Riding the storm out: Experts’ advice to investors: Stay cool
REGION – A perfect financial storm has reached all the way from Wall Street to Front Street, buffeting businesses and investors even as it loses some of its bluster.
At first glance, it would be hard to find a region with more at stake in the current conditions than northern Michigan.
It has a tourist economy sensitive to gas prices, along with a retirement community relying on stock portfolios to cover expenses. And many businesses need loans from a limping financial sector to thrive and expand.
To some extent, northern Michigan has declared its independence from the rest of the state. It draws visitor and retirees from beyond Michigan's borders. Even as their portfolios struggle, the retirees seem to insulate the region from the worst economic crosswinds.
The region may even profit somewhat from higher energy costs as more people take vacations closer to home, although that may be small consolation to year-round residents paying high home heating bills and $4 or more a gallon at the pump.
That brings up the other side of the equation: The Grand Traverse region is already part and parcel of the international economy, selling nationally and internationally and buying products and materials from around the world.
The jury is still out on the region's likely performance in the short-term. But everything considered, it certainly isn't time for consumers, businesses and investors to lose heart, financial experts say. Their main advice: Don't panic and stay flexible.
"We are hearing on a daily basis that people are very nervous and scared about what is going on," said Jason Piedmonte, a financial advisor with J.P. Morgan. "Not just the media, but the numbers that are coming out about the economy."
The broad trends are becoming clear: The stock market is down around 14 percent this year, unsettling investors. It has been erratic, as well. Credit is tighter than in the past. Rising commodity prices are stretching business and consumer resources.
The sub-prime crisis, the source of many of the problems, is still simmering. That situation, at least, has improved.
Erik Falconer, principal at the Falconer Group, believes the Federal Reserve "has reduced the risk of a more complete financial meltdown" stemming from the crisis. It has shored up failing institutions and kept money flowing to lenders.
"But the reverberations of the crisis are still being felt, and losses from bad loans continue to mount and clearly are more severe than initially believed," he said.
Investors will have to grapple with deep slides in the value of their investments. That's especially true for people who have invested heavily in bank shares. If they panic, they could easily make things worse.
"It is important to remain grounded and recognize the emotions that are stirred with each report of another huge corporate write down, market low, or gloomy forecast," Falconer said. "We have been through market turbulence before, and we will go through it again."
Kimberly Simpson, vice president and investment officer at Northwestern Bank, thinks many people may be too pessimistic about current conditions.
"People are feeling bad. They say, 'You know what, this is the worse economy I have ever seen.'"
Simpson knows better. In her office, she has a chart of the so-called "misery index," the sum of the inflation and unemployment rate. "It was 21 percent in 1980," she said. "And now it is 10."
So top financial advisors are advising clients to shake off their depression and make some clear-headed decisions.
For instance, Simpson notes that many retirees now find their portfolios are delivering less income. Many are tempted to draw down their equity to maintain their standard of living, she said.
But that usually isn't a wise course. If at all possible, it would be better to cut back on the payout and then take out more when the market improves. Otherwise, their smaller investment base will hurt their earnings far into the future.
"When I meet with people who are retiring, they might say, 'You know what, I want to take out 10 percent of my portfolio each year,'" Simpson said.
"That's not a realistic expectation. It could very well be that the stock return over the next decade is below average. So you are not going to get that 10 or 11 percent return. You may be better off taking 4 percent rather than 10 percent."
The mood of investors may be more sour than usual after seeing two successive market downturns since the boom of the 1990s, she said.
Simpson says there is a time-honored recipe for minimizing losses in a downturn: diversify your investments across asset classes. This strategy has the greatest effect when it is implemented as early as possible. "We try to get the asset mix right at the very outset," she said.
That often means investments in small, mid-range and large capitalization stocks. "We also invest in high quality bonds," she said.
Falconer especially likes "value investing," or investing in under-valued stocks, in certain circumstances. He argues that careful investments in financial stocks could bear fruit. Even though they have fallen sharply, he thinks it would be a mistake to give up on the segment.
Based on their fundamentals, many banks are good investments, he contends. And they are bargains right now due to the overall decline of the financial segment. Many had nothing to do with the sub-prime crisis.
"Our expectation is that when the financials come back on the attack, so to speak, investors will be able to find winners in that correction," Falconer said.
Paul Sutherland, president of the Financial Investment and Management Group, Ltd., especially stresses the value of diversification right now. Investors should consider funds that include international shares and up-and-coming segments like alternative energy and entertainment.
For investors, a downturn in the U.S. equity market may be accompanied by an upturn somewhere else, he said. He is especially eyeing the growth of the middle-class in China, India and other emerging economies. That growth will fuel the rise of their stock markets long-term.
"These areas of the world are still going to be very robust," Sutherland said.
Piedmonte of J.P. Morgan, likes diversification. But, at the current juncture, he is not as partial to international shares and value investing as some other financial advisors.
It's important for investors to make strategic, long-term decisions, he said. "Otherwise, they are often just trying to chase returns." Some international stock exchanges, he notes, are down further than the U.S. stock market.
J.P. Morgan has turned to diversified hedge funds as a way of protecting the value of clients' investments.
"What we are trying to do is make sure that people are not significantly overweight in cash, because people want to put all their money in CDs and safe investments," he said.
"We want to make sure that people are properly diversified, we want to make sure that they have the ability to enter the market at these levels and are holding 10, 12, 15 percent in cash to protect themselves."
When the market is down, he notes, families should pay closer attention to estate planning. It could strengthen their financial and tax positions for the long-term.
On the credit side, the picture isn't as bad as it might be. Most well-qualified homeowners shouldn't have a problem getting mortgages, thanks to the Fed's measures to improve the flow of money to home lenders, Falconer said.
Falconer also believes companies have options if they have trouble getting a business loan in the current environment. If they shop around, they are likely to find a bank ready to grant them one. The less they were affected by the sub-prime crisis, the more likely they are to lend.
Just by surviving the sluggish economy, small businesses will be well-positioned for the eventual upturn.
One important strategy is to improve your company when business is slow, Sutherland said.
Owners and employees can attend training to sharpen their skills. Their business processes can also be improved.
"If we go into a deeper recession, you have the time to retool your business with one goal in time: making sure you are stronger when you come out of the downturn."
The survivors then will see opportunities for growth, he added.
"The businesses that have been around for 20 or 30 years know what is going on, and they make their businesses stronger. The more marginal businesses say, 'Oh gosh, the world is coming to an end.'" BN