Although stock watchers may not agree on where the market is headed next, most concur its recent volatility has been unprecedented. “It’s definitely a unique situation right now,” said Louis G. Murphy Jr. registered representative and stockbroker for Brown Lisle Cummings Inc. in Providence.
It used to be when folks wanted “long term investments” they were talking 10 years at least, said Murphy, who recently counseled clients for whom long-term meant two or three weeks. “I said, that’s not long term,” he said, laughing.
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This nearsighted understanding of investing illustrates the negative side of the last “five spectacular years,” where NASDAQ climbed at an annual rate of about 80 percent, said David Ullom, financial consultant for Raymond James Financial Services in Cranston.
Now it’s back to reality, time for investors to “step back and put the current market turmoil in perspective and apply the lessons learned from many years of studying the financial markets,” said Allen N. Jones, senior vice president and director of Merrill Lynch.
Investors should review their investment goals, time frame and risk tolerance in the wake of the market’s recent gyrations, Jones said, adding that “having a diversified portfolio can cushion the effects of volatility and enhance total returns.”
Wise advice, Murphy said, especially these days where “one bad report” can cause a company’s stock to plummet 10 percent at a shot. “We never used to see this,” he said, adding that the overall downturn these last couple of months has quieted such dramatic turnarounds, since investors are “not having the opportunities to be selling right now.”
“Buying the dips has always worked, but it doesn’t work this time,” Ullom said. Now it’s buy low and sell even lower, he added. And although “bear market” no longer describes the current situation, the “absence of buyers and dearth of sellers” is causing investors to feel uneasy.
Lorayne Fiorillo, a senior vice president for a major brokerage firm and author of the recently published “Financial Fitness in 45 Days,” said investors might simply need to cut out of certain stocks now and let go of hopes of former peak performance. “People don’t take profits,” she said.
Another idea is to use dollar cost averaging, buying by the dollar’s worth rather than by the number of shares, so temporary downswings in price can benefit investors if they continue periodic purchases in both good times and bad. “It’s the famous no-brainer” of the investment world, Fiorillo said.
Investors can also consider convertible securities that may be exchanged for common stock or another security, usually of the same company, in accordance with the terms of the issue. Another strategy is short-term securities, “especially now, because the yield curve is inverted,” meaning investors can get a “very high yield when maturities are short.” But “no matter what you do,” Fiorillo said, “consult your tax or financial advisors.”
Actually, one result of today’s frenetic market is the restoration of relationships that have taken a back seat, Ullom said. Many investors “are becoming disenchanted with their recent investments” as they watch interest rates rise, and are leaving the stock market to earn “reasonable rates of return” with old stand-bys like short, interim and long-term bonds.
Corporate bonds are attractive in a volatile market, Murphy agreed, with interest rates of 6.5 to 8.5 percent on some, producing a pretty good return “with much less risk.”
Fearful investors may also start putting their money back into CDs, and although this isn’t a smart move, Ullom said, “that’s human nature.” Investors are also looking again to brokers rather than going it alone on the Internet. “We are more becoming a market of stocks rather than a stock market,” Ullom said, meaning you can’t just buy anything now and expect to make money. “They are going to need our advice” in order to know “the right stocks, the right companies, the right sectors at the right time.”
”A lot of information can be a good thing,” but too much isn’t good, either, Murphy said, agreeing there is a current disenchantment with Internet stock advice. “I think people will think twice about information going on in these chat rooms,” he said, preferring the old fashioned reliability of a reputable, real-life firm.
“It’s kind of tough to ask your mailman what to do,” Ullom said. Their firm “took very early measures” to provide investors heavy cash positions, doing the best to avoid capital gains – so that money will be available to put back into the market “as we see the opportunities develop.”
And, while the mercurial nature of the present stock market may inspire fear and loathing among investors, for the most part market swings have little effect on the day-to-day business of running a company. “Volatility in the marketplace has more to do with trends in stock prices,” Ullom said, although dramatic market shifts could scare investors into selling their holdings in local companies, which could “artificially drive prices down short term.”
Volatility in the position of a local stock, like Hasbro, say, “on a business plan doesn’t really play much of a role,” Murphy said. “The only way [is] if they were going to do a secondary offering,” he said, adding that “companies that have been acquiring companies of late” who do so by putting up their own stock will be affected.
In terms of mergers and acquisitions, market volatility can affect a company “fairly substantially,” Fiorillo agreed. Also, if a stock declines to a point too close to its book value, a company becomes vulnerable to a hostile takeover, she said. But for the individual investor, there’s no point in spending too much time worrying about market gyrations.
“There is never a simple answer to the question of what’s best for your financial well-being,” especially in times of market volatility, Jones said. ” In the weeks and months ahead, don’t lose sight of your long-term financial objectives,” he said. “Your financial consultant can help you filter out the static caused by market turbulence and help you clarify the messages that hold the keys to financial success.”
“This is a fascinating business; it really is,” Murphy said. “I think if people are patient,” and forget about the short term, the market will eventually correct itself. “They’re just too anxious to do things, and they should wait,” Murphy said, although “I don’t think it will ever go back to the way it used to be.”
