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Are You Managing Your MoneyOr Is It Managing You
Despite market meltdown, it s not yet time to put investments in a shoebox under the bed
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Business New Haven
9/30/2002
By: Karen Singer
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In these troubled economic times, as markets continue their downward slide, small- and mid-sized companies, as well as individual investors, are becoming ever more concerned over what to do about shrinking portfolios. Business New Haven recently asked several local experts for their advice on strategies to mitigate losses.
During the profitable days of the last decade, many market players forgot the basic rules of good investing, contends Ronald R. Milone. That s why so many are hurting now.
The rules don t change, says Milone, a certified public accountant and principal with Konowitz Kahn & Co. P.C. in North Haven. We just have to get back to them. A big problem in the 90s was a lot of people just jumped on the high-flying stocks without paying attention to diversification and asset-allocation.
Despite what seems to be shaping up as another negative year, Milone is telling clients, Relax, take a deep breath and let s do whatever we can to fix whatever problems you have, and position you better going forward.
The No. 1 concern among his clients, he says, is what to do with their investments. They ve obviously become disenchanted with equities and are looking for safety and decent growth, Milone says.
Many clients are pulling the old ostrich thing, saying they don t even open their statements anymore, Milone continues. That s like locking your child in a room for ten years and hoping they turn out okay. You need to manage your money, and the first thing you need to do is reassess your risk-tolerance.
A big concern for people who have lost money in their IRAs or 401(k)s, especially those with a short time to retirement, is ŒHow can I make up for these losses so I can retire in the lifestyle I ve been accustomed to? he says.
Milone can t answer that question. He says his crystal ball broke years ago. All he can say to allay their fears is: This isn t going to last forever. I believe that 2003 will be a positive year for overall economy.
After assessing risk-tolerance, which depends on such factors as age, health, income level and wealth, Milone works with clients to determine what parts of their portfolios may need to be liquidated or reallocated.
The next key is to go back to the tried-and-true: diversify, diversify, diversify, he says. It could be a mixture of equity and fixed-income securities, bonds, or perhaps gold or precious medals, and liquid assets such as money-market accounts or CDs. You need to make sure you have a proper allocation.
He advises: It s difficult to convince people they should continue to invest in the bad times as well as the good times. It s a hard sell these days. I do feel like when this market does turn positive, the first phase will be in the large caps, then mid- and small caps will follow.
If a client is interested in bonds, Milone recommends short-term government bond funds, which are netting about four percent interest. Corporate bond funds ‹ but only high grade ‹ would be his next choice. Even though they re not insured, real estate investment trusts (REITs), particularly commercial funds, are worth pursuing, Milone says, adding, fixed annuities also are a rather nice investment right now.
Precious metal funds, including gold, have been good performers of late, but can be volatile and thus far riskier, Milone warns.
The immutable investing rules apply to businesses as well as individuals, according to Milone, who also recommends investors seek professional assistance to effectively manage their assets.
It s my belief most of us are either too busy living our lives or don t have enough time or interest to manage our portfolios, he says. Professional managers typically charge one to two percent a year, but I think it s a reasonable fee to pay.
Although many of Carmen Macca s clients have experienced major valuation losses ‹ rather than cash losses ‹ in their portfolios, the damage, he believes, has caused a negative impact on business.
A lot of bad things are happening at once: the down markets, the corporate scandals, the Iraq problem, says Macca, a certified public accountant with Simione, Macca and Larrow. When you put it all together psychologically, everything seems to be doom and gloom.
What happens is it turns into a very pessimistic view of the business environment, and business owners hold back in terms of spending and additional buying. Psychologically, they figure, ŒWhat can I do over the next couple of years to maintain what I have? Most of them have a pretty good lifestyle, so to maintain cash flow, they cut spending and lay off people on the high end.
In recent months Macca has been gently urging small and large business owners, particularly those who don t have much debt, to buck the trend. I m telling them to be a little cautious, but maintain their growth plans, he says, adding there are some other ways for businesses to generate cash.
The only good news for the economy is interest rates, including mortgage rates, have been at an all-time market low, so a lot of business owners are taking out loans to refinance their homes, which puts more cash into the market.
But Macca acknowledges such a strategy is tougher in the current climate because Many banks are reluctant to lend money to business owners.
Another recent trend for business owners, as well as retirees who have seen their pension funds shrivel, is to explore a reverse mortgage. Some banks will lend up to 70 percent as a lump sum or annuity payments, Macca says. Another option is to borrow against a life insurance policy.
Meanwhile, clients are looking for secure harbors for their cash.
They want their money to be safe, but there not much of a difference in terms of ways to do that because of low rates, Macca says.
As for safe fixed-income investments such as Treasury notes or CDs, return rates are less than stellar these days, but step-ups, which increase the interest they pay according to varied criteria, may be worth checking out.
Regarding write-offs, Macca says despite recent congressional talk of change, the maximum amount allowed remains $3,000 a year, which has been the case since the last major overhaul of the tax system in 1986.
Macca views a recent state law requiring employers to provide more retirement options for 401(k) employees as a positive development for both parties.
These will allow for greater diversity, he says. Macca is advising businesses, which typically hire one money manager to oversee such plans, to hire two or more. Also, he notes, over the last year, more and more financial advisory companies have begun offering their services to individual investors.
The sad truth is many people are going to have to work a little longer and reduce their spending, he says. There is no magic to getting their money back.
They have to have a little patience and unload the dogs in their portfolio, Macca adds. And, if history repeats itself, the turnaround will happen.
Friends often tell Richard Everett they haven t seen him smile in more than a year. That s hardly surprising, because Everett spends his days watching a volatile stock market and advising fearful clients on how to manage their losses.
Their largest concern is losing all their money, especially seniors and retirees, says Everett, who heads Everett Financial Group, a full-service financial planning firm based in North Haven. They have absolutely no place to turn. If they re in the market they re losing their shirts, and if not, banks are offering 1.5-percent interest.
Indeed, many recently retired workers he sees are now seeking part-time employment.
They want to know when is this going to end, and what are we going to do until it ends? No one knows at this point when it will end. We re at a 40-year low, and it s the second-longest and second-deepest dip in history. Plus there are a lot of unknowns if there s another terrorist attack or corporate scandal, Everett says.
Another unknown is what may happen if the U.S. goes to war with Iraq.
In the short term the market will go down, Everett predicts. The last time we went to war with Iraq, in [1991], the Dow declined 15 percent. But it did come back, and relatively quickly. War historically has been good for the economy. It was World War II that pulled our country out of the Depression.
These days, Everett tries to pull clients out of their own depression by reassuring them there are alternatives to equities.
In the short term, most people are going to be better off out of the market, he says. Putting money in a mattress or the bank is not necessarily the right thing to do.
Corporate bonds, municipal bonds and annuities, at least they re paying substantially more, as long as the [Federal Reserve] doesn t raise interest rates, which seems unlikely in the foreseeable future, he says.
With regard to strategies to offset losses, Everett says there are a couple of good places to go if you re retired and need cash. One is high-rated corporate bonds, such as General Electric or General Motors Acceptance Corp., which he regards as relatively safe, and are paying about seven percent interest these days. Although they usually are for 20 to 25 years, they re typically callable after four or five years.
Fixed annuities are another good bet, Everett says, because they usually guarantee at least three percent, and any bonuses are around four to 4.5 percent.
Among other options are real estate investment trusts, or REITs. I m not so sure REITs are such a safe place to be anymore, Everett says. They ve done okay up until this last quarter, but now they re just as risky as anyplace else.
Value stocks also were doing okay up until this last quarter, and foreign stocks have been getting beat up, too, says Everett. If you re looking for Œdefense places, gold funds are doing quite well, and have are appreciated in value 50 percent over the last year. Silver also has done well, he adds, as have some precious-metals funds.
Because of poor market performance, capital gains are rarely even an issue these days. Most people don t have them, Everett says, adding you can still write off $3,000 a year, but all federal plans for tax cuts this year have been shelved because of the deficit. Any kind of state break is very minimal.
When clients ask what they can do about pension-fund or 401(k) losses, Everett says most should do nothing, but if they re younger than 50, they probably ought to reevaluate their options.
For younger investors with a long-term horizon, he suggests any good growth fund. When pressed, he recommends small cap mutual funds focusing on technology.
Everett also notes that tax losses on IRAs are deductible.
Although he often doesn t feel very optimistic these days, Everett urges clients not to give up hope. If they are buying, he advises them to buy for the long term.
A lot of people tell you they want to be aggressive, but when the market goes down, they want to bail out, Everett says. The psychology of investors is that most, if left to their own devices, self-destruct.
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