Don't Let Panic Rule Your Portfolio
During a time of national crisis--particularly one whose epicenter lies in the heart of the nation's financial capital--it's natural to feel anxious about your financial security. But if you have a well-crafted, diversified plan that reflects your goals, risk tolerance, and investment time frame, stifle the urge to rip it up and flee to safe havens, such as cash or bonds. "A sound long-term investment plan assumes there will be bad times--really bad times," says Dan Moisand, president of Optimum Financial Group in Melbourne, Fla. So Moisand and many of his financial-planning colleagues are advising their clients to sit tight.
At least that's what they're telling those who asked. Numerous financial planners contacted said their phones were silent for most of the week following the attacks on the World Trade Center and Pentagon on Sept. 11. Numbed by incomprehensible events, most people did not dwell on their finances. But as the reopened markets experience wide swings, the questions will come to the fore.
Advisers say they'll tell most people to retain their high degree of exposure to stocks. Equities typically make up a large portion of investment programs intended to pay off in five or more years. Stocks tend to outperform bonds over long periods and, historically, have been the most reliable route to college or retirement.
PAST CRISES. Although current events are unprecedented, history suggests that those who stick with stocks in times of national crises will be rewarded. That may seem hard to believe, given the 7.13% fall in the Dow Jones industrial average on Sept. 17, the first day of trading after a four-day halt. Nonetheless, in 14 prior national crises, the Dow rebounded to finish an average of 0.5% higher three months later and 4% higher within six months. Returns after six months were negative in only four cases, including Pearl Harbor and the Arab oil embargo, according to Ned Davis Research, a Venice (Fla.) firm that compiles financial-market research.
The Federal Reserve Board and other central bankers are doing their part to help by cutting interest rates and pumping liquidity into the financial system. That brought the Fed funds rate to the lowest level since the Gulf War. And the Fed indicated it will cut more if needed. While the Sept. 11 terrorist attacks nearly guarantee a global recession, the U.S. economy has great strengths that should bear out over the 20-plus years upon which most investment plans are based.
In fact, many financial planners are advising clients with cash to buy stocks in the coming weeks, especially on the market's dips. "You hate to take advantage of a tragedy, but usually it's a good time to buy when people are panicking," says Ronald Roge, president of R.W. Roge in Bohemia, N.Y. Just be prepared for some gut-wrenching volatility along the way. In the month following past crises, investors had to withstand declines of as much as 23.6%, according to Ned Davis Research.
J.P. Morgan, for one, is recommending big, well-known companies whose earnings are relatively insulated from bad times and whose stocks typically trade in large volumes. Examples include utilities, drugmakers, and consumer product concerns such as Dominion Resources (D ), Cardinal Health (CAH ), Pfizer (PFE ), and PepsiCo (PEP ).
Thomas Grzymala, president of Alexandria Financial Associates in Alexandria, Va., has his eye on defense industry contractor, Lockheed Martin (LMT ), as well as General Electric (GE ) and Alcoa (AA )--both of which he describes as cheap. And Morris Armstrong of Armstrong Financial Strategies in New Milford, Conn., is on the lookout for real estate investment trusts (REITs) that own commercial property in New York City. Such REITs--Vornado Realty Trust is an example--are likely to benefit from rising rents, as companies impacted by the attacks scramble for a limited supply of available office space.
HOLD OFF. Meanwhile, industries to avoid in the near-term include those most affected by last week's tragedy: insurers, airlines, and hotel chains. Retailers and manufacturers of big-ticket items such as automobiles also stand to suffer if--as economists predict--American consumers clamp down on spending.
Although you should never rush to make sweeping changes in your financial plan, this is a good time to reassess your risk tolerance, if the bear market hasn't already made you do that. One of the worst things investors can do is "make major decisions in a time of emotional stress," says Joel Ticknor, a financial planner at Ticknor Financial in Reston, Va. Indeed, selling into a crisis "can result in receiving fire-sale prices," says Paul Baumbach, president of Mallard Asset Management in Newark, Del.
But if after a decent interval you still feel you have gone overboard in your exposure to stocks, scale back. Whatever you do, though, maintain a commitment to diversification. "The past 18 months have shown us that concentrating investments in any one area can be disastrous," says Carl Camp, president of Eclectic Associates in Fullerton, Calif. Indeed, while fallen technology stars have been mired in a bear market this year, bonds, as well as some mutual funds that invest in value stocks and the stocks of small companies, have done relatively well.
A sound investment strategy remains just that--through an economic downturn, a national crisis, or both. So if you had a sensible financial plan two weeks ago, keep a cool head. But if recent tragic events have exposed flaws in your long-term plan, get to work. Just remember to keep your eye on your long-term goals.
By Anne Tergesen
With Lewis Braham and Susan Scherreik