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Lessons From the Market Correction


As Pay Dirt reported yesterday, some brokerage houses have extra staff manning the phones and taking questions from panicked investors. The Dow fell 634.76 points on Monday amid worries about a double-dip recession — making it the steepest single-day plunge since 2008. Are you asking the right questions? And are you happy with the answers? We asked executives at Vanguard, Fidelity Investments, Morgan Stanley Smith Barney and the owners at two boutique advisory firms for their answers to a few of the big questions anxious clients have been asking over the last 24 hours.

Is this 2008 all over again?

“Not even close,” says Jeff Applegate, chief investment officer for Morgan Stanley Smith Barney. “That was caused by the completely unexpected bankruptcy of the largest investment bank on the planet. The markets literally froze.” In 2011, he says bank lending and inter-bank lending is very much intact. Velda A. Eugenias, president and CEO of Eugenias Advisory Group in Northeast Alabama, says, “2008 was like a forest fire,” she says, “it was long overdue and necessary for the cleansing that every so often must be done.” This time, Eugenias says, Americans were not riding high on low unemployment and unrestrained confidence in the banking system. She says investors were far more prepared: “This is more like an aftershock.”

Should I get out of stocks?

Investments should be made on economic fundamentals, says Blaine Dunn, owner of Dunn Financial Advisors in Winchester and McLean, Va., and the same is true this time around. “That has not significantly changed in a day,” he says. He says stay in stocks until the volatility is over, and then reassess your position based on whether you can stomach the risk. Experts say the same is true for worried baby boomers. John Sweeney, executive vice-president of planning and advisory services at Fidelity Investments, says that even if you’re in your 60s, you’re still planning for 30 years in retirement, so their baseline asset allocation should still be around 50% equities to provide some growth (with 40% fixed income and 10% short-term instruments).

Where can I go for safety?

“Safety is a relative issue,” says Fran Kinniry, a principal at Vanguard’s Investment Strategy Group. “It all depends on whether you are investing for retirement, college or even a wedding,” he says. He recommends U.S. Treasuries and money markets as the safest markets you can find at the moment, but also warns of “purchasing power risk” in money markets. “Ask yourself if you will get enough growth to spend those investments in the future,” he says. Applegate also points to U.S. Treasuries as the go-to place for safety, and describes the reaction by investors to the Standard & Poor’s downgrading of the U.S.’s Triple-A credit rating as “extremely ironic.” Defensive stocks are also worth considering: Eugenias recommends fast-food companies McDonald’s and Wendy’s and Dunn says Procter & Gamble and Johnson & Johnson offer relatively stable earnings in a time of economic uncertainty.

Should I be worried?

In short: No. All of the experts say you should not make decisions based on fear. Eugenias says ride out the storm. After, she says clients should ask themselves questions like, “Should I have been so aggressively positioned?” She says, “Money is not made from panic selling – it is lost from it.” Sweeney believes the U.S. will meet its debt obligations and the economy will continue to grow. Applegate says investors will closely watch the special Congressional committee. The committee will be charged with finding debt cuts of at least $1.2 trillion over the next decade. He has high hopes it will be run by “adults not children” when its members are chosen: “Democrats and Republicans who are moderate and who can compromise over ideological positions.”

The money quotes:

Kinnery on portfolio changes: “We don’t know where the bottom is we’re not really good at forecasting the future. The advice is to stay the course on your asset allocation.”

Sweeney on the debt downgrade: “Countries that have had their Triple-A credit rating downgraded by a credit ratings agency have historically weathered through that.”

Eugenias on weathering the storm: “If you buy an airplane ticket and the captain says, ‘We’re experiencing turbulence,’ you don’t decide to jump out at the wrong time.”

Applegate on asset allocation: “Whatever portfolio you had on Thursday you should have today. We don’t think the S&P downgrade will be much of a real economy event.”

Dunn on non-cyclical stocks: “Companies are still going to sell products. Johnson and Johnson will still sell medical supplies and Procter and Gamble will still sell soap.”

Pay Dirt readers, does any of this advice put your mind at ease?


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    • Hello. Neat post. There’s an issue with your web site in internet exlporer, and you might want to check this The browser is the market leader and a huge part of folks will miss your wonderful writing due to this problem.

    • What I can’t figure out, is why anyone so convinced that the market is rigged against us (the little guys) would even be on a forum like this, or reading articles like this, unless they’re just looking for somewhere to vent. Touching on some points above: You should indeed have your emergency fund (whether that’s 3, 6, 9 months of expenses, in a solid safe place before you deal with equities in any way. That may even include the 401k plan. If you don’t have the emergency fund in place, you probably shouldn’t be contributing, unless it’s at the lowest possible level. One major financial issue and you could be toast. Investing in equities is indeed a reasonable path for most of us to find financial security. Average in over time, don’t jump in and out every week, and don’t try to jump on the latest hot thing, and you should be fine. I’m 48, never made over $60k a year, and I just quit my job last month. I’m consulting part time, and loving the extra time to do whatever I want. It’s all possible because of frugal living, and investing in stocks. If you don’t have time to watch things closely, find a low cost index fund, and stay out of the way. Talking people out of even trying to invest is not going to help them at all.

    • No need for sorry. Some people just aren’t comfortable “riding it out” and that is each person’s choice. After all, if every one was on the same page all the time, there would be no market. But also try to realize: in investing, it often pays to be a part of the minority – buying when everyone seems to be selling.

      My advice to those that have stock in quality companies is to not try to “play” with the institutional investors. You don’t know when “they” plan to reverse the tide, and start buying back in.

      People will ALWAYS claim that “now” is a different time, with more severe problems that have dire market consequences. But are our current problems actually worse than the great depression? What about the early 80′s with hyper-inflation? Same crap, different toilet, I say.

      Right now, companies are cash-rich at tremendous levels – which means many may either grow their dividend or reinvest in the company for growth (hopefully leading to a lower unemployment rate). As this happens (hopefully sooner than later), people will begin to feel “safer.” And then, so will begin the time of consumer confiedence, when people will finally feel comfortable enough to put money back into the market.

      BUT, at that time, you will simply be moving with the herd. The market will be flush with buyers, with limited sellers. At a certain point – only god and Warren Buffet know when – the the tide will once again change.

      Either way, what do I know? All I know is my opinion after studying the markets for a while. My opinion here, now seems like a pretty good buy opportunity.

    • I’m one of those “little people.” I take no comfort in this article, and don’t believe a word of it. The only value in my 401(k) is the cash I have put into it. I side with Michael Davidson’s post, sorry Brian. I am not hiding my cash in a mattress, however … Joe’s advice makes a lot of sense.

    • If retail investors think of the game of investing as “Us” versus “big money”, the result will inevitably be a blow-out loss every time.

      However, there are smart ways for even the smallest investor to make money OVER TIME. One of my favorites: dividend paying, blue chip companies, that regularly grow their dividend – and historically keep pace with inflation.

      Now, if you need the principal values in the near future (day, over the next 3 years), the stock market is not a comfortable place.

      All in all, the world has been through MUCH worse. The problem with today is that information is at our fingertips every second of every day. We’ve been through 2 world wards, a nuclear crisis, 9/11, and the list of catastrophic events goes on and on. We’ve recovered from worse, and we will recover again.

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  • Pay Dirt examines the millions of consumer decisions Americans make every day: What to buy, how much to pay, whether to rave or complain. Lead written by Quentin Fottrell, the blog examines these interactions, providing readers with news, insight and tips on shopping, spending, customer service, and companies that do right – and wrong – by their customers. Send items, questions and comments to or tweet @SMPayDirt.