So you’re trying to save for retirement, but at a loss for what to do after seeing the market slide to 1997 levels? Don’t worry so much — at least you’ve got good company.
Professional money managers are also in uncharted territory. They’re unsure how to respond to clients who are adrift after seeing the market sink below the worst-case scenarios they set in their investment plans.
In such times, careful analysis of stock prices and the government’s latest economic fixes can get short shrift.
“Over shorter-term time frames, the psychology can certainly overwhelm fundamentals,” said Kent Croft, chief investment officer of Baltimore-based Croft Funds and manager of the Croft Value Fund.
Last week, when the Dow Jones industrial average sank below 7,000 points, The Associated Press asked several money managers how they’re dealing with market forces and investor behavior that are defying expectations.
Mark Travis, chief executive and senior portfolio manager, Intrepid Capital Funds, in Jacksonville Beach, Fla.: Many of Travis’ private clients are at an age where they’ve protected themselves from stock volatility. They’ve put more than half their savings in bonds or money-market funds. But when the markets plunge, they can get just as jittery as investors who have everything riding on stocks. These days, Travis spends more time than usual on the phone with nervous clients.
“When they hear the Dow has broken below 7,000, they assume they too have lost 50 percent of their capital — whether they have or not is irrelevant,” Travis said.
Such a mindset can lead to potentially rash decisions to pull out of stocks entirely.
“You do get a stampeding effect, and it starts to cascade on itself, and you see it in days like [last Monday], where I’ve had customers call who are probably 70 percent invested in fixed-income assets, but they don’t want any equities exposure, whether it makes sense long-term or not,” he said.
The challenge comes in reminding people that benchmarks are just a general gauge of performance. Travis measures performance of his company’s four mutual funds — Intrepid Capital Fund, Small Cap Fund, Income Fund and All Cap Fund — by comparing against the areas of the market that each fund tracks. But benchmarks often hold little weight with investors when markets are reeling.
“I seldom see private clients that really want to know how they look versus a benchmark,” Travis said. “They don’t care. They want to know if they’ve got more money or less money.”
With the government’s role in the markets growing, Travis keeps a close eye on Washington. And he, like many investors, finds government efforts lacking.
“I think you saw a stimulus package that didn’t really get to the meat of the coconut, which is how to deal with the bad assets in the banks,” he said.
Travis also says the government isn’t addressing issues such as corporate tax rates that he considers too high, a complex tax code and the cost of debt the U.S. owes to banks in places like China and Japan.
He wants a simplified two-tier tax rate structure and lower capital gains taxes. If those steps were paired with the government’s bank bailouts and economic stimulus, “you’d see the Dow quickly re-inflate, in my view,” Travis said.
Ben Inker, director of asset allocation, GMO LLC: Inker helps his firm’s money managers make investment decisions and right now he calls stocks “compellingly cheap.” Since October, that’s where Boston-based GMO has been shifting more of the $86 billion it manages for institutional clients such as endowments, foundations and pension funds.
But these days, many of those holdings have eroded so much that clients are abandoning carefully laid plans.
“People had planned for certain eventualities: If the market goes down 20 percent, I will do this,” Inker said. “They didn’t plan for the market going down 50 percent.”
Institutional investors who may be overseeing money for thousands of people are typically more sophisticated than individual investors. But Inker says the groups’ current thinking doesn’t seem to differ much.
“The fact that stocks are now below their level of 12 years ago — and this is without taking inflation into account — definitely affects people,” he said. “Unfortunately, the effect it has is causing people to give up on stocks.”
But Inker also takes heart in the opportunities for long-term investors who stick to their plans.
“Stocks are cheaper than they have been in a long time,” he said. “And as bad as the economy is, it will not be bad forever.”
Kent Croft: Research shows the disappointment most investors feel from a market loss is deeper than the joy they experience from a comparably sized gain.
“It explains why the market goes down a lot faster than it comes back up,” Croft said.
He thinks investors are naturally optimists, even if many are now wracked by fear. At such times, they’re prone to latching onto any news that breaks the barrage of negative headlines.
So Croft is carefully watching for any indication that the economy may be turning a corner, or that the Obama administration’s rescue measures may be gaining traction. Of course, if he misses such signs, he might miss a rally.
“When you finally get some whiff of something suggesting that things may be less bad down the road, things can turn,” he said.
At such times, market watchers shouldn’t disregard seemingly remote factors that can nevertheless influence how willing investors are to buy or sell. So this March, Croft says it’s not beyond the realm of possibility that investors may take a cue from the arrival of spring.
“People are just sick and tired of being negative,” he says. “The days are getting longer, and that type of thing can affect mood.”
(Associated Press)
