In the recent tech meltdown, investors lost a whopping $4.6 trillion. Since last summer, Standard & Poor’s 500-stock index has fallen 27%. With countless stories circulating about how wealth has been blown away, many investors, especially those nearing retirement age, are getting nervous about protecting their assets.
How are financial consultants encouraging investors to keep the faith?
“Declining markets are always stressful times for investors,” said J. Harmon Bays, a financial advisor with Legg Mason Wood Walker Inc. in Jackson. “It is in times like these that it is important for investors to focus on their long-term goals and not get caught up in the day-to-day volatility of markets. Now is the time for individual investors to sit down with their financial advisors and review their portfolio to be sure it is structured to help them meet their goals and objectives.”
The recent stock market decline has attracted the attention of most everyone, especially people invested in the stock market via mutual funds, variable annuities and individual stocks, said Bill Brame, a financial advisor from Madison.
“Couples nearing retirement have to understand what their long-term needs are, as not all those in pre-retirement have the same needs,” he said. “Protecting the buying power of your nest egg has to be balanced with managing the risk of how you put your nest egg to work.”
Even though most seasoned financial consultants advised clients to diversify their investments during the bumpy tech ride and stock market roller coaster, many people didn’t listen, Brame said.
“After watching CNBC, cruising the Internet and reading about tech stocks, many people decided to make investments themselves, without going through a broker,” he said. “When investors lost money, they realized they needed seasoned financial advisors.”
Ashby Foote, president of Vector Money Management Inc. in Jackson, called early 2001 one of the toughest times for investors — individual and professional — that he could recall.
“It’s primarily because of different cross currents,” Foote said. “Added to the concern and confusion of the market is the huge amount of information that comes to us on a daily basis. It’s made it more difficult to be a long-term investor because the daily onslaught of information has compelled people into thinking they have to make an immediate decision on an investment in a market or a particular area that was originally intended as an investment with a 10- or 20-year time run.”
It’s counterproductive if you zig when you should zag, Foote said.
“One of the lessons that will come out of the last three or four months will be the danger of trying to be a market timer,” he said. “More and more people are saying ‘go to cash because the market’s not doing well.’ Then, some people think there’s a need to make timing decisions and move away from stocks being a long-term investment. The sad thing is that some people will get out at 5% down, then it becomes extremely difficult when you have these giant up days to know whether you need to get in or not. You may end up staying in cash and missing a 30% to 40% up move. What it stems from is changing your game plan in midstream, which can be counterproductive to your investment objectives.”
From 1982 to 2000, investors enjoyed a great return on investments primarily because interest rates dropped and it was the best of all worlds, going from a high interest rate/high inflation environment to a low interest rate/no inflation environment, Foote said.
“The wind has been at the stock market’s back,” he said. “But in the last year, what has happened to cause so much confusion is that interest rates have stayed low, but the Federal Reserve has put us into a deflationary environment rather than a no inflation environment. By tightening up interest rates, they have cranked down on demand. Then we wind up with oversupply on the production side of just about everything. If you look at industry after industry, you’ve got overcapacity as a result of companies not being able to make much money because there’s too much product chasing too few dollars. Then, prices drop and nobody can maintain their profit margins.”
The same scenario happened to the oil industry in 1998 when marginal production was shut down to gain a balance between supply and demand, Foote said.
“A lot of wells were closed off, drilling stopped, the rig count hit a 15-year low in 1998, and it forced consolidation,” he said. “That’s when you saw mergers, like Exxon and Mobil. Fortunately, the oil industry had a robust year in 2000. Production levels were down and demand increased. Then the oil industry had pricing power.”
The same process has hit the technology area with overcapacity, Foote said.
“Everywhere you look, there are too many chips, too many cell phones, too many PCs, et cetera, so the industry has to go through this retrenchment, consolidation and this gut-wrenching process to strike a balance between the production side and the demand side,” he said. “It all goes back to the Federal Reserve being too tight. They didn’t need to cut down on the demand like they did, so this has really been a Federal Reserve-created problem because there’s been no inflation to speak of.”
What’s an investor to do in this dilemma?
“The Federal Reserve will get the monetary policy to the right level, where there will be a balance between supply and demand,” Foote said. “We’ll have very low interest rates, which is good for financial markets. We’ll have no inflation. And at that point, you’ll see a very robust economic growth and money to be made in the stock market, so I’d encourage people to stay the course.”
Even though some industry analysts are saying bonds, especially investment-grade ones, are no longer a safe harbor, Foote said government bonds continue to be a good solid investment — for protecting principal.
“Unfortunately, the yield will be pretty low right now, around 5-1/4%,” he said. “If you have enough principal to live off of 5-1/4%, you might want to do that. But those who want to build up a nest egg and need a better return, I think stocks will do very well. Historically, stocks have returned 10% to 12% a year.”
Contact MBJ contributing writer Lynne Wilbanks Jeter at firstname.lastname@example.org or (601) 853-3967.