It’s been a rough month for investors – watching the American stock market rise to historic highs, then drop a record number of points in a single day. Experts disagree on the reasons for the downturn and what investors should do next, prompting Sandy Hausman to investigate the subject in search of consensus.
The University of Virginia’s Darden School of Business hosts an annual conference on investing, and the most recent gathering was the biggest yet, drawing 400 people. Among them was Larry Kochard who oversaw UVA’s endowment for seven years and is now CEO of a $19 billion investment firm. It was November and he suspected the turnout was a sign of concern.
“The market’s been going up a lot but people are just increasingly nervous about valuations,” he recalls.
Even as national leadership faltered. “Given the fact that there are so many macro and geopolitical risks, there seems to be a disconnect with the volatility and those risks in the market,” Kochard said.
“Does Wall Street not care about who’s in the White House or whether the Congress is doing anything,” asked reporter Sandy Hausman.
“It does show the challenge of trying to predict the direction of the market base solely on politics,” he concluded.
At the time of the conference, corporate earnings were strong, interest rates low, and no one could predict when the market might correct or why.
“The only reasonable answer is we don’t know,” concluded George Craddock, Executive Director of the Mayo Center for Asset Management at Darden. He noted the growing role of computers and artificial intelligence in the markets, and Larry Kochard pointed to rapidly changing technologies putting once solid sectors in peril.
“Whether it’s ride sharing and the taxi business, AirBNB disrupting hotels. There are some many businesses that are being disrupted, and that’s going to be an on-going trend,” he explained.
We’ve reached a point it seems where even the experts are uncertain. Greg Fairchild was named Professor of the year at Darden.
“I sit in an institution where we talk about finance all the time. I have sat on a bank board, I’ve been on an investment advisory for a pension fund. I’ve been involved with mutual funds, insurance companies, and I still feel like there’s a lot that I’m learning, and that I haven’t yet figured it all out,” Fairchild confessed.
A very small number, he says, understand the stock market well enough to consistently pick winners.
“There are a few very, very successful people at choosing equities in ways that continuously beat the market. They’re famous, but these are few people.”
So Virginia Tech Professor Derek Klock, who teaches a course on investing technology, says there is little hope for the layman.
“And for the other 99.94% of the U.S. investing market it’s impossible for them to truly know. They’re not going to understand the investing environment.”
Many have turned to mutual funds – a professionally managed collection of stocks or bonds, but even there Klock says they find a bewildering range of choices.
“You know back in the 70’s there were about 500 different mutual funds. Today it’s about 10,000. If you can think of a sector there is an indexed fund that pertains to it. It could be something very broad like a Wilshire 5000 that covers the entire U.S. stock market to something that is very narrow that invests only in biotech firms.”
So what’s a would-be investor to do? It turns out there are some areas of consensus – things on which most financial professionals agree. Click on part two to learn more.
In the first part of our series we surveyed the nation’s complex financial landscape, exploring the challenges professional and amateur investors face. In part two, Sandy Hausman reports on basic areas of agreement – what many experts advise clients to do.
Alice Handy spent nearly three decades managing the University of Virginia’s portfolio and – today – heads her own company, Investiture. If someone corners her at a party to ask for investment advice, she keeps it simple.
“Just keep putting money in over time, and set an asset allocation that seems to be about right for you and your risk tolerance," she says.
If you’re comfortable with a volatile market or have plenty of time until retirement, she says, stocks are your best bet.
“Bonds don’t return anything right now, so it’s very, very difficult to find a safe place to put things,” Handy explains.
And deciding which stocks will make the most money over time is tough.
“Individuals should not be picking individual stocks unless they care about them or want to do a lot of research on them or have a professional advisor telling them what to do,” she concludes.
So if you want to put money into stocks, financial planner David Marotta suggests an index fund. That’s a type of mutual fund that aims for the same rate of return as a particular market index, like the S&P 500 or the Dow Jones industrial average. Because they’re not actively managed, Marotta says, fees for index funds tend to be low.
“Vanguard has a great fund. Its symbol is VT – Vanguard Total Stock Market. It’s everything in the United States, everything in foreign stocks, everything in emerging markets all rolled into a low cost fund.”
What you shouldn’t do, he adds, is to keep all of your savings in cash. Virginia Tech Professor Derek Klock, who leads the financial planning program, agrees.
“I know that if I put $100 in my jewelry box at home, when I open it up tomorrow or ten years from now, and I’ll still have $100 in my jewelry box. The problem is that ten years from now that money isn’t going to buy what $100 bought when you put it in your jewelry box. When you’re losing 1-4% of your purchasing power every year over one’s entire life that’s a recipe for disaster!"
When you invest, says Darden Dean Emeritus Bob Bruner, be patient. Jumping in and out of the market is itself risky.
“What we know from extensive research is that investors tend to overshoot. They tend to project the most recent trends outward to infinity, and they say, ‘Well, I better get on the train today if I really want to make some serious money. They will often wind up investing late in a cycle and then suffer the consequences of a sudden market plummet, so they will have bought high and sold low, which is the exact opposite of Investing 101 – which is buy low, sell high,” he says.
Alice Handy adds that investors should be realistic about the money they can make, and try to avoid high management fees.
“We used to expect we could get ten percent returns, and that’s just no longer the case. We expect going forward that you can probably get five or six. Take inflation out of 1-2%, and you get down to 4-5% kind of returns, so there isn’t a lot of room in there for fees.”
One other point of agreement comes from Derek Klock. The best way to protect your savings, he says, is to invest.
“It is easy to get analysis paralysis. There are tens of thousands of investment choices. The industry that is supposed to help you has let you down more times than we can count, but there are ethical practicing professionals out there that honestly want to sit on the same side of the table as you.”
But do you really need an investment advisor? Check out part three of our series:
Last week’s wild ride on Wall Street left many small investors wondering what to do and whether it was time to hire a financial advisor. In part three of our series, Sandy Hausman reports on when to seek professional help.
Experts on financial services don’t agree on many things, but those who aren’t selling anything will say you probably don’t need someone to tell you where to invest. Take Bob Bruner, Dean Emeritus at the Darden School of Business.
“If you followed my advice of investing in no-load mutual funds and well-diversified strategies and then leaving the funds there for the very long run, you’ll turn out fine," he says. "You don’t need very sophisticated investment advice.”
Dave Marotta agrees. He’s a financial planner in Charlottesville, but even he doubts your need for help investing.
“My heart aches for people who have to go to commission-based agents just to get their money invested, and they’re saddled with high fees and hidden fees, and who makes most of the money? Well it ends up being the financial companies that makes most of the money,” he explains.
He feels so strongly about this that he’s posted guidance on his website for people who want to park their money in relative safety with the promise of steady growth. He calls it the Gone Fishing Portfolio.
Of course a financial planner could talk you off the ledge in the event of crash or save you from investing in scams that sound too good to be true. Bob Bruner says it’s a bad idea to make emotional decisions about money.
“You need to fight your emotions on the downside as well as the upside,” he says.
And investing aside, planners can help clients take maximum advantage of tax laws, assist with budgeting, buying insurance, estate, education and retirement planning. They may also offer options for dealing with debt and advise on how much money to put where according to Virginia Tech Professor Derek Klock.
“When people are trying to make allocation decisions – how much of their money to put in a stock fund versus a bond fund versus a cash fund, the average investor doesn’t really know how to do that,” he explains.
Nor is the average investor equipped to rebalance a portfolio, taking money out of a sector that’s doing well but might soon level off or fall -- then investing in something that’s less expensive but holds more promise. Again, Dave Marotta.
“Studies suggest that that kind of contrarian rebalancing boosts returns by about 1.6%.”
You might think a financial planner could warn you if the market was about to drop, but Bob Bruner, the Dean Emeritus of UVA’s Darden School of Business, is skeptical.
“Even a stopped clock is right twice a day, and we have pundits galore today who are predicting upturns, downturns. I think we should take them all with grain of salt.”
Bruner is a student of history as well as economics. He and Sean Carr just published a book on the panic of 1907, and he notes this country has weathered nearly two dozen panics or crashes, and we will likely see more.
“I tell my students that I am reasonably confident that there will be another financial crisis within their professional lifetime. Let’s say the next 50 years. It has to do with the structure of the banking system, the way people behave.”
That’s why he and his colleagues at the University of Virginia are organizing a series of talks and conferences on the crash of 2008. The circumstances were not the same, but he thinks there’s value in understanding what happened then.
“Mark Twain famously said, ‘History doesn’t repeat itself but it rhymes.’”
And in the mean time he offers some tried and true advice. Be cautious in where you invest. Keep an emergency fund that could sustain you for six months or more, and don’t spend money you haven’t yet earned.