Downturn Affords Opportunity for Investors to Become More Educated

November 7, 2008

By MBJ Staff Writer, Michelle Leach

Economically challenging times may appear to stifle opportunity, but financial advisers say times of downturn actually afford employers and their employees, opportunities to reevaluate and strengthen their portfolios and ultimately emerge from the downturn as stronger investors and companies than ever before.

"At times like these investors are tempted to start making decisions based on emotion and panic rather than looking at their long-term plan and staying the course," said Rod Al-Rashid, senior wealth management specialist at Wells Fargo Private Bank. "It's human nature to want to sell when the market hits the bottom of the cycle.

"If you do though, you may end up selling low and missing out on the recovery. The result can be diminished returns over the long-term."

Instead of veering off course and selling low, Al-Rashid recommends investors review asset allocation annually, taking into consideration not only the market but changes in personal and family life, and horizon to retirement.

"If you have not done this recently, now is the time," he said. "But your long term asset allocation should not change dramatically as a result of what's been going on in the market."

"Diversification" has long been the savvy investor's buzzword.

"One of the worst things an investor can do is to not diversify," said Lizanne Lefler, vice president of the SilverStone Group. "Who would have thought a year ago that big names like AIG, Merrill Lynch, even GM could be in jeopardy of bankruptcy?

"Diversity helps protect against any one investment going poorly."

But well-intentioned diversification (30 or more stocks, limited international exposure and a few pooled investment products), doesn't take correlation into account, Al-Rashid said.

"Correlation is the tendency of seemingly unrelated investments to be linked in some way and move together," he said. "Consider rebalancing your portfolio."

Risk control, liquidity and investment cash flow and tax management are all areas that are particularly crucial to review during unstable and unpredictable economic environments, Al-Rashid said.

"Right now the worst thing a business owner could do is stop investing in his or her people," said Byron McFarland, estate and business planning advisor at Northwestern Mutual Financial Network.

At times like these, he said, employers may be inclined to cross out investments deemed non-essential: such as decreasing 401 (k) matches and eliminating formal training programs, leadership curriculum, access to workout facilities or traditions such as free food on Fridays.

He said those non essential items that contribute to a strong workplace environment, when stripped from the balance sheet, adversely impact company morale and ultimately productivity.

He recommends business owners follow an open book management structure, whereby the financial condition is made known to the company's greatest investment: its people.

Turning seemingly limited possibilities into bountiful opportunities during an economic downturn is also key to happier employees and higher retention, McFarland said.

"It's a good time for employers to have their retirement plan advisors provide educational opportunities to employees on the benefits of a plan and the impact of market volatility," McFarland said.

Either way, whatever the investment, nothing is 100 percent safe, Lefler said.

"Mortgages used to be considered relatively risk-free," she said. "All investments have some element of market risk, interest rate risk and default risk; however putting your money under a mattress is not without the risk that your money will not keep up with inflation."

Leflersaid during a financial crisis it's tough to believe the stock market will recover, but the history books demonstrate that "this too shall pass."

"The market seems to be more and more emotional and less and less based on the true value of the underlying asset," she said. "When the value of any one stock fluctuates up or down 10 percent in a given day, it might be wise to remind ourselves that all of the underlying companies could not have changed in value to that extent overnight."