Economy drawing investors back to the fundamentals
July 21, 2011By Adam White Observer staff
The horror stories associated with investing during a recession aren’t just make-believe. The threat of a monstrous economic market devouring hard-earned savings is very real.
“Unfortunately, there is no silver bullet,” said John Davis, owner of JDA Financial Services in Williston. “This is the first time I can remember, in my 30 years in this business, when there isn’t a darling alternative for investors to go to.”
But that doesn’t mean that potential investors should curl up under the covers atop mattresses stuffed with cash, either.
“I think ‘challenge’ is the right word for it,” said Don Dempsey, an independent fee-only advisor with Dempsey Investments in Williston. “There is risk, any way you look at it — but depending on your goals, there are still options that make sense.”
Caution hasn’t exactly been thrown to the wind in the current economic climate. In fact, those with a tendency toward minimizing risk within their portfolios are being extra careful.
“American consumers are much more protective of their personal balance sheet than they have been in the past,” said Bill Smith, senior retail delivery executive with New England Federal Credit Union. “People are generally being more conservative. They are saving more and borrowing less, and there has been an influx of funds to insured investments.”
Older investors are typically the most conservative because they have less time to ride out trends, such as fluctuation in the stock market in order to reap the benefits of longer terms. But choices for stable, short-term investments with significant yield potential are limited.
“The people who are having trouble now are the ones who are near retirement and need to generate income from their investments,” Dempsey said. “It is definitely more difficult to find income opportunities today, while keeping the same level of security you had before.”
Even as old-reliable investments like real estate are taking owners on a stomach-churning roller coaster ride, Dempsey maintains faith in the virtual Ferris wheel that is the stock market. Through all of their rises and falls, the right stocks can still help owners come out on top — provided they have the time, and nerves, to ride them out.
“One thing I have always liked, and like even more in this economy, are high-quality companies,” Dempsey said. “People can feel confident in a good mix of household-name type companies, because they pay dividends every year, through thick and thin.”
Davis agrees, citing what is arguably the golden rule of investing: buy low, sell high.
“If you’re looking more at the long term, (stock) prices are low — so it’s a good time to get in,” Davis said.
But the second half of that golden rule is equally important, and might be harder for investors to fathom given the uncertainty of the economy.
“I advise clients to reallocate at least once a year, and part of that is determining which stocks have gone up the most — and dumping them,” Davis said. “That is difficult for people, because they can get emotionally attached to their best performers. That is a big reason why investment managers are important: they help take emotion out of the equation.”
Spreading the wealth
At night, when investors count dollar signs until they drift off to sleep, their dreams looks something like this: they get in on the ground floor of a single stock or fund that vaults straight up, overnight, and turns a modest initial investment into a financial windfall.
But in reality, the get-rich-quick opportunities for the common investor simply don’t exist. Instead, experts urge their clients to spread their investments out as much as possible, especially in the current climate where the rebound of any single market could open the door for significant gains.
“Diversify, diversify, diversify,” Davis said. “That strategy is more critical now than ever before, because no one knows what is going to take off.”
That anticipation of a rebound is also a factor in the waiting game with interest rates. Experts have continually predicted a bounce-back in the real estate market as rates hit rock bottom, but that hasn’t happened yet — and Davis isn’t so sure that better numbers for investors aren’t waiting around the economic corner.
“Timing is always the issue with interest rates, and I don’t know if the timing is there yet,” Davis said. “The reality is that real estate has been no charmer; in commercial real estate in particular, the interest rates are no treat. It is hard to know where the rates are going to go from here.”
The future remains clouded, and the doomsayers of the U.S. economy insist that darker days loom ahead. They have predicted everything from further economic downturn to a full-blown depression to a total collapse of the dollar, leading more than a few reactionary investors to convert chunks of their savings into silver and gold to keep stashed away for the financial apocalypse.
Dempsey said he typically recommends gold as a hedge, a way for clients to further diversify.
“I tell people to buy it like insurance,” he said. “But in a way, I hope the gold market stays the same — because if not, it means that everything else is going haywire.”