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A Long-term View Can Help Investors Secure Their Future

A slowing economy impacts people’s daily lives in many ways, but for those with money tied up in stocks or other investment vehicles, market turmoil can seem like a threat to their future, too. But most analysts say that keeping one’s eye on long-term investment goals is key to riding out what one local expert called the “noise” of short-term fluctuations.

Paul Valickus recalled a pool employees used to conduct at St. Germain Investment Management.

“Everyone would throw in a quarter in the morning, and to win you had to get within 10 or 15 points of the Dow at the end of the day,” said Valickus, president of the Springfield-based investment firm. “Do you think the experts won that pool? No, the receptionist won it the most. There’s no sense to it.”
The lesson from that game is that investment markets are uncertain and highly volatile beasts in the short term — but that those who make smart decisions over time will be rewarded.

“My crystal ball is very blurry over the next six months, but that’s when people want to know what’s going to happen,” Valickus said. “Over the next six months, I don’t have a clue. But I do know that, over the next five to 10 years, you’ll be happy you got into the stock market today. What happens in the short term is all noise.”

Nonetheless, that noise worries investors, many of whom are counting on the financial decisions they make today carrying them through a comfortable retirement. Financial analysts who spoke with BusinessWest called that an understandable anxiety, but warned that it can be dangerous to bail on the market or make wholesale portfolio changes in response to a rocky economy.

In other words, to borrow an oft-used metaphor from sports, investing for the future is a marathon, not a sprint. And there’s no reason to quit the race, experts say, just because the current stretch is cratered with potholes.

“In uncertain times, we try to reaffirm with customers that the strategies we put in place to begin with are still relevant,” said Chris McCarthy, director of national sales for TD Banknorth Wealth Management Group, the investment arm of the financial-services institution.

“When the market is fluctuating, that tends to generate dialogues with clients,” he continued. “We’re always looking to see how we can make tactical changes in clients’ portfolios, but generally speaking, we don’t see that long-term plans change.”

Typically, McCarthy explained, that long-term strategy looks ahead five, 10, or more years, and historically, the market is virtually assured of gaining ground over any such stretch.

“We want to help clients establish what their strategies are to achieve those long-term goals,” he said. “In the short-term management of the portfolio, we’ll always be adjusting to what the market is doing, but even when it’s more volatile than normal, you have to go back to the basics and focus on your long-term goals and building a diversified portfolio.”

In this issue, BusinessWest examines the difference between short-term and long-term outlooks in the world of investments — and why there are plenty of opportunities to make up ground in that race toward financial security.

Staying the Course

Although the long-term health of the stock market is a good bet, Valickus said, many people let current conditions rattle them.

“We, as Americans, look at Warren Buffett as the god of investing and believe his philosophy of buying something cheap and selling when it gets expensive,” he said. “The problem with most people is, even though that works, they don’t follow it.

“In other words,” he continued, “right now, with everything going wrong, with oil prices going up, inflation rearing its ugly head, and the economy slowing, everyone is getting nervous with the markets down big over the past 12 months. But this is a time when we at St. Germain are actually looking to buy stocks on sale.”

Valickus explained that it makes sense to take advantage of the two great emotions that come into play in the stock market: greed and fear. “What we want to do is buy stocks when everyone has the greatest fear, and we want to sell stocks when everyone is greedy and saying, ‘oh, did you see the stock market?’

“We do very well in questionable markets; people can trust us to be conservative and cautious,” he added. “Where we do poorly is when the market goes crazy, and people don’t want to think about three to five years out, but about what’s going to happen over the next two months and how they can make a killing quickly.”

People who are serious about a long-term growth strategy must understand that they will endure some fluctuation in value, noted Richard Duncan, president of Richard G. Duncan Financial Services in Longmeadow. The difference between making and losing money long-term, he suggested, is knowing how to spot a trend amid those daily fluctuations — or, in most cases, hiring someone adept at spotting them — and be able to objectively change course when those fluctuations harden into negative trends.

“You and your adviser could end up being the last people to climb aboard the train before it goes bad, and if that happens, how much money are you willing to risk?” he asked.

“You can’t get emotional; you have to make the decision based on the trends. It’s like going home and seeing a for-sale sign in front of every house on the street except the one that belongs to you and your wife. Unless you’re going to ignore those signs, you have to make some decisions — and the sensible decision would be to turn around and get a for-sale sign for the front of your house until you figure out what’s causing all this.”

Duncan noted that there are a number of blue-chip companies that were once considered safe havens, but times have changed. “General Electric, for example, was the quintessential example of a blue-chip stock. It was trading at $56 in 2000, and it’s in the mid-$30s now.”

That’s why he suggests working with a broker with experience in successfully analyzing the small movements that become trends, because there are fewer ‘sure things’ out there. People with a limited amount to invest, he said, need to set a loss threshold at which point they will stop the bleeding and sell.

“If you want to buy a share in Apple, you need to tell me why you’re considering investing money in this company, and there is really only one answer: you’re expecting it to grow in value at an attractive rate of speed,” he said. But if the trends turn and cross that loss threshold, an investor must be willing to cut the stock loose, no matter how much they admire a company.

Diversification of investments is important, but it’s a more effective buffer when the overall market is healthy, Duncan noted. “When fear and panic set in, every boat in the harbor sinks.”

Next Big Thing

That panic can manifest itself in different ways, Valickus noted.

“Habits change tremendously based on what’s going on in the markets,” he said. “Two or three years ago, a lot of our clients were leaving because real estate was the place to be. Right now, it’s commodities. Ten to 15 years ago, people wondered whether the steel industry in the U.S. would survive. Now, it’s the hot place to be.

“People want to jump on the latest trends; it’s human nature,” he continued. “When everyone wants to be in real estate, maybe it’s time to get out. When everyone wants to be in oil and commodities, you have to step back and say, ‘maybe we have a bubble here.’”

McCarthy said asset allocation is key for any long-term investor, with a mixture of stocks, bonds, and other products spreading out the risk. But equally important is setting aside emergency savings as a buffer against everyday economic challenges, such as energy and food prices that are taking large chunks out of Americans’ discretionary spending.

“Clearly you want to keep your cash position,” he said. “A general rule is to keep three to six months [of salary] to weather the storm. That storm could be things costing more, or it could be losing your job. When people do that, it keeps them from dipping into their longer-term savings and investments. You want to let those ride and not put yourself into a position where you’re taking money out.”

One good thing about market uncertainty, said Valickus, is that sometimes expected bad news doesn’t pan out. “Everyone’s offering their own guess on where gasoline’s going, saying we’ll have $5 gas by the end of the summer,” he said. “But if everyone thinks gas is going to be $5 soon, it probably won’t be. The consensus may be right, but very often at the extremes, it’s wrong.”

But he’s not betting a quarter on it. After all, nobody has a crystal ball.

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