Financial experts say it's no time to panic
Financial advisers in the suburbs didn't see clients panic Tuesday when the stock market dumped 465 points at the opening bell, then recovered slightly later in the day. But that is because they've been preparing investors for the last six weeks on what could happen.
The common theme they stressed is: Stay in the market, especially if you are young or middle age and have more time to recover any losses.
Without the market's volatility, you would be stuck with low returns, said William Dever Jr., financial planning adviser with JMG Financial Group Ltd. in Oak Brook.
"The volatility of today, and even the significant downturn that we have experienced year to date, is within a normal range," said Dever. "Therefore, I don't believe any changes in investment strategy are necessarily warranted as a result of where we are now."
Other advisers felt the same way, including:
• Jeff Baer, of Grayslake, president of the Financial Planning Association of Illinois;
• Mark La Spisa, co-founder of Vermillion Financial Advisors Inc., South Barrington;
• Patrick Doland, president of Reason Financial Advisors Inc., Northbrook.
Here's what they had to say:
Q. What are you advising your clients to do today after what's happened?
BAER. Not to panic and to remember their original reasons for investing in the stock market.
LA SPISA. We remind clients there are six reasons to sell an investment: 1. Price is high and its evaluation is no longer attractive; 2. A better idea has come along; 3. Time to rebalance the portfolio; 4. A change in underlined fundamentals; 5. Poor performance or excess risk in comparison to a benchmark; 6. The investor made a mistake. Assuming none of these six reasons apply, we are telling clients to focus on their long-term goals and continue the investment program they designed with their adviser when they originally set up their goals and objectives.
DOLAND. Allocations can be more diversified. But this isn't the time to sell.
Q. What overall advice are you giving people about their long-term investments?
BAER. Do not get emotional and review your goals and your tolerance for risk during these volatile times.
LA SPISA. Review their plan, their risk tolerance, evaluate their diversification, and evaluate their long-term goals regarding expected returns. If none of these factors have changed, we recommend clients continue their current investment plan. If there are changes, we are working with those clients on adjustments. Adjustments could mean adding to cash positions, re-balancing into more conservative or defensive stock positions, purchasing "Put" options or writing "Call" options. (A stock option is a contract that gives the owner the right but not the obligation to buy or sell a particular stock at a fixed price for a specific period of time.) They can write a call option, which means they are willing to sell if the stock price goes up above a certain amount. Purchasing a put option allows an investor to make money should the market decline.
DOLAND. The real question is whether most of the damage has been done or not. It's like trying to catch a falling knife. You're either very talented or extremely lucky when you try to time the market. You have to know the right time when to sell and the right time when to buy. Sometimes you just have to grin and bear it.
Q. How will the Fed's rate cut impact the average investor in the short term? In the long term?
BAER. In the short term, prime rates will drop so people with loans linked to this will see savings. Bank accounts will pay lower interest so people will earn less. Long-term mortgage rates should drop.
LA SPISA. It typically takes six months to 18 months for a Fed rate cut to be felt in the market place. However, this should provide a benefit to the real estate market by providing additional liquidity and lowering mortgage interest rates, helping those with adjustable rate mortgages, and those facing default with an opportunity to refinance with lower rates.
DOLAND. In the short term, the biggest impact will be on retirees on fixed incomes. It will impact their yields on bonds, CDs and savings accounts because it will be harder for them to generate the same annual income when they renew CDs or bonds. In the long term, borrowing will improve. The rates will come down, especially for home equity loans. It will take a while for mortgages because they are tied to a longer-term index.