Jerold Warner The Fred H. Gowen Professor of Business Administration and professor of finance at the Simon School
“I don’t think what’s happened over the past year changes anything as far as the kind of investment advice that financial economists have to offer,” says Warner. “It’s just that recent events are a powerful wake-up call to remind us about general principles.”
If the drop in the stock market showed you that you were exposed to more risk than you had the stomach for, you should move more heavily into bonds. But “if your view of risk hasn’t changed, you should be getting back to what the allocation was before.”
With a 10- to 20-year investment horizon, the safest long-term investment is still in stocks, not bonds, says Warner, who is also the area coordinator for finance in the Simon School. But “it’s also the case that on a year-by-year basis, you can lose money. On a day-by-day basis, or year-by-year basis, one cannot predict the direction that stocks are going to take. Don’t try to time the market.”
Investors should be wary of market forecasters, including mutual fund managers following active strategies. “It’s hard to do better than low-cost index funds.”
For some high net-worth individuals, tax considerations may dictate a different strategy. “You can’t beat the market, but you can beat the government in terms of good, tax-managed strategies.”
Daniel Burnside A lecturer in finance at the Simon School
People too often confuse their personal financial planning with what’s going on in the stock market, Burnside says. “They think these things are strongly linked together. People don’t understand that the decisions they have to make very rarely are impacted by what’s going on in the market.”
You don’t need to watch financial news or read personal finance magazines—and you may be better off without them. “The most common word that you’ll see on the cover of those magazines is ‘NOW’—what to do with your money NOW,” says Burnside. “That squeezes out any discussion of things that are evergreen true.
“You shouldn’t be trying to figure out, ‘Will TARP work? What will happen to Bear Stearns? Will China want to hold U.S. dollars?’ If you’re trying to do that, you’re on the wrong track.”
All the basics of personal finance—diversify your portfolio, keep expenses down, minimize taxes, set aside emergency cash, insure against big losses—“are just as true as they were five years ago, or 10 years ago. It’s kind of like eating well. The rules aren’t that much different from last year.”
And reviewing your investment allocation once a year is plenty, he adds. “The more often you look, the more often your sense of risk is heightened. Most people will make bad decisions when their sense of risk is going up.”
Mark Zupan Dean of the Simon School and a professor of economics and public policy
When the news makes you question your choices, sometimes a historical perspective is helpful.
If someone had invested a dollar in common stocks in 1802, Zupan says, it would be worth $400,000 in real terms today, even after the stock market drop. If you had invested in Treasury bills, that dollar would be worth just $350.
“Over time, there are significant dividends,” as well as major variances. “If you’re into stocks, you’ve got to have a tolerance level for periods like this.”
Richard Ryan A professor of psychology, psychiatry, and education in Arts, Sciences, and Engineering
“For most people in a stagnant economy, the things that make them happy are still free,” Ryan says. “Those are relationships with other people, giving to community, and pursuing your own growth and learning.”
Considerable research shows that once people are above the poverty level, further material gains don’t produce a lot of added happiness. “When people start to lose income, it’s not the loss of buying power that produces unhappiness. It’s more the sense of insecurity, and also the blow to one’s ego.”
Ways to relieve stress in these times include staying healthy, staying physically active, staying in touch with friends and family, and being outside in nature, Ryan advises. In addition, because more people are in real need right now, “this is a good time to be reaching out.
“Go out and do something for others. It will both make you happy and it will do others some good, too.”
Hilary Appelman is a Rochester-based freelance writer.