Uncertain times paralyze investors
As war jitters mount, do you find yourself torn among urges to run out and buy plastic sheeting and duct tape, dump your stocks or maybe buy the stock of some duct tape manufacturers?
Or is your desire to do nothing at all?
If so, you have plenty of company. Investment professionals say many clients are so overwhelmed with the bad news about global conflicts, weak economic growth and ailing financial markets that they have trouble making decisions.
Scott Baker, a retired elementary school principal, is one such investor. In the last few years, the 55-year-old Baker has watched helplessly as his major retirement account lost value Ñ more than 55 percent from its peak to now.
'I switched investment managers in January and watched my account lose another $1,600, which may not be a lot to some people but is to me,' he moaned. 'My faith is shaken. I don't feel comfortable making big money decisions with all this war talk going on.'
So Baker has decided not to put his Portland townhouse on the market and doesn't want to tinker with his retirement portfolio until the world political situation settles down.
Investment paralysis may be a sign of the times. 'We do have a few clients who are scared spitless,' said Marilyn Bergen, co-president of CMC Advisers, a fee-only financial planning firm in Portland. But such people are in the minority, she added, and may be facing unusual circumstances, such as unemployment or loss of a spouse.
Often, there are two factors at work with such individuals, she said: lack of a paycheck and a lot of time to watch the latest war preparations on television. 'It drives the whole fear factor to a new, heightened perspective,' she said.
Nonetheless, Bergen continued, the firm is 'doing lots of hand-holding É helping people to acknowledge the grief factor.' This could involve saying to someone who had a $1 million portfolio that is now worth $750,000, 'Yes, this is a lot of money to lose and may mean some dashed dreams, like putting off retirement for a few years.'
'Clients are nervous,' agreed Steve Holwerda, a portfolio manager and chief operations officer with Ferguson Wellman Capital Management, a private investment firm in Portland that caters to high net-worth individuals (the minimum account size is $2 million).
'It's been a grind for everyone,' he said, adding that this bear market 'has been worse and lasted longer' than the 1973-1974 correction. As a result, some clients are forsaking the stock market, saying they can no longer tolerate the downside bumps that are the flip side of an investment that offers the prospect of outsized gains in the future. 'They tell us they don't want the downside risk to get the upside potential É that they'd rather just settle for something less.'
But, Holwerda added, even though the talk of war makes everyone edgy, investors need to decide whether such an occurrence would be 'a problem that will be affecting the market for the next 10 years or the next 10 months.' The answer, he said, was probably closer to 10 months.
Holwerda and others think that because corporate earnings are improving, and because the long bear market has pushed down prices to reasonable levels, stocks are actually less risky than bonds right now. He noted that the companies in Standard & Poor's 500 index are selling for 16 times estimated 2003 earnings, versus 28 times earnings a few years ago, and that corporate earnings are expected to grow this year at the same 7 percent rate as they did last year.
'We are more comfortable with the stock market at current levels than we are with the bond market,' he said. 'In fact, we think that buying 10-year Treasuries yielding less than 4 percent is an aggressive move.'
Peter Matzke, a financial adviser in the Portland office of Waddell & Reed, a national financial services company, agreed, noting that in the last year and a half there has been a 'large transference of wealth from the stock market to the bond market.'
But with interest rates at their lowest level in four decades, putting all one's eggs into the bond market basket 'may not be the best thing to do at this time,' he added.
Such thinking doesn't sway investors such as Baker, who have been burned by the stock market. The retired school administrator said he'd need to see a sustained rally before he'd venture into equities again. 'The market wouldn't have to go up every day, but it would have to go up significantly and stay there for at least six or eight months before I would feel good about buying stocks,' he said.
Even though statistics indicate that stocks remain the best investment for the long haul, despite their recent dismal performance, your gut may be telling you to hold off. This doesn't mean that you should immediately liquidate all your holdings and stick the proceeds under your mattress.
But you may want to postpone putting fresh money into the market Ñ even into the stock of makers of duct tape and plastic sheeting Ñ until there are some reliable signs that the market has truly bottomed out.
After all, there's no reason why being able to sleep at night doesn't count as a valid investment goal.
Deborah Rankin, an award-winning former personal finance columnist for The New York Times, is based in Portland.