For all investors, a test of nerves
Experts agree that now is not the time to panic
Bob Smith has seen it all and he’ll tell anyone who listens that now is the time to buy, not sell.
And who should know better than an investor who just last week saw the Citigroup stock he bought for $50 a share plummet to a new low of — gulp — $20 a share.
Smith’s reaction? He bought 100 more shares.
“You don’t get nervous when you’re 87,” he said last week. “Besides, I’d buy even more if I could.”
Smith is one of those savvy investors, a veteran of the stock market wars.
Black Monday, 1987. Smith was there and survived.
Dot-com crash of 2000. Smith came out of that one, too.
“I never lose because the market always comes back,” said the Ellicottville retiree. “Besides, what’s the alternative, total collapse? That’s not going to happen.”
Wise words from a wise investor, or the advice of a misguided mentor?
The experts think Smith is right on.
“For the average investor, there still are many companies with outstanding businesses,” said Gerald T. Cole, managing partner at Amherst money management firm Arbor Capital Management.
Good advice but hard to swallow, given the nearly 20 percent drop in the Standard & Poor’s 500 index since its peak last October, erasing almost 40 percent of its gain from the five-year bull market that began in 2002.
For investors of all size pocketbooks, it’s gut-check time. Everyone with a stake in the market, whether through mutual funds, 401(k)s or Section 529 college plans, is wondering if they have the stomach to weather its sometimes steep ups and downs.
“Stay the course,” said Jordan Kessel of East Amherst without missing a beat. “That’s the sensible thing to do.”
While a lot of the investors admitted to nervousness, even anxiety, over the state of the market, Kessel seemed unfazed by the daily dose of gloomy news.
But he also spoke for most of those interviewed last week when he said the only wise thing to do is to stay in the market.
“We’ve been through this before,” he said.
Neth Nusbaum shares Kessel’s strategy but admits to being a bit anxious last week. She kept telling herself she’s 15 years from retirement and there’s plenty of time for the market to rebound.
“For me, it’s a gut feeling,” said the Williamsville resident. “I’m optimistic things will turn around.”
If anyone should have been nervous, it’s Radhika Varavenkataraman of East Amherst. She had stock, a lot of it in AIG, the insurance giant that teetered on collapse before getting bailed out by the federal government last week.
Her AIG shares, worth $12.14 a week ago, lost more than two-thirds of their value as the insurance giant swooned and finished the week at $3.85.
And yet, she too stayed the course.
“I was very concerned,” she said. “I went to sleep one night not knowing what would happen and woke up feeling a lot better.”
If there’s a guidebook on what investors need to do, it starts with the need for a long-term and diverse investment plan, a strategy that reflects the benefits of owning stocks and mutual funds that cover a wide range of industries and even countries, local financial advisers said.
And once you have that, sit back and ride out the market’s daily gyrations.
Begin by reviewing
Financial advisers say the first thing investors should do during times like these is to look at your investments to see if they match your long-term financial goals.
Generally, money you don’t expect to need for five years or more is ideally suited for stocks, which tend to produce the greatest returns over time but can be subject to big and sudden swings.
Money you expect to need within a year — college tuition bills, for instance — would be better in safer, less volatile investments. Think bonds, certificates of deposit, Treasury securities or money market funds, although last week’s crisis even forced the federal government to step in to provide guarantees to money funds.
Next, assess your stomach for risk. If the stock market’s latest plunge is keeping you awake at night, you may be better shifting at least a portion of your money to less risky investments.
“The first step is always to ascertain an appropriate risk level,” said Bruce Kaz, the president of Courier Capital Corp., a Buffalo money management firm.
It’s natural for investors to question whether the stock market is right for them at a time like this, Kaz said. But he notes that, over the last 70 years, similar steep drops in the stock market have turned out to be good times to buy.
“This time should be no different,” he said.
Spread the risk
The greatest pain from the market’s recent plunge has been centered in financial services stocks, such as banks and investment firms.
Other segments of the market, while dragged down by the turmoil, have fallen much less severely. Profits have grown this year among companies in nine of the 10 main industry sectors of the S&P 500, although earnings are forecast to drop in the third quarter.
“Right now, we’re sitting tight,” said Howard Grobe of Clarence. “We’re looking at the long-term. We’re not looking at the short-term.”
Like a lot of investors, Grobe is making sure his investments are diversified, spread between stocks, bonds and cash, and scattered through a wide range of companies and industries. That way, if one segment of the market goes sour, other investments could gain or fall less steeply.
In the current downturn, for instance, stock prices have fallen, but bonds have rallied as investors have sought safe havens from the upheaval on Wall Street.
Think globally
As part of your plan to spread the risk, advisers suggest investors hold a modest portion of their assets, typically 10 percent to 20 percent, in international investments.
By doing so, they reduce their exposure to U. S. market swings and gain access to other markets that may not move in sync with us. The easiest way to tap into international markets is through broad-based mutual funds or exchange-traded funds that focus on foreign investments.
“Investors have got to be global in their thinking,” said William A. O’Loughlin of O’Loughlin Financial Group & Securities America, an Amherst investment firm.
A strategic approach
Trying to figure out when the stock market has peaked and when it’s hit bottom is almost impossible to do, according to the experts.
Local advisers warn that investors who try to do it are likely to time their moves poorly, which ends up costing them money in the long run.
“We’ve all lived through downturns,” said Keith Schwertfeger of Clarence. “The people who panic tend to live to regret it.”
Instead, advisers are recommending investors buy stocks gradually by making smaller, regular investments over a long period of time through a strategy known as dollar cost averaging. That approach allows investors to buy more when prices are low and less when prices are high.
Research has shown that, over long periods, investors tend to fare better with that approach, rather than trying to figure out when is the best time to move money in and out of the stock market.
Of course, if you listen to Bob Smith, the Ellicottville retiree who’s been investing for 35 years, or Mary Bengart, a Clarence investor who remains upbeat, you would never leave the market.
“Obviously, the market is not going to collapse,” Bengart said. “We’re not going to have 1929 again.”
She then paused and added, “Besides, next year we could all be sitting pretty.”
drobinson@buffnews.com and pfairbanks@buffnews.com
