Stocks wrapped up their worst January on record with a final plunge on Friday.

The Dow Jones Industrial Average finished January down 8.84% on the month. Previously, the worst January for the Dow had been that of 1916, when it fell 8.64%. – WSJ Online 1/30/09

We may be halfway through winter, the days may be growing longer, but the worst recession since World War II hasn’t let up yet. Rather than fret about it, or mince words, let’s just get down to business. This month, we focus on:

• What are the most important things we can do today and for the rest of this year to protect what’s left of our assets (You may be surprised at how simple and practical this one is).
• Can Americans save in the face of the government’s stealth attack on saving?
• How to resist the pressure – that’s right pressure – to invest.
• The “$64,000 question”: Are we heading into a Depression?

But first a re-cap of 2008. We don’t know about you, but we’ve read all we can take about how bad 2008 was. We don’t want to add to that mountain of woe. But just so we don’t brush off the seriousness of it all, here are the lowlights of 2008:

Enough about 2008. Let’s move on to 2009.

Item #1: Ignore the sound bites: seek the truth

It’s never been easy to find – the truth, that is. Let’s face it, we live in a world of lies. Now that the wheels have come off the cart and the investigations have been ramped up, it seems Wall Street ran on a lot more lies for a lot longer than anyone imagined. All the phony loan applications that led to the sub-prime crisis were just the tip of the iceberg. Madoff may be the biggest swindle in memory, but now there are is a virtual parade of Ponzi schemes being uncovered. All on top of the (sadly) business as usual practices of bankers and brokers selling things they themselves wouldn’t dream of investing in personally.

If you’ve ever lied about anything, you know how tough it can be to face the truth. On the other hand, if you’ve ever faced an unpleasant truth straight on, you know what a relief it is to clear the air. You take your lumps and move on.

Unfortunately, we don’t think people in the government and on Wall Street are really looking to clear the air. So far, it looks like finger-pointing and heavy denial. Back and forth they go; when it stops and where we eventually wind up is anyone’s guess. Nationalized banks? More regulation? A new super-regulator to regulate the regulators?

Yet life goes on. 2009 is now staring us in the face. Question: what’s the first step we take to cope with a deepening recession? We suggest starting, first and foremost, with the truth. To do that, we’ll need a dose of healthy skepticism. Here’s an example.

Last October 17th, Warren Buffet wrote an Op-ed in the New York Times touting American stocks. He was buying and suggested we do the same. Buffet’s one of the greatest investors ever, so we suspect some people followed his advice.

Buffet stated an opinion. He didn’t say anything that wasn’t true. He even gave his reasons. In his words: “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful.”

Contrast this with certain investment gurus – and there are more than a few out there – saying stocks are the cheapest they’ve been in living memory – or some variation of that. Now either these folks were born after 1982, or they’re not telling the truth. In 1982, the average dividend yield of blue chip stocks was around 6%. P/E ratios were under 10. Now, on the other hand, the average dividend yield of the S&P is around 3.4%. The average P/E is around 14: cheap but not as cheap.

Whatever you do, don’t invest because stocks are the cheapestany of us has seen. It’s simply not true.

Another example:

You read and hear that you’d better be in stocks now. All sorts of statistics and charts show you that after big declines, the stock market rebounds quickly, even violently. If you’re not in, you’ll miss out on the turnaround. It can seem pretty convincing.

But we thought, just for the heck of it, we’d take a quick look at the four largest stock market declines in history and see what happened.

Looks like, except for 1907, the big drops were followed by big drops, not violent upswings. The point here is: it’s not true that after drops, big rebounds always occur.

But there’s more. Even when they do, they may not be quick and violent. And even when they are quick and violent, if it’s really the beginning of a new bull market, there’ll be plenty of time for you to get in and make money.

So relax. Invest in stocks if you want, but not because you think you’re might miss out on something. Stick to the truth. Don’t be misled. And don’t invest for the wrong reasons.

Item #2: Save

Do yourself a favor. Stop listening to all the chatter about how much our economy relies on the consumer, so you’ve got to get out there and shop. It’s not your problem that we’ve built a culture and an economy based on “consumerism.” If you haven’t saved enough for a rainy day, start now. If you’ve started saving, save more.

Real economies – the healthy kind that build real prosperity – are based upon savings that get invested wisely, not on borrowing and spending. We’ve borrowed and spent our way into what seemed like prosperity, but has now turned into the worst mess since the 1930’s. Stop the madness and get down to the basics. Get financially healthy by saving. But as you do, watch out for:

It’s really simple. They’re holding rates down around zero so that you can’t get any return on your “safe” money. (That’s the stuff you’ve got socked away in bank accounts and money markets.) It’s like they’re trying to force you to invest in riskier assets (stocks, bond, real estate, etc.).

Relax. Keep your safe money safe. (We talked about this last month.) Investment opportunities – real ones – will be out there one of these days. Stick to your guns and you’ll have the money to invest…in the right thing at the right time. Don’t let anyone push you where you don’t want to go.

One more thing: whatever you do, don’t “chase” yield. If you see something that has a high yield, understand why. Ask: how is this investment able to return 10% in a zero interest rate environment? If the answer makes sense, you may have uncovered a real opportunity. Maybe you should invest (only do it slowly, unless you’ve got money to burn). Chasing yield is a big no-no. It’s a sure way to lose money.

Item #3: Open up that brokerage or 401k statement

We hope these simple, practical suggestions help. They’re not rocket science and they won’t make you rich. But they’ll help you to avoid being poor. And they’ll help you develop the skill and discipline to weather hard times – which brings us to 2009.

We’ll avoid the temptation to make any predictions. You only need to look at our quick 2008 re-cap and remember that pretty much no one (well, there were one or two) predicted the sort of catastrophe we experienced. So let’s develop the habit of checking the facts. Ignore the noise (a/k/a the media). Stick with the truth.

What more can we say, except to ask the obvious question:

As for economists and other pundits out there, the same people that were trumpeting how great the economy was only a year ago are now crying the blues. The always sharp and insightful Caroline Baum of Bloomberg put it this way:

It may be sitting on your dresser, or in the mail pile on the kitchen counter. Wherever it is, open it up now. You’ve let it sit too long. It’s time you knew the truth (back to the “T” word again!). Face it and move on. You’ve got to face the facts first, before you can make things better.

So what do we think? The next Depression will have to wait until there’s more evidence. Example: Unemployment appears to be heading for 10%. But in the Great Depression, unemployment exceeded 25% (they stopped counting at that point). The same comparisons apply to retail sales, real estate values, business contraction, etc. We’re simply not there yet. Put us down as on “Depression watch.”

But whether it’s a Recession, a Depression, or something else, one thing we can all agree on is that it’s “hard times” and they seem to be getting harder – a strange feeling for any of us under the age of 70 or so.

You see, at least two full generations of Americans have never faced hard times. You’ve got to go back to the Depression/World War II generation to find out what living in hard times was like. The prosperity that has blessed the United States since the end of World War II has never been seen in all human history. How will we, the children of that prosperity, be able to manage in these hard times?

We thought about the obvious: tighten your belt and proceed cautiously. Pretty good advice, to be sure. This is no time to either squander or speculate with your money.

But then we started digging a little deeper. If hard times are upon us and due to get worse this year, what can we realistically expect? Among other things, an increase in stress and anxiety – even despair in worst cases. And for that, no amount of “smart money” tips or “wise investing” wisdom will matter. No special “recession-proof portfolio strategy” can counter the force of true hard times.

Nope. This calls for some really creative thinking and action. So here’s what we came up with.

We went right back to the idea of sticking with what we know and seeking “the truth.” We realize that sticking to what you know and seeking the truth doesn’t need to stop with making decisions about money. In fact, it can be a big step in making all our lives a lot better.

So here’s one thing we know: if hard times settle in, it will bring out both the worst and best in us. That means we all face a choice. What’s it to be, the worst or the best? And since it is a choice and time is short, we decided to cast the first vote right now for the best – in fact the whole enchilada: the True, the Good and the Beautiful. (Big problems call for big solutions.) And here’s the beauty part (as we say in New York): each one of the “Big Three” won’t cost much – if any – money.

Start with the True. We’ve seen how developing the habit of sticking with the truth can keep us out of trouble. And it’s all free. It just takes a little common sense and mental discipline.

As for the Good, think strength of character, moral fiber, a willingness to sacrifice for our families and the common good. Admittedly a high standard, but certainly worth the effort, isn’t it? And it doesn’t cost a dime.

What about the Beautiful? Start with Nature and work your way through the rest of God’s and mankind’s creations: great art, music, theater, architecture. Sure, orchestra seats at the Met will run you $200, and having fresh flowers in your living room every day adds up, but most of the great Beauty in our world costs little, if anything.

Hmm…living an exemplary, moral life, free of lies and deceit, seeking the truth, surrounded by the beauty of Nature, and the creations of great artists and musicians (OK, let’s not get too “high-brow”: throw in some popular entertainment – but only the good clean stuff) and you’ve got something.

Are we too idealistic? Maybe. The cost of health insurance alone, when you’re unemployed (or self-employed) can throw cold water on all we’ve said. There’s no doubt the world can be a daunting and difficult place.

But wait. The True, the Good and the Beautiful aren’t reserved for the idealistic. They are, in fact, the Real – all that’s worthwhile in this world.

Is this just all the philosophy we studied in college come to stake its claim while all those business and finance majors shake their heads in disbelief over what’s happened? That’s part of it. After all, those MBA’s who thought they’d cornered not only the market, but the good life as well, must be wondering now.

In the end, what’s really real, what’s most worthwhile hasn’t changed all that much, in spite of all the “paper” prosperity that distracted so many of us for so long. While all that phony paper “wealth” disintegrates (overpriced real estate, overvalued stocks, over-leveraged banks, inflated dollars…and on and on) we think the True, the Good and the Beautiful will stage a dramatic comeback. And there lies the path to a better, saner, more just, and ultimately happier existence. To the extent we live our lives in recognition of that reality, no matter what happens in the weeks and months to come, we will find the light at the end of the tunnel.

Sincerely,

Rick

P.S. For those of you who don’t already have it, here’s our contact info:

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com