Buy, Sell, or Stay Put? Advice from the Pros
By Amy Feldman
If you're feeling pummeled by market mayhem, you're not alone. With Lehman Brothers (leh.) filing for bankruptcy, Merrill Lynch (NYSE:MER - News) selling out, and AIG getting a government bailout, investors have been knocked for a loop. Financial advisers have been fielding phone calls from panicked clients, but the smarter ones called their clients first to put things in perspective. "My issue with my clients is: Are they getting to a place where they cannot sleep?" says David Diesslin, a financial planner in Fort Worth. BusinessWeek spoke with more than 15 of the country's top financial advisers to find out what's keeping their clients awake at night. Here's what they're telling them to do about it.
Should I pull my money out of the market?
In short, no. With the Dow Jones industrial average down 4.4% on Sept. 15, and off 22.9% from its peak last October, investors are undoubtedly watching portfolios shrink. Right now, it's hard to see beyond the bad news. But the market has survived major upheavals in the past -- the savings and loan crisis, for example.
In fact, a number of advisers see a positive sign in the government's decision to allow Lehman to fail. "In the short term, there will be volatility and uncertainty, but the world didn't come to an end," says Coral Gables (Fla.) financial planner Harold Evensky, who was rebalancing clients' portfolios to make sure equities kept their weighting after the sell-off. "Investors who are properly invested own little pieces of companies around the world, and, for the most part, those companies are still fine and making money."
The smart strategy remains the tried-and-true one: Set your asset allocation and stick with it. Panic selling is more likely to harm your portfolio than doing nothing. "Selling at the bottom is not a good strategy, but I'm not a soothsayer," says Laurence Kotlikoff, an economics professor at Boston University and president of ESPLanner. "All I can say is, I'm staying in the market. The U.S. economy can get along quite nicely with fewer Wall Street investment companies, none of which seems able or willing to tell shareholders precisely what they are holding."
I have a life insurance policy or annuity with AIG. What will the Federal Reserve bailout mean for me?
It means you can take a deep breath. Even when there was a risk of bankruptcy, American International Group's insurance subsidiaries appeared healthy and policyholders weren't really at risk. There are numerous safeguards in place for policyholders. Now, with the government injecting $85 billion into the parent and the risk of bankruptcy gone, policyholders should be able to stop worrying.
What about my money market fund? Could it be affected by the market turmoil?
Sadly, yes. On Sept. 16, The Reserve Fund announced that hundreds of millions of dollars of debt securities issued by Lehman (leh.) and owned by its Primary Fund were worthless. That means The Primary Fund "broke the buck" -- net asset value fell from $1.00 per share to $0.97. At Evergreen Investments (AMEX:ERC - News), however, parent Wachovia (NYSE:WB - News) announced it would support the value of three money funds so they would not reflect the decline in value of Lehman debt. Several other money funds have followed suit.
What if I now realize my investment strategy is way off? Should I move my money?
If you were 100% in equities or overweight in your own company's stock, it's good to get out of denial about the risks. "This is a wake-up call for a lot of people," says Christine Fahlund, a financial adviser at T. Rowe Price Group (NasdaqGS:TROW - News). "People are finding out that their risk tolerance isn't what they thought it was or that they're not superstars when it comes to investing."
The big question is how quickly to act. "It's not a good time to sell anything, so it depends how bad it really is," says George Feiger, chief executive of Contango Capital Advisors in Berkeley, Calif. Investors not yet approaching retirement may be able to move portfolios toward a desired asset allocation slowly and wait for the market to settle down.
Will I still be able to retire?
The real reason to worry isn't market movements, no matter how nerve-wracking; it's whether you're saving enough. If you're in your 20s, 30s, or 40s, you've got lots of time on your side. "With a longer time horizon, say 10 to 20 years, even the crash of 1987 looks like a blip," says Michael Mauboussin, Legg Mason's (NYSE:LM - News) chief investment strategist.
For some people on the verge of retirement, there's a tougher reality that may mean working longer. Psychologically, being able to blame the market turmoil is helping investors cut through their denial about how long they're going to need to work to have a comfortable retirement. "It's the first time that people are saying publicly, 'In this market, I am not ready to retire,' " Fahlund says. "The reason is probably more than just their investments, but finally they can share these emotions with people and feel like they are in this together."
What if I'm already retired?
The big problem is the cash squeeze that can come from the double whammy of lower asset values and interest rates. With your portfolio throwing off less cash, you may be tempted to reach for yield. Or you may consider selling assets -- at what are now low valuations. Do either, and you could face trouble in the long term. "It's easy to tell a guy who's 35 and panicking that this is the wrong time to sell. But the consequences are worse if you're older, and it's harder to overcome the emotion and fear," Feiger says. Be sure to run the numbers, and don't assume you'll be short because of the plunge on Sept. 15.
Is this a buying opportunity?
That depends on your risk tolerance. "We may not have final markdowns yet, but if you have the stomach, some investments are looking cheaper," Diesslin says. Even so, he'd steer clear of financials.
Stephen Wetzel, a financial planner and adjunct professor of financial planning at New York University, is far less circumspect. "I'm buying like a crazy man: value stocks, financial services, value funds, muni bonds, some international small cap. You don't get opportunities like this very often."
If you're feeling pummeled by market mayhem, you're not alone. With Lehman Brothers (leh.) filing for bankruptcy, Merrill Lynch (NYSE:MER - News) selling out, and AIG getting a government bailout, investors have been knocked for a loop. Financial advisers have been fielding phone calls from panicked clients, but the smarter ones called their clients first to put things in perspective. "My issue with my clients is: Are they getting to a place where they cannot sleep?" says David Diesslin, a financial planner in Fort Worth. BusinessWeek spoke with more than 15 of the country's top financial advisers to find out what's keeping their clients awake at night. Here's what they're telling them to do about it.
Should I pull my money out of the market?
In short, no. With the Dow Jones industrial average down 4.4% on Sept. 15, and off 22.9% from its peak last October, investors are undoubtedly watching portfolios shrink. Right now, it's hard to see beyond the bad news. But the market has survived major upheavals in the past -- the savings and loan crisis, for example.
In fact, a number of advisers see a positive sign in the government's decision to allow Lehman to fail. "In the short term, there will be volatility and uncertainty, but the world didn't come to an end," says Coral Gables (Fla.) financial planner Harold Evensky, who was rebalancing clients' portfolios to make sure equities kept their weighting after the sell-off. "Investors who are properly invested own little pieces of companies around the world, and, for the most part, those companies are still fine and making money."
The smart strategy remains the tried-and-true one: Set your asset allocation and stick with it. Panic selling is more likely to harm your portfolio than doing nothing. "Selling at the bottom is not a good strategy, but I'm not a soothsayer," says Laurence Kotlikoff, an economics professor at Boston University and president of ESPLanner. "All I can say is, I'm staying in the market. The U.S. economy can get along quite nicely with fewer Wall Street investment companies, none of which seems able or willing to tell shareholders precisely what they are holding."
I have a life insurance policy or annuity with AIG. What will the Federal Reserve bailout mean for me?
It means you can take a deep breath. Even when there was a risk of bankruptcy, American International Group's insurance subsidiaries appeared healthy and policyholders weren't really at risk. There are numerous safeguards in place for policyholders. Now, with the government injecting $85 billion into the parent and the risk of bankruptcy gone, policyholders should be able to stop worrying.
What about my money market fund? Could it be affected by the market turmoil?
Sadly, yes. On Sept. 16, The Reserve Fund announced that hundreds of millions of dollars of debt securities issued by Lehman (leh.) and owned by its Primary Fund were worthless. That means The Primary Fund "broke the buck" -- net asset value fell from $1.00 per share to $0.97. At Evergreen Investments (AMEX:ERC - News), however, parent Wachovia (NYSE:WB - News) announced it would support the value of three money funds so they would not reflect the decline in value of Lehman debt. Several other money funds have followed suit.
What if I now realize my investment strategy is way off? Should I move my money?
If you were 100% in equities or overweight in your own company's stock, it's good to get out of denial about the risks. "This is a wake-up call for a lot of people," says Christine Fahlund, a financial adviser at T. Rowe Price Group (NasdaqGS:TROW - News). "People are finding out that their risk tolerance isn't what they thought it was or that they're not superstars when it comes to investing."
The big question is how quickly to act. "It's not a good time to sell anything, so it depends how bad it really is," says George Feiger, chief executive of Contango Capital Advisors in Berkeley, Calif. Investors not yet approaching retirement may be able to move portfolios toward a desired asset allocation slowly and wait for the market to settle down.
Will I still be able to retire?
The real reason to worry isn't market movements, no matter how nerve-wracking; it's whether you're saving enough. If you're in your 20s, 30s, or 40s, you've got lots of time on your side. "With a longer time horizon, say 10 to 20 years, even the crash of 1987 looks like a blip," says Michael Mauboussin, Legg Mason's (NYSE:LM - News) chief investment strategist.
For some people on the verge of retirement, there's a tougher reality that may mean working longer. Psychologically, being able to blame the market turmoil is helping investors cut through their denial about how long they're going to need to work to have a comfortable retirement. "It's the first time that people are saying publicly, 'In this market, I am not ready to retire,' " Fahlund says. "The reason is probably more than just their investments, but finally they can share these emotions with people and feel like they are in this together."
What if I'm already retired?
The big problem is the cash squeeze that can come from the double whammy of lower asset values and interest rates. With your portfolio throwing off less cash, you may be tempted to reach for yield. Or you may consider selling assets -- at what are now low valuations. Do either, and you could face trouble in the long term. "It's easy to tell a guy who's 35 and panicking that this is the wrong time to sell. But the consequences are worse if you're older, and it's harder to overcome the emotion and fear," Feiger says. Be sure to run the numbers, and don't assume you'll be short because of the plunge on Sept. 15.
Is this a buying opportunity?
That depends on your risk tolerance. "We may not have final markdowns yet, but if you have the stomach, some investments are looking cheaper," Diesslin says. Even so, he'd steer clear of financials.
Stephen Wetzel, a financial planner and adjunct professor of financial planning at New York University, is far less circumspect. "I'm buying like a crazy man: value stocks, financial services, value funds, muni bonds, some international small cap. You don't get opportunities like this very often."
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