goals.

Take the initiative now to move forward with confidence on the road to recovery.
We possess the tools, talent, temperament and a team approach to guide clients to
the brighter future that lies ahead. Simply contact one of our partners listed below
to schedule a convenient meeting and start down the road to rebuilding your
finances.

Phone: (414) 475-1369

John T. McCarthy CFP® JohnM@mgfin.com

Scott D. Grittinger CFP® ScottG@mgfin.com

Michael J. Weil CFP®, ChFC, CLU MikeW@mgfin.com

*McCarthy Grittinger Weil Financial Group serves individuals with investable assets of
$300,000 or more.