Investors Ride Out Turbulence

Rhode Islanders seem to be keeping their investment plans on course in the face of whipsawed stock market trading, and that’s the prudent track to take, say financial advisers and business-course academics. Weeks of economic uncertainty in the United States and abroad resulted in nearly a week of wildly churning stock prices, which seemed to moderate only last Friday. Individual investors, though, seemed to be sitting out the storm, leaving it to institutional money managers and wealthy individuals to navigate through the choppy financial seas.

There are three ways to react amid such financial turmoil, said Peter Cohan, a lecturer in the business management program at Babson College: ignore it, panic and sell, or look at it as a buying opportunity. “Most people do nothing,” Cohan said. “Part of it is they get advice that says, ‘Don’t panic.’ ” And that’s exactly what financial planners reached by The Journal said they were telling their clients. The president-elect of the Financial Planning Association of Rhode Island is David Matarese of Corrigan Financial Inc. in Middletown. Matarese said he began noticing nervousness among the firm’s clients even before Standard & Poor’s lowered the U.S. credit rating earlier this month. “People do get worked up,” Matarese said. “I remind them [clients] to focus on the time frames we’ve discussed and not worry about the short-term,” he told The Journal at the beginning of August. “A diversified portfolio is the name of the game.”

The advice remained the same last week, even as the Dow Jones Industrial Average experienced four successive 400-plus point swings for the first time in its history. The Dow capped the tumultuous week Friday with a 126-point gain. The financial planners said many of their clients are retirees, or people near retirement. Panic selling or over-enthusiastic buying are not optimal strategies. “Making drastic changes is not something I recommend,” said Jeffrey H. Massey, of Massey & Associates and president of the financial planners association. Matarese said, “Hang tough when the market goes through these downswings.” And, people seem to be taking that advice, perhaps because of their experiences in 2008, when years of accumulated finances seemed to melt away within weeks.

“The liquidity crisis was real back then,” said Richard J. Anzelone, managing director at Strategic Point Investment Advisors. As opposed to 2008, when panicked clients sought to pull out their money, they’re doing the opposite. “I’ve had people call and say, ‘I hope you’re not selling into this market.’ ” Conventional wisdom appears to be that the unprecedented swings in stock exchanges highlight investor uncertainty about the direction of the economy and political paralysis in the United States and the lack of a resolution to the sovereign debt crisis in Europe. “We already had problems when the downgrade came,” said David Louton, chairman of the finance department at Bryant University. “We were in a brittle market.” Cohan, of Babson, dismisses those concerns as the causes of the recent market volatility. He called the S&P downgrade “a red herring.” Cohan believes the huge swings in stock prices are due to opposing bets made by institutional investors who are trying to outmaneuver each other in the stock market.

Huge selloffs of stocks don’t make much sense in light of the recent strong financial performance of many companies both in the United States and abroad, Anzelone said. He noted corporate earnings, generally, are the strongest they’ve been in years. “There’s a big disconnect between the market and the economy,” Anzelone said.
Peter Morici, a business professor at the University of Maryland, said, “Markets are behaving irrationally. Global financial markets are not headed for a second meltdown.” Louton, of Bryant, agreed some investors are behaving irrationally. “I don’t think that it’s rational, but it’s normal,” Louton said. Massey laid the cause of the volatility at the door of firms that trade stocks in large volume. “The folks driving the craziness in this market are the big, big traders,” Massey said. Those small-money investors trying now to out-guess the institutional money managers play a risky game, Louton said. “I suspect that individual investors are getting hurt in this market more than professional investors.”

The business professors suggest the markets would calm, and even rise consistently, if only politicians would agree on a coherent government strategy that deals with budget deficits and trade imbalances. Joel Shulman, also a Babson professor, said, “If Congress and the White House settled on a plan that made sense, the markets would rally.” Morici, who formerly was chief economist at the U.S. International Trade Commission, said, “Growth is going to be slow until western leaders correct the imbalance in demand between Asia and the West, and work off all the debt. “Still, 2011 is simply not 2008.”

Sunday, August 14, 2011
By Paul Grimaldi
Journal Staff Writer
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