As I write this, I am on an airplane for the first time since the terrorist attacks on New York City and Washington, D.C. As someone who typically flies 200,000 miles annually, it's been strange to not be flying at all over the past week. The airport in Pittsburgh was eerily empty this morning.
Everyone — from the airline personnel to passengers — seemed on edge. You can no longer park close to the terminal. As we pulled up to the passenger drop-off point, we passed the county bomb squad van. While there are more police officers visible and you have to check in at the ticket counter, frankly, not much has changed so far. I was surprised to be asked exactly the same two questions airline passengers have answered since the Oklahoma City bombing: "Have your bags been under your control since you packed them?" and "Has anyone asked to you carry something on the plane for them?"
"That's it?," I said to the ticket agent. "Nothing else?" She shook her head sadly and with a tinge of sarcasm in her voice said, "These questions didn't do a lot to stop what happened last week, did they?" I had to agree.
You have to show your ticket in order to pass through security. However, the same familiar faces scanned my carry-ons. No one conducted a hand search of my bags. There were no explosives-sniffing dogs roaming the terminal. I found myself staring at people, mentally assessing whether they had the potential to be a terrorist. No one was allowed to board the plane until the captain said so. I can't say what, if any, additional procedures stowed luggage went through. The plane, a 737-400, took off with just 33 passengers onboard. I hope and pray there were more safeguards in place than I realized and that additional measures will eventually be adopted.
Despite my anxiety about resuming flying, I know I will adjust. We will all adjust to whatever additional security measures and restrictions are required to prevent another horrific incident from occurring. And although it now seems forever altered, life will resume. Despite our differences, Americans are fundamentally a warm, generous and outgoing people. We are also tough and resilient. I am confident America will recover from the barbaric brutality inflicted on our country on September 11th. And so will our economy.
The question is, what should the typical investor do in the short term?
For starters, don't get caught up in "The News of the Day" or, worse, "The News of the Hour." Decisions motivated by panic are a sure recipe for making investment choices you will regret later. Here's an example: earlier this month the government released the unemployment figures for August. They showed the jobless rate had jumped to 4.9%. Throughout the day, we heard a steady stream of negative comments from so-called economic "gurus" who predicted we were headed for 5% unemployment and worse. In response, the stock market sold off sharply.
However, the jobless number is what's called a "lagging" indicator; it tells us what happened in the past — in this case, the month of August. In fact, data collected in early September showed hiring had actually begun to pick up. In other words, the picture was much brighter than the unemployment report alone would lead you to believe. Instead of selling stocks that day, smart investors would have been buying shares of companies with the best prospects for earnings. If you one of the ones who hit the panic button and sold instead, you have this consolation: you were not alone.
Don't blame the news media. It's their job to give you the latest information; that's why it's called "News." It's not an anchorperson's job to tell you whether a piece of information has any relevance for you and your portfolio.
If you don't feel capable of putting the information into perspective and making this decision yourself, by all means find a financial professional to help. In my opinion, one of the most valuable services a financial advisor can render is to prevent you from making a dumb mistake.
The kind of market volatility we're seeing is typical after a major traumatic event. While it's true nothing like this has ever happened before, it's also true that the other market-upsetting events were unique, too. There was only one attack on Pearl Harbor; until JFK we had never had a president assassinated in the 20th century; there had never been an OPEC oil embargo prior to 1973, etc.
The folks at Ned Davis Research looked at 40 major crises going back to the fall of France in 1940 and found some striking similarities in terms of how the financial markets reacted. Immediately after the event the Dow Jones Industrial Average generally fell an average of 7%. But then it rallied.
A month afterwards, it was ahead of where it had started by an average of 3.8%. It recouped nearly all of its initial loss within three months. A half year later it was up by about 12%. Let me emphasize that these are average results, meaning in some cases the market's reaction was worse and in others it was better. And, as always, past performance doesn't mean that prior markets will necessarily be duplicated.
Nevertheless, if you are truly an investor, then by definition you have a longer time horizon than a trader who is moving in and out of positions all day long. And if history is any guide, the market trend for someone with a 3-to-5 year time horizon is very positive: down sharply immediately after the crisis, then a recovery, followed by a sustained gain. If you were comfortable with the mix of investments you owned on September 10, then at the very least, do nothing until things settle down.
If you have a cast-iron stomach and were thinking of adding to your stock investments, then consider moving money into the market by dollar-cost-averaging. This involves investing a fixed amount of money at regular intervals. For instance, if you had $5,000 to invest, you could buy $1,000 (or $500, $250, etc. — you pick the amount) worth of securities (stocks, mutual funds, etc.) on the same day each month. Or, you could use the same technique and invest weekly instead. If you can't figure out which companies are going to survive and prosper, then by all means let the experts decide by either following your advisor's recommendations or using mutual funds.
Since you're not committing all of your cash at once, with dollar-cost averaging you don't have to worry about picking the "best" day. And you can use the market's volatility to your advantage: investing your money incrementally gives you a better chance of buying on market dips when prices are lower and your investment dollars can go further. Of course, you should always consider your ability to invest during periods of low price levels.
Dollar-cost-averaging will not protect you against a loss or guarantee a gain. But because it involves investing gradually, it can help you overcome that little voice in your head screaming, "Don't do it!" As you've probably realized by now, "Buy low. Sell high." is an easy thing to say but incredibly difficult to execute. That's what being a "contrarian" is all about, you are going against the market herd.
Even if you don't believe history will repeat itself, there are strong reasons to believe this economy is headed for recovery. While the terrorist attacks struck at the hearts of our nation's financial and military institutions, with devastating loss of life and property, they did not cripple the American economy. It was nothing short of amazing that the New York Stock Exchange was open and operating less than one week after the horrific destruction of the World Trade Center just a few blocks away.
Talk about American resolve and resilience! So here are some of the positives the economy and financial markets have working in their favor:
1. Inflation is virtually non-existent. Even energy prices have come down and our Arab friends have committed to keep the pipelines full.
2. Interest rates have been falling all year. This week the Federal Reserve announced another cut — its eighth cut year-to-date — amounting to half a percent.
3. Taxes are also lower and slated to continue in that direction. Now there's talk on Capitol Hill of a cut in the capital gains tax.
4. We are the most productive country among all of the industrialized nations. Federal Reserve Chairman Alan Greenspan told Congress this week he expects American ingenuity to continue to produce innovations in technology which will result in further productivity gains.
5. Congress just passed a $40 billion spending bill. The money is to be used to re-build the World Trade Center and Pentagon and pay for counter-terrorism measures. Although consumer spending has slowed, this should be temporary. And it will be offset by a burst of spending from the government and corporate sectors.
Frankly, I cannot recall a time when the economy has had so much going for it: fiscal and monetary policy is aligned, inflation is barely to be found, productivity is high. But it will take time for all of these to register an impact on the economy. The recovery has been set back, not derailed. The smart investor is looking out six months or so and seeing the clouds begin to lift.
Keep the faith. God bless America.
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The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.