Mendoza School of Business

Investors are advised to ride out downturn

Published: January 23, 2008 / Author: YaVonda Writer

Listen to Professor Jeff Bergstrand’s radio interview about economic stimulus

Professor Frank Reilly 
When investors see the Dow plunging faster than the Millennium Force at Cedar Point, it’s easy to start panicking.”It never feels good when things are going down,” said Leo Priemer, financial adviser at Edward Jones in downtown South Bend. “And it’s really hard when you have money in the market to think it’s going to rebound.”

But stay the course, he said.

“Never try to outrun a bear,” he said. “It will only make matters worse.”

Lately, U.S. markets have been joining stock exchanges around the globe that have fallen amid concerns that a downturn might spread around the world.

In many ways, market troubles can be the result of a psychological domino effect where people are tempted to sell, sell, sell.

“There’s a story,” said Jamshid Mehran, professor of finance at Indiana University South Bend. “If a monkey jumps from the tree for no reason, other monkeys are going to jump, and the market is sometimes like that.”

Wall Street plunged at the opening of trading Tuesday, pushing the Dow Jones industrials down about 400 points after an interest rate cut by the Federal Reserve failed to soothe investors’ concerns.

“My clients are closely monitoring the market on a daily basis,” said Ronald Silverman, certified public accountant and certified financial planner for Creative Financial Planning Advisors on West Jefferson Boulevard in South Bend. “Today, (it’s) on a minute-to-minutebasis.”

Fortunately, the Fed is doing the right thing to help the situation, said Jeffrey Bergstrand, professor in the department of finance in the Mendoza College of Business at the University of Notre Dame.

The Fed’s decision to cut its federal funds rate by three-quarters of a percentage point — from 4.25 to 3.50 percent — shows that it at least recognizes the seriousness of the world financial situation, analysts say.

“The Federal Reserve is pursuing the best action right now in order to stabilize the financial market,” Bergstrand said.

The move not only aims to provide more liquidity to investors, Bergstrand said, but it can help get interest rates down to spur spending and demand for houses, cars and other durable goods that tend to be interest-sensitive. The Fed’s move could also entice investors to hold onto their stocks in the face of falling prices.

Right now, it’s vital for consumers to remember that jumping out of the market — and even
jumping into it — right away isn’t the best strategy, Priemer said.

It’s probably a bad time to sell almost any stock, added Frank Reilly, professor of finance at
Notre Dame. Just sit tight or, better yet, take some time to do a little shopping.

“This is a buying opportunity when things get down like this,” Reilly said, emphasizing that buyers must first understand what various companies and stocks are worth before just buying anything.

Reilly noted that now is the time when you can find many stocks at a discount — though many consumers don’t always look at it in a positive way.

“When the retail stores cut prices, everybody thinks that’s so wonderful,” Reilly said. “When the (stock market) cuts prices, people run away.”

Just remember that the market’s troubles are like a toothache: It might seem like it’ll last
forever — but it won’t.

In fact, one day, one week or one month in the stock market is just a blip on the screen in terms of long-term investment objectives, said Creative Financial’s Silverman, noting that many of his clients are focused more on the long term.

For now, it’s best for investors to simply turn off CNBC, said Edward Jones’ Priemer. Constantly focusing on news about the markets is kind of like taking your temperature and watching your pulse all day, Priemer said.

“It can make you crazy,” he said. “You have got to get away from it.”

For investors who do have ongoing concerns about the Dow’s performance, it’s best to call their adviser so they can sit down, go over their investments and gain a peace of mind, Priemer said.
Those who are planning to retire soon, in particular, shouldn’t hesitate to sit down with their
advisers, make sure they’re in the right place to weather the bear market, and make sure they’re not investing too aggressively.

In fact, since soon-to-be retirees need more stability in the value of their wealth, they should
make sure their portfolios are diversified, and that increasingly smaller shares of their portfolio are in stocks, said Notre Dame’s Bergstrand.

And those who can’t stay the course with individual stocks should consider moving their money into less aggressive investments — for example, money market accounts.

“If you’re losing sleep at night over it,” Priemer said, “you have no business in the market.”



Topics: Mendoza