Consumers are concerned about the state of their investments as the federal government takes unprecedented steps to prevent companies from failing for fear of a wider impact. Experts anticipate a recovery, but say the short term impact will create a need to reassess risk tolerance and quality of life choices.
Dale Johnson, president and CEO of TruStar Federal Credit Union in International Falls, said this is the worst stock market meltdown since the Great Depression.
The difference today, he said, is that a strong economy could bring improvement by the second quarter of next year.
“It is not rosy, but we do not have double digit inflation or double digit unemployment,” said Johnson. “But, I don’t expect to see anything positive or new of any measure for four to six months.”
Most financial institutions stuck with traditional lending principals and remain solid, he added. The dollar devaluation is reversing and inflation is not out of control and exports are looking good, Johnson said. He cautions people to be careful and not to panic.
“This is a scary time and I am very concerned,” said Johnson. “Fear is ruling the market and its impact is beyond common sense. It is being exploited by those that want to take advantage.”
Johnson is taking a conservative approach with any new investment. He does not want to change his existing accounts and take what would be a certain loss.
“Stop and take a hard look at what you want to achieve in a time line and talk to an investment advisor and make a decision based on that and your risk tolerance,” he added.
Mike Katrin, president of Border State Bank, said the silver lining is the “flight to quality” in investments. The investments leaving the stock market are moving into insured, safe and sound bank deposits.
The dip in the mortgage rates and the spurt in home mortgage refinance activity has saved consumers substantial dollars, he added.
“Diversification and the assistance of a qualified and professional investment advisor is always a good thing in trying times like these,” said Katrin. “Bankers are not stock market advisors, nor should they be.
“My suggestions is that you always invest within your personal tolerance for risk,” he added. “Think long term, diversify, and do business with people and companies you both know and trust.”
The current crisis is forcing an aging working population to reconsider retirement plans, as the value of their accounts drop considerably, according to Timothy Nantell, a professor in the Finance Department at the Carlson School of Management, University of Minnesota. He said the choice of the moment is whether to delay retirement or reduce the quality of planning.
After 37 years of teaching, Nantell, 63, said his own pension fund value deflated to a fraction of its value five years ago. Working people can wait and ride out this downturn, he added. However, retirees or those about to retire, face major lifestyle choices and may want to minimize risk and reassess their portfolio.
“This literally has me thinking about how much longer I am going to work and it may be longer than I thought,” said Nantell.
His primary concern is with the rebound predictions after two years of “remarkably” worsening news. He said these unprecedented events resulted from financial firms leveraging good deals that turned bad with borrowed money rather than shareholder capital. The dip in the portfolio wiped out equity and capital and made it impossible to pay the loans.
“People are holding their breath; there is no place in history to go and figure this one out,” he said. “When Merrill Lynch, Lehman Brothers, and Morgan and Stanley can all disappear in a matter of a few days, well that is just out of our experience.”
The fear is that the problem will spread to the rest of the market and impact employment, he said. No one is really sure if the market has hit bottom or how much affect the world economy. Hesaid that a government operating with a deficit and leveraging internationally could also spell trouble for the dollar and the economy.
“I don’t see the market staying flat for two years,” he added. “But the economy may be as people entrench themselves and claw their way out.”
Risk tolerance, said Nantell, will determine individual movement to cash, government securities or short term treasury notes. Others will see opportunity with buying stock low in sectors they feel have hit bottom.
“I am staying the course,” said Karen H. Tangen, associate professor in the Department of Business and Economics at Bethel University. “If you are invested in solid stocks, bonds etc. this is not the time to run. The market will recover in the long run.”
Bruce Corrie, dean of the College of Business and Organizational Leadership at Concordia University in St. Paul, is concerned that consumers have received the same costly advice to stick with the market, and perhaps should have been given advice to switch to safer options as signs of trouble grew.
The resulting panic move en masse to securities and bonds has Corrie concerned that the low interest harbors, precious metals and commodities could be at risk with inflated prices.
“People are trying to find safety,” said Corrie. “There is a tremendous amount of financial anxiety out there and people are hoping this crisis will be only with the financial market and not hit other sectors of the economy.
“If their house was an asset, then that value declined,” said Corrie. “If equity was their asset and they leveraged that by taking loans and getting caught up in the sub prime mess, then that became another attack on the standard of living.”
The Federal Reserve could overextend itself and the treasury to leverage bailouts, he added. This puts another consumer option at risk if they are not careful.
LeRoy Winkel, Bremer Bank investment representative in International Falls, said these are challenging times, but notes that historically the market finds ways to correct itself. He recommends that clients diversify between various investment classes and maintain their current objectives.
“Clients should not be making emotional decisions on short term results but focus on the long term results of the market,” he added. “If they feel that a change should be made, then it should be done in an orderly manner, possible moving some of their assets to a more conservative investment strategy.”
Winkel said that incremental reviews of client holdings helps to reconfirm investment objectives and to see what, if anything has changed. At times like these, he said a decision to stop investing is common based on a current portfolio status.
Retirees already drawing on accounts tended to move some or all of their holdings into more conservative investments to maintain a supplemental income.
“They try to time the market, when they should continue to maintain their objectives and invest as the prices are lower,” he said. “Investing is a marathon not a short sprint.”
