Investment advisers: Don't panic

Alex Gary

Financial experts spent much of September sounding the alarm, with some analysts warning that the financial meltdown could mark the worst economic climate since the Great Depression.

And by most measures, the Rock River Valley’s economic outlook isn’t good. The jobless rate for Boone and Winnebago counties hit 9.5 percent in August, the highest it has been here since February 1992. Homebuilding is at its lowest level since the early 1980s.

But there has been no noticeable panic in the Rock River Valley. Most are like Rich Brien of Roscoe, who works for Liebovich Brothers Inc.

Brien, 38, said he watched coverage of the $700 billion federal bailout talks in Congress “only a little.”

“At my age, it’s a little early to be concerned about the stock market. I’ve got a lot of time left (before retirement). Plus, there’s so much information out there about what went wrong and what the plan is supposed to do, it’s hard to decipher.”

Of course, Brien’s parents are nearing retirement.

“I assume they are watching it closer,” he said, “but they haven’t jumped overboard yet.”

Banks and brokerage firms have reported some worry among customers, but not overwhelming concern.

“This past week we’ve gotten five phone calls, which is more than normal,” said Kirk Hosler, senior vice president of Stillman Bank’s trust department. “I’d say there was an elevation in their level of concern. No one called to make serious changes. The questions centered around what we were doing. They just wanted reassurance.”

Of course, there still is a strong chance that the U.S. economy will suffer a recession — if it isn’t in one already — and no one is quite sure when all of the credit problems will be filtered out. But where and what you should be doing with your money depends greatly on your age.

The Register Star recruited five investing professionals to write about what people should be doing at different points in their lives. As you’ll see, the advice is similar for many of the age groups and the same for all: Don’t panic.

Alex Gary or at (815) 987-1339.

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There are risks inherent in all investments, such as fluctuations in investment principal. With any investment, past performance is not a guarantee of future results. Individual situations can vary, therefore the information presented here should only be relied upon when coordinated with professional advice.

Age 25: Julie O’Rourke, Chief investment officer, Alpine Trust & Investment Group

The first priority must be to establish an emergency fund of three to six months of living expenses. The appropriate investment would include a bank savings account, a money-market fund or a short-term certificate of deposit.

Once that fund is established, the 25-year-old should consider deferring income into his company’s 401(k) or similar retirement plan. If the company offers a matching contribution to the employee’s, the goal should be to invest enough to take advantage of the employer match. This is the only “guarantee” you will get in investing. Think of it as a 100 percent return on your investment because each of your dollars is matched by a contribution from your employer.

The retirement account for this age should be invested in equities. Although current financial markets have tested the patience of an investor of any age, the sell-off has created a tremendous investing opportunity for the 25-year-old investor. With 40 years or more until retirement, we will look back at this time as one of the best investment opportunities in some time.

Diversifying the equity portfolio will help investors weather even these most challenging markets. Our recommendation would be to invest 50 percent in large-cap domestic equity funds, 25 percent in domestic midcap equity funds, 15 percent in small-cap domestic equity funds and 10 percent in developed international equity funds. We prefer to exclude emerging markets from the portfolio for now, but this asset class certainly has a place in the portfolio once the market volatility recedes.

Age 35: Donald Thompson, Premier agent, The Prudential Insurance Co. of America, Rockford

Rather than dwelling on the pessimism, accept conditions for what they are and set out to change your financial prospects in retirement. Try to save more. For many people, this is easier said than done. If you can find a few dollars a week to put into your retirement savings, it may add up over time, thanks to the power of time and compounding. When you invest on a regular basis, you are dollar-cost averaging, so when the market is down, you are purchasing more shares.

Contribute to your workplace retirement plan. If your company has a 401(k) or other qualified programs, contribute as much as allowed or you can afford. Contribute at least the amount of money the company will match. Failing to do this means you leave what is essentially free money on the table. If there is a qualified plan available, you should be able to meet with the financial professional who set it up, or with your own financial professional, to review your asset allocation or start one to be sure the investments you are in match your risk tolerance.

Create an emergency fund. Rather than using your credit card during a financial emergency, you could put away a portion of your salary to meet unexpected expenses. This should be six months of income and should be in a savings account or money market account. Remember, investing is for the long term, and revisiting your asset allocation can cause you to take a second look at how you feel about your investments.

Age 45: Palmer Klaas, Owner, Palmer Klaas Financial Group, Securities and Advisory offered through AIG Financial Advisors Inc., member FINRA and SIPC

A husband and wife who are both 45, for example, and have two precollege-age children are in a typical scenario of having to save for retirement in a substantial way and saving for future college expenses. This couple, with about 20 years until retirement, will want to be in more growth-oriented investments based on the years ahead before retirement. At the same time, they are wondering what to do in this uncertain financial market.

For many, particularly those in their mid-40s, the best time to buy shares is when the prices are lower. Sir John Templeton said: “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.” The contrarian built an investment management company he sold in 1992 for almost $1 billion.

This couple should be taking advantage of an employer 401(k) plan with the tax deferral. Any employer match is critical. Next, consider taking advantage of Roth IRAs, where all the growth has tax advantages when the funds are taken out — as long as they abide by the government distribution rules. This is can be a tremendous tax windfall. Looking at investing for college, the couple have been able to save through 529 plans. Here their contribution dollars are after-tax, but the growth will be tax-free when withdrawn if used for higher education.

It would be prudent for this couple to consider a portion of their investments as alternative investments that have a low correlation to the stock market. To have certain investments that do not always go up and down at the same time potentially gives more stability to an investment portfolio.

Taking out emotions despite the financial turbulence is important. Take a deep breath and stay on track and continue to work the plan. History has shown that after a number of recessions in our country, the stock market has had substantial gains 12 months after the low date of the market during those recessions (Source: Ned Davis Research Inc., Jan. 14, 2008). With a number of financial companies either no longer around, merged or bailed out, this could prove to be a more healthy market with less risk moving forward over time.*

*These views are not necessarily the opinion of AIG Financial Advisors Inc. and should not be construed as an offer to buy or sell any securities mentioned herein.

Age 55: Brian Pond, Financial adviser, Edward Jones, Rockford

If you’re thinking of retiring early or by the time you reach age 65, start preparing for it as early as you can. Address at least two key financial concerns. First, you’ll have more years of retirement to pay for than people who retire later. Second, if you decide to retire early, you’re sacrificing the opportunity to contribute to your 401(k) or other employer-sponsored retirement plan. Also, you need earned income to contribute to an IRA.

How can you overcome potential barriers to a successful retirement? For starters, a couple in this age range may need to put as much as possible into their 401(k) and IRA each year — and a greater percentage of the investments in these accounts may need to be in growth-oriented vehicles, such as stocks.

Of course, it’s not a good idea to fill your retirement accounts entirely with stocks at this age, given their higher risk and volatility. You’ll also want to add some bonds, certificates of deposit and other fixed-income investments to help diversify your holdings. Keep in mind, though, that diversification cannot guarantee a profit or protect against loss. Furthermore, you may well need fixed-income vehicles to provide a more predictable income stream. Remember, however, that this couple’s retirement could last 30 years or more, so they’ll still need growth-oriented investments to keep them ahead of inflation, which, over time, can seriously erode their purchasing power.

Age 65: C. Pamela Hedges, Owner, CPH Financial, Rockford

For someone who is 65, much depends on the size of the assets. Someone who has $100,000 needs to make different decisions than someone with $1 million. It is important to be realistic about the amount of income they need and the lifestyle that they are living.

At 65, the individual needs to protect his or her assets from erosion, but they also need growth, which requires accepting some level of calculated risk. Because inflation is a fact of life, growth is necessary. You need to protect and grow assets to provide and/or produce income. It used to be that bonds would provide that mechanism, but bonds are too tightly correlated to stocks and do not provide that counterbalance as well as they had in the past. So it is important to find a stable bond alternative as a part of the strategy. The growth component of the strategy will reflect the risk tolerance and perhaps high-quality, stable mutual funds might still serve you well.

As we all know, being 65 is not as it was when our parents or grandparents were 65. Our life expectancy is much longer, and our quality of life is at a higher level. We are healthier, and our ability to work longer must be taken into consideration, especially at a time like this. Panic is not warranted, and it is important to stay the course until the markets calm down and adjust. Even at 65, it is important to stay with the game plan so as to not miss the opportunities that come along with this type of market.