That doesn’t mean, however, that the best place for your money is buried under your favorite tree. Barring a complete apocalypse, there are still some basic, sound principles that can help you venture into that world and be better off for it in the long run. According to Beth Jones of Third Eye Associates, it’s about following time-tested wisdom and avoiding the trendy notions that can lead straight off a financial cliff.
“Short term money that you might need within three to five years, you should keep in CDs or the bank, not in the stock market. It’s not the place for short term gain right now,” she says. “There’s still an awful lot of nervousness in the market. We have a pretty good indication that the worst is over, but every time a little news comes out, people react—the market will continue to be volatile mainly because of emotion. Everyone gets afraid that a stock will go down so they sell, which of course then makes it go down. We’d all be better off if we take the emotion out of the picture, and let money do its thing.”
That thing it still does, over the long term, is grow, and Jones says that diligence and patience can still yield results that will afford you a comfortable old age. “For starters, don’t spend more than you make, and save 20 percent or more a year toward your retirement. That’s the long term money, and you should have it properly diversified among stocks and bonds. Mutual funds are usually best, because people can’t afford to diversify sufficiently on their own. If you own five stocks and two vaporize, you’re SOL.”
Motley Fool writer Dan Caplinger concurs with Jones about avoiding panicky overreactions. “It's always scary when a stock you own drops a lot. But selling after such drops often proves to be a terrible mistake when the stocks inevitably recover,” he writes. Jones is not a fan of index funds in times like these. “Indexing does not work in a volatile market. For example, take Standard and Poor’s. The top 30 companies comprise a huge amount of the market, but with an indexed fund, nobody’s minding the store. You’re not truly diversified. The best way to go is good quality, active management that can anticipate and analyze, and allocate tactically—that outperforms indexing in a volatile market. And while I do believe we’ll see a return to stable markets and single-digit, steady returns, there are likely to be several more years of volatility first.”
What effect will the recently enacted financial reforms have on individual investors? Jones believes it’s too soon to say for sure. “We’ve had deregulation in progress since the 1980s, starting with Ronald Reagan, and it’s continued under both parties. And our current troubles didn’t just begin in 2007—it started with the Tech Bubble at the turn of the century, and the craziness just accelerated. You can’t use your house as a bank account while the bank makes fifty grand on the $10,000 they loan you and expect good results, but people bankrupted themselves doing what the banks were recommending. The bottom line has always been one plus one equals two, and it always will be. People think they’re missing the boat if they don’t get in on hedge funds or day trading or the latest thing, but the lack of oversight led to a great many Ponzi schemes and shell games. And the way things like E-Trade work, with automatic stop-loss sell orders—no human brain involved—is guaranteed to make the volatility worse.
“Now the pendulum’s swinging back toward regulation. But the
financial services lobby will keep fighting tooth and nail against it. I don’t know yet what impact the new legislation will have, or what will happen with the Consumer Financial Protection Bureau. One thing that needs to be in place is the requirement of fiduciary duty.”
Fiduciary duty, a concept rooted in English common law, is an obligation to act in the best interest of another party. While independent financial advisors are bound by it, brokers and other financial salespersons are not, and it’s a distinction Jones believes that investors should be aware of. “Brokers follow a suitability standard, which is entirely different. You can have a mystifying product that’s truly terrible, and still push it under suitability. The insurance lobby managed to convince Congress that widening the requirement of fiduciary standard would restrict consumer choice. ”
In short, these are still curious and volatile times, in which anything could happen and very well may. Some of the best minds out there, such as Kingston-based trends forecaster Gerald Celente, don’t believe we’re anywhere near out of the woods yet; reform or not, we’re a long way from 1937, when William O. Douglas ran the Securities and Exchange Commission with the stated philosophy: “We are the investor’s advocate.” And even Jones, who isn’t the type who scares easily, sees a possible scenario in which things could get
considerably worse before they get better:
“The TARP bailout and the stimulus program may have been frustrating, but they were absolutely necessary. If that had not been done, the whole thing would have fallen apart completely. And all this screaming about the deficit right now is absolutely wrong,” Jones says, echoing the 300 economists who recently signed on to a statement to that effect. “Even more than ordinary people, the politicians ought to be leaving emotions out of their financial decisions right now, not playing on them. But they have this desire to appear ‘strong.’ If the Tea Party attitudes prevail, and those folks get elected, we could be headed for a recession that’s deeper and worse, because they don’t know what they’re doing. In a recession, when people can’t spend, the government has to spend to keep the whole thing moving. Otherwise not only is the suffering worse, but the eventual deficit will dwarf what we’ve got now.”
None of which—barring the complete meltdown of capitalist civilization—changes the long view. If the 300 economists manage to get heard, and the powers that be do ‘take the high road to fiscal balance,’ perhaps the ship of Finance will gradually correct its course and sail on. If they’re drowned out, and a greater crash is yet to come, bear in mind that these phases play out over decades, not months or even years. No less a financier than Warren Buffet himself has just proclaimed that it ain’t over till it’s over. “We're still in a recession and we're not gonna be out of it for a while. But we will get out of it, ” he told CNBC’s Becky Quick. (“Has Warren Buffet gone bonkers?” wonders a writer at the Globe and Mail.)
“We had a bad recession that lasted from 1968 till 1981, and then a long bull market that followed that,” Jones observes. “Right now, the market is actually right about where it was 10 years ago. This is a time to breathe, get centered, and not do anything crazy.”
Gabriel Sottile, president of Sawyer Savings Bank, agrees: Caveat
emptor, and keep a clear head. “The next three to five years are going to be rough going,” Sottile says. “I would have to advise playing it safe right now, sticking to insured banks and treasury bonds. I’m disgusted by the things that have happened in the business world—no, nobody held a gun to those people’s heads and made them buy huge houses they couldn’t afford, but the people in the banks knew better, and shouldn’t have been blinded by commissions. Thank God we never did sub-prime or credit cards; we lost customers to those who did, but we’ve had no layoffs, and only two foreclosures in 10 years.
“The real bottom line is, it won’t get better until people realize that your value is not your net worth,” says Sottile.