Filed under: Uncategorized | Tags: Crisis, Financial, from, learned, lessons, Three, Valuable
NEW YORK–Wow. I bet a lot of you are surprised at the size of the bubble and the size of the burst. Didn’t see that coming, right?
Established businesses, managed and staffed by experienced financial risk management professionals, lending to people who didn’t need to borrow, just like the good old days of “It’s a Wonderful Life.”
I saw the exploding debt load America was carrying as I was meeting and coaching real people on shows like Dr. Phil. But that’s not the point. What to do now is the point.
Going forward, the following investing and money management principles are right on, now more than ever:
1. If you don’t understand it, don’t invest in it
I’m still a value investor. I don’t invest in a stock, I invest in a business. And if I don’t understand the business, I don’t invest in it. Yes, I thought I understood financial companies better than I did. As it turns out, they didn’t understand themselves very well, either.
The lesson remains crystal clear: only invest in businesses you understand. Understand what they buy and sell, and how they make money. But remember this: just because you understand a business doesn’t mean it’s time to buy it.
2. Manage your asset allocations
You’ve heard it a thousand times: the stock market provides better returns over time.
A new study by Javier Estrade, a professor of finance at IESE Business School in Barcelona, examined the stock markets of 15 nations (including the U.S.) over several decades and found that the person who sold and missed out on the best 10 days of those 15 markets ultimately ended up, on average, with a portfolio worth about half what the person had who sat tight.
Still, many people fall victim to a demographic surprise and don’t have much “long term” left. They forgot that stocks are for those with a long-term horizon – meaning 10 years or more. Retiring baby boomers and younger boomers funding college for their offspring are in a bad way now. A double whammy, if stuck with declining investments and declining property values. A triple whammy if also stuck with a big mortgage payment for an oversized house or an oversized lifestyle.
Especially with today’s volatility and sharper up-down, bubble-crash cycles, it’s more important than ever to lock some money away in relatively fixed investments.
We get older faster than we think. Don’t just talk about shifting assets — do it. If you need cash within five years, you shouldn’t be in stocks. If this crisis is making you finally wake up and re-think how much you have in stocks vs. bonds vs. cash, do it. If you have some investments that have held up well or are still ahead compared to your basis, now’s a good time to assess your allocations.
3. Live within your means
Last but not least, no matter how old you are, the signals are clear: it’s time to live within our means. We got drunk on easy credit. Now the binge is over, and we can’t expect to borrow to support an expanded lifestyle forever. And realize that “means” might decrease too – those who adjust fastest to reduced living standards will fare best.
So it’s time to live not just within your means but below your means. That will give you the margin of safety to handle bad times, present and future. Think about it this way: if prosperity returns quickly, you’ll be that much farther ahead.
Margin of safety — another oh-so-true mantra of value investing applied to daily life.
Jennifer Openshaw is co-founder and president of the soon-to-launch WeSeed, a new approach to demystifying the stock market for everyday people, and author of “The Millionaire Zone.” You can reach her at jopenshaw@themillionairezone.com.
Copyright © 2008 MarketWatch, Inc.
Filed under: Uncategorized | Tags: Advisers, Answers, Crisis, Financial, Have, more, questions, than
BOSTON–More than 3,000 financial planners came here this week looking for answers.
They were told about how the economy had gotten so out of whack and what the bailout plan was supposed to do, about investment options to consider for the future and safe havens to run to now, but they never got what they came for.
That’s because the members of the Financial Planning Association who attended the group’s annual convention in Boston still have no clue for the biggest question they are facing: “What do I say to my customers now?”
Consumers working with financial advisers are likely a bit more comfortable than others as the current economic crisis unfolds. That’s not just because those folks have sufficient funds that they can afford to pay someone for financial advice. Nor is it that roughly nine in 10 consumers with a financial plan feel they have a clear financial direction — about 50% higher than for self-directed investors, according to a study released by the FPA and Ameriprise Financial.
It’s because the primary role of a financial planner is not just to manage investments and pick stocks and bonds, but to provide “emotional discipline” — the ability to foment a plan and see it through, regardless of market conditions.
Game changer
Where the do-it-yourself relies entirely on their own judgment — or what they read or watch in the media — the financial-planning customer has their adviser as a backstop, someone who can provide a heads-up to avoid trouble, who they can bounce ideas off and more.
But judging from casual talks with dozens of financial planners last weekend, the advisers are having a tough time right now providing that kind of emotional discipline, largely because they don’t have any comfortable answers. They are proactively contacting clients — and talking the panicky ones down from ledges — but they acknowledge that the standard advice isn’t making people comfortable right now.
That advice boils down to:
1. Stick with the plan, rebalancing if necessary but staying the course as best possible.
2. Cut your spending, as it’s the one piece of the puzzle over which you have total control.
3. Watch your income, and consider how to protect it, whether it comes from salary — where you may need to consider working longer — or from investments, where you may be able to weather market fluctuations so long as your income stays steady.
4. Don’t panic.
No one is going to take solace from that kind of counsel. While investors understood that bad times were possible — that the huge spikes of good years could become the awful daggers of a downturn — they never really expected to have it happen to their own portfolio.
“Everybody wants answers, but there aren’t any sort of answers out there that come with certainty or clarity, that say ‘This is what you should do right now,’” says Terence Odean, a professor at the University of California-Berkeley who studies investor behavior.
“You can make the case that there’s a good chance that the market recovers over time, and you can also make the case that there’s a real chance things turn out very, very badly here,” he adds. “We won’t know what’s right or wrong for a long time.”
Redrawing the map
With that in mind, investors are living in fear of two fundamental risks, the one that comes from staying with the plan, remaining invested and having the market sink lower and not recover for years, versus the risk of pulling everything out now, and then missing out on the recovery.
“In behavioral terms, it’s the risk of omission versus the risk of commission,” says John Nofsinger, a Washington State University professor who studies behavioral finance. “It’s failing to do something versus doing something that turns out wrong, and a lot of people get frozen in between.
“People tend to have a stronger regret feel for the act of commission,” Nofsinger adds. “When they act and it turns out poorly, they feel really bad about it. … That may be driving some people to hold tight right now, it may be driving their inaction.”
One thing that the current economy has clearly forced on financial advisers is a formal change in the definition of “short term.” This is a fairly common flip-flop; when the market is going gangbusters and investors don’t want to sacrifice returns, they tend to keep the short term short, lasting a year or two. That way, they can get more money into the market to take advantage of what seems like a sure thing.
Right now, judging from advisers at FPA, short term is defined as “five years,” meaning that any money you might need for at least the next five years needs to be in safe-haven investments or cash. Intermediate-term — which had been defined as two- to five years during the good times — now seems to be that period from five- to 10 years, and long-term investments are looking forward by a decade or more.
Plenty of advisers believe the market will snap back before then. Citing history, they contend that people will look back and see that they made money while investing in a bear market, but didn’t recognize it until the next bull market arrived.
Said one adviser, who asked to remain nameless because she is waffling on the right thing to say to clients: “They say you make money sometimes by doing what’s uncomfortable. … Well, everything makes my clients uncomfortable right now, whether that is staying in or getting out. I’m telling them that we’re making hard choices knowing what they need to do right now is take the strategy that they think is most likely to pay off for them and their family.
“Either way,” she adds, “it won’t be comfortable, and either way, they’ll have to live with it. So while I advise them to balance the risks and ride it out, I understand if they can’t do it. This is one of those situations where we won’t have any clear answers until we’re looking back at it and calling it history.”
Copyright © 2008 MarketWatch, Inc.
