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Guide for the financially perplexed

Jane McMillanOn Dec. 1, 2008, the National Bureau of Economic Research officially declared that America had been in the grips of a recession since December, 2007.

The headline-making news did not faze the majority of Americans who already knew something was terribly wrong.

Approximately 2.6 million jobs were eliminated in 2008. The housing market, which cracked under a slew of subprime mortgages, sank dangerously close to Depression-era lows.

Venerable financial institutions either shut their doors or merged with other companies in a last ditch attempt to stay afloat. The government extended a hand but received more slaps than applause.

At one point, gas prices soared to over $4.50 a gallon, which took an extra slice out of already shrinking paychecks. The cost of food jumped so sharply and suddenly that shoppers reeled from sticker shock.

Dilemmas formally limited to the elderly –– whether to forgo their monthly Lipitor in favor of fresh vegetables –– suddenly became daily concerns for people on the lower end of the age scale.

The stock market, that sensitive barometer of economic winds, fell 38% in 2008. Precipitous daily declines ranging from 500 to nearly 700 points froze the heartiest investors.

The wealthiest individuals who thought they could survive anything called their brokers in a frenzy.

Middle-income couples who contributed regularly to their IRAs in anticipation of retirement lost so much money that they could no longer afford to retire.

Then, just when things looked their bleakest, Bernard Madoff and his $50 billion Ponzi scheme entered our financial vocabulary.

Madoff’s tentacles, which affected institutions, charities and individuals all over the world, hit the Jewish community particularly hard.

On Jan. 20, the day Barack Obama was inaugurated as the 44th president of the US, the Dow fell 332 points. National investor confidence, at least on

Wall Street, evaporated due to negative forecasts from the Royal Bank of Scotland.

As bad as it sounds, this litany of financial woes will change its tune –– eventually.

The economy, by its very nature, is a cyclical beast.

What goes up invariably comes down –– and goes back up again.

The big question is when.

The Intermountain Jewish News asked some local investment advisors to weigh in on the current economic crisis and offer professional insights to weather the storm.

Jane McMillan, who is with the global wealth management group at Morgan Stanley, says most financial analysts anticipate that an economic recovery will take hold in mid-2009.

In the interim, some investors might want to consider keeping a portion of their wealth in cash –– CDs, money markets, savings accounts, FDIC-insured options offered by brokerage firms –– until the dust settles.

“CDs are excellent vehicles for funds that you don’t want exposed to stock market risk,” she says. “Annuities can also play an important role in creating retirement income. But it’s important to evaluate the financial strength of insurance companies issuing annuities.”

Quality municipal bonds, corporate bonds and treasury inflation-protected securities yield more relative value right now than straight treasury bonds, which are at a low yield, she says.

“Your financial advisor should tell you how particular municipal bonds are rated, and which are the strongest,” she adds.

The decision whether to stick with the stock market depends on one’s comfort level, which McMillan believes “is the most important factor in how actively you participate in the market.

“However, there are many reasons to stay in the stock market. History shows that a disciplined and diversified approach to wealth management is one strategy for navigating choppy waters.

“If you take your assets out during a downturn, you may miss the best month in a recovery –– which could significantly lower your returns.”

Shoppers may love grabbing up bargains in the stores, but the average investor is not inclined to take advantage of good deals in the stock market.

“This is so true,” McMillan says. “When the stock market is going up, investors typically want to buy. When it’s falling, investors feel uncomfortable about buying. But this is exactly the time when they should consider investing in high quality, undervalued companies that are trading lower than value.”

Prior to Bernie Madoff, the average investor didn’t give much thought to whether his or her investments were safe. One simply assumed a level of trust.

“It’s important to objectively evaluate the financial advisors and firm advisors with whom you affiliate,” McMillan stresses.

“Ask about the due diligence process: the evaluation process, steps and criteria that managers have to meet in order to be selected by a firm. A hot tip from Uncle Harry doesn’t qualify.”

She also says it’s crucial for a company to separate clients’ funds from assets held by the particular firm and its managers.

“This was not the case with Madoff. He had the money, and he was the manager.”

To avoid a future housing crisis, McMillan says homebuyers “should not be seduced by introductory low rates that can go up substantially later on. And don’t purchase a property unless you feel comfortable about making the payments.”

McMillan says the US has a history of being a spending vs. savings society.

“Even in a volatile markets, it is especially important to continue contributing to 401Ks and other retirement plans. People who do so will look back years from now and realize that contributing when the market was down was a good decision.

“We need to be smart spenders. If you follow the adage, ‘pay yourself first,’ you will create a balance between saving and spending.”

Jeff WilsonJeff Wilson, owner of the Wilson Advisory Group, is an upbeat person who can find a light at the end of just about any tunnel.

When it comes to the current economy, however, his prognostications are frankly glum.

“Investors need to be extremely cautious in 2009,” Wilson says. “The economy and financial systems are very fragile, and I expect dramatic declines in 2009 in almost every area.

“I believe the markets may rebound, but not much higher than where they started in 2009,” he says. “It will be a scary and volatile ride.”

While many investment advisors hesitate linking the current recession to an imminent depression, Wilson speaks his mind where others fear to tread.

“After 34 years in this business, I’ve never seen an economy like this one,” he says. “But I’ve read about one –– the Great Depression in the 1930s.

“The comparison of our market economy and stock market to the 1930s is appropriate. That was the last time we faced a crisis of this magnitude nationally and internationally.”

Wilson, who received a degree in economics from the Wharton School of the University of Pennsylvania, is not a big fan of the stock market.

“People need to understand that the Japanese stock market is trading today at the same levels it did in 1981,” he says. “You have to ask yourself, how will my future investments be affected by [strategies] that take 28 years to see any growth?”

According to Wilson, there are nine dangerous myths of investing: 1) a strategy of buy and hold makes money; 2) stocks outperform bonds; 3) bonds are the safest and best way to preserve your portfolio; 4) you can’t time the markets; 5) the modern portfolio theory creates safe diversified portfolios; 6) dollar cost averaging will always be profitable; 7) real estate always makes money; 8) stock market growth corresponds to economic growth; and 9) standard deviation is the best way to measure risk.

“Buy low, sell high”is the only steadfast and true investment rule, Wilson insists.

It’s still possible for investors to successfully grow their wealth by utilizing certain fixed income securities such as annuities and bonds, he says.

Real estate, especially with today’s rampant foreclosures, might be another sound investment area in the future.

“All investments have up and down periods,” he says. “You must be proactive –– willing to buy at the right time and sell at the right time.”

What’s important, says Wilson, is that investors focus on their particular objectives and timeframes. “And it’s different for each person and each situation.


“You have to identify your goals, seek investments that fit your individual profile and find the best way to accomplish your objectives,” he says.

“You may even have to look at whether your goals, such as retirement, are even possible at this stage. Right now, for many people it’s going to be common not to retire.”

Wilson says that saving money is an excellent strategy at all times.

“Have a professional investment advisor help evaluate your budget,” he suggests. “See where you can cut expenses and cut costs. This actually enforces a discipline of saving.

“That’s why the IRS requires you to send in your taxes by a certain date –– you’re not on the honor system.”

Wilson insists that it’s much better for individuals to have a realistic assessment of where they stand financially, instead of being in denial.

“A lot of people are in shell shock –– especially those who kept their money in the stock market because they didn’t know what else to do,” he says.

“Many people just put their heads in the sand and didn’t even open their financial statements. They were hoping it all would go away.

“Consumers can be afraid,” he says, “but they can’t let the fear paralyze them. They have to be proactive, especially now.

“Get independent, objective professional advice, and implement those recommendations immediately. Don’t procrastinate. Act.”

Jerry ReiffJerry Reiff, a financial planning specialist at Smith Barney since 1992, uses the word “challenging” to describe the fierce economic currents sweeping into 2009.

“It appears that corporate earnings will continue to decline and the economy will continue to slow due to the housing and financial turmoil,” Reiff warns. “What remains to be seen are the effects of the stimulus package provided by the government.”

While he believes there will be some general economic improvement in the latter half of 2009, he cautions that “it is important to remember that ‘improvement’ doesn’t mean that everything is back to a more normal economic environment.

“I do believe that we will avoid a global economic depression. However, one could argue that the housing and financial sectors are already in a depression.”

Reiff believes that despite the roller coaster bumps and jolts, the stock market is still a good place to invest.

“The long-term outlook of the market is good,” he says. “But it is important to remember one’s time horizon, risk tolerance and asset allocation when considering investing.

“Current pullbacks in valuations, in my opinion, have presented opportunities for the long-term investor. Historically, bear markets have presented some of the best times to invest in the stock market.”

Reiff is fully cognizant that many investors have seen their portfolios drop in value, making them reluctant about changing or adding to their investments.

“It is in difficult times like these,” Reiff says, “that investors need to be thinking about and implementing a recovery strategy for their portfolios –– one that allows them to take advantage of the market’s pullback and change in the economy.”

Citing an historical hierarchy, Reiff says that treasury bills have outperformed cash, long government bonds have outperformed treasury bills and large company stocks have outperformed long government bonds.

“But the biggest question for investors is, how do they plan on staying up with inflation so they don’t fall behind with their purchasing power?

Remember time horizon, asset allocation and risk tolerance will dictate how an investor should allocate their resources.”
Investing at the right time –– despite the risks –– remains key.

“Very few investors have been consistently successful at market timing,” Reiff says. “Therefore a prudent investor looks at time in the market, not timing in the market. Timing in the market may seem rewarding in the short term, but if you missed the top trading days between the end of 1987 and the end of 2007 you would have dramatically reduced your returns.

“Even a few missed days in the market may cause you to lose out on the biggest gains, which are often concentrated within a few trading days.

“Investing is a lifetime endeavor that should be done in a disciplined and structured way throughout a person’s entire life,” he says. “If one follows a well defined investment program they should be able to enjoy both wealth accumulation and a practical and enjoyable lifestyle.”

Reiff says it appears that the current recession may last longer than the average historical recession.

“But if you believe in the free enterprise system and capitalism, then one would have to conclude that the economic cycle is alive and well.

“Eventually, corporate earnings will rebound, unemployment will peak and then start to decline and the housing market will bottom and eventually improve. The financial markets will stabilize, economic growth will return and consumer confidence will rise again.”

Studs Terkel, that great social commentator, oral historian and author of Hard Times: An Oral History of the Great Depression, died in October, 2008, at the age of 96.

Shortly before his death, he was interviewed by his close friend Alex Kotlowitz about the Great Depression and its relation to the current economic crisis.

Terkel’s reflections, published in the winter edition of AARP magazine, rise up like a fountain of hope sculpted by experience –– his own, and America’s.

“I was about 17 years old. Hoover was still president. People had been living high off the hog. And then, boom, comes the Crash. It was so sudden . . . The free market fell on its fanny. We learned nothing. It’s exactly the same today.

“My mother ran a hotel, the Wells-Grand Hotel, for men, just outside Chicago’s skid row. Skilled workers. Mechanics. Guys with jobs here and there.

Some retired. It was fine.      

“Then came 1929. Suddenly they’re not working. Or those guys who retired, suddenly their pensions are gone. They don’t know what the hell to do. So they drank more. And played the horses more. And there were fights.

“What were they fighting over? Their own self-respect. I mean, they had nothing to do. They were furious. Who do you blame? Who do you hit? That was sort of a metaphor for what happened to the country. They blamed themselves. Yet I met people who weathered it one way or the other, some just by lending a hand . . .

“The lessons of the Great Depression? Don’t blame yourself. Turn to others. Take part in the community.

“Hope dies last –– ‘La esperanza muere ultima.’ Without hope, you can’t make it. And so long as we have that hope, we’ll be okay. Once you become active helping others, you feel alive. You don’t feel, ‘It’s my fault.’

“You become a different person. And others are changed, too.”



Andrea Jacobs

IJN Senior Writer | andrea@ijn.com


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