By Kayla Smail
INDIANA, Pa. – Stores closing. Banks going under. Business failing. Sound like an economy anyone wants to invest in? Didn’t think so.
In the current crisis the economy is falling into, people are becoming more afraid to invest their money in other places. It seems that they feel safer with their money hidden in a shoe box under their bed instead of in a bank or stock where it could accrue interest. So the question is: What are the consumers doing to the state of the economy by keeping their money?
When people were asking where to invest in 2008, experts at Kiplinger.com were saying that economic growth would be slightly ‘anemic,’ meaning they would be small, but still positive. They were expecting stock earnings to jump and the recession to subside as long as people continued to invest, but in reality, the market went for a downfall and the economy still resides in that recession. Kiplinger.com also stated that, “The US. Economy and consumer will be subdued, but investors will have plenty of opportunities thrown up by the boom in emerging markets.” It is true that these investors may have had plenty of opportunities, but most were scared of the idea.
Investing is turning into a game that is not for the faint of heart. True, it was always a game, but it seems that in the brief past, more and more investors have turned into cowards, questioning everything that they didn’t before. An article in the USA Today reported that, “Cowardly investing can work if done right.” The cowardice that so many prospective investors are suffering from today can actually help this dwindling economy by putting the money where it should go.
These types of things are money funds and the convertible market, which offer virtually no negative returns. Malcolm Polley, President & Chief Investment Officer at Stewart Capital Advisors, LLC, a subsidiary of S&T Bank, says that, “people are looking for the safest investments possible, even if it doesn’t make much sense.” These people are looking at things like short-term Treasury Bills that pay back virtually zero interest.
What’s the point of investing in something if you aren’t going to get back more than you put in? It’s that kind of cowardice that is unnecessary. This is affecting the economy in an even more negative way by making less money available for the things that need it: new businesses, products, and services.
When asked about the scared consumer, Polley says, “I don’t think consumers are more scared than they were, say, three months ago, but they are scared. They are scared because they hear about companies laying off workers, friends losing their jobs, news about home foreclosures and corporate bankruptcies, and they may be having difficulties making ends meet because incomes are not growing and costs keep rising. Furthermore, there doesn’t seem to be any light at the recessionary tunnel.”
Jonathan Pavlick, Portfolio Manager at Stewart Capital Advisors, LLC, says, “Most consumers understand that the stock market has its ups and downs, but because this downturn has been so severe, investors are truly being tested.” Pavlick believes that the people who are selling their stock investments now after a 40% decrease shouldn’t have been investing in stocks in the first place. “Investors need to be aware of what investments they have, but they do not need to be watched on a daily basis,” says Pavlick.
Speaking of the consumer, Jack Erwin, who has been investing for 20 years, says that he hasn’t been deterred from investing at all. Erwin says, “During the last year and a half, my portfolio has lost about 20%. I restructured my investments to safer, more bond-structured fund and this year to date, I’ve only lost about .1%. I haven’t given up on the system, but I am playing it safer.”
Ronald Patrick, another 20 year investor in his employer’s 401k, investment management with the Trust Department at S&T Bank, mutual funds, company stock, money market accounts, and a Roth IRA, says he isn’t afraid to invest for the long term. Patrick says, “I believe that over the long term, the investments will perform and provide a positive return. However, I will continue to invest less at this point because I feel that the return is still too unsure so I will use available investment funds to reduce current debt.”
Both Patrick and Erwin have looked to people like Polley and Pavlick to help them determine what to do with their money during these trying times. They say that these people have more experience and are constantly watching the market, so they are the ones that are able to answer any questions. Erwin says, “I talk to my advisor, Jon Kratsas, often. He has a lot of experience in what type of funds will perform better in this economy.”
Though there are people like Patrick and Erwin that calmly look at the situation and consult others to help them through their difficulty, there are still those that make the wrong decision. Helena Rados-Derr, AVP Portfolio Manager at Stewart Capital Advisors, LLC, talks on a daily basis with new and existing clients, trying to find out how comfortable they are with investing and is always trying to steer them in the right direction.
Derr says, “Most of my clients understand that the best thing to do during a crisis is to stay the course. Taking the money out when the market is falling can only create losses and heartaches. Fear will get the best of us during a crisis.” When asked what could be done to eliminate this fear, Derr says that the best thing to do is to talk to clients and make sure they understand the risk/reward schedule.
Pavlick also agrees with Derr’s thoughts on the risk versus reward information. He says that people get scared watching their investments shrink, and instead of just staying the course and waiting for it to get better, they pull out and inevitably lose everything. There are so many different investments that there should be something for every kind of invester. Pavlick understands that different investors need different things, and he’s sure that because of this, the economy will inevitably be okay.
After talking to all of these experts, it’s very common that being able to invest is without doubt due to how well your stomach can handle it. Each investor needs to know their ability to stomach risk and deal with rewards. Derr believes that an investment officer needs to completely understand their client. “I think the greatest mistake an investment officer can make is sell a product that does not fit their client’s needs, which can lead to lack of diversification of their investments.”
Patrick thinks that the main issue making other people afraid to invest is that “fear of continued losses.” People see the economy on the decline, so they think that they need to stay out of the investment field. The best thing to do, though, according to the investment officers, is to just make smarter investments. Diversity is key and fear is unnecessary.
According to Polley, this recession will pass just like all the others. It’s just getting through the recession that is difficult. People are afraid of doing things they may regret with their money, but they are also more prone to missing opportunities because of their fears. It’s this vicious circle that has everyone worried in the first place. In this crisis, people have been forced to walk away from their houses simply because they could no longer pay for them. The cost of living is so high that people get lost and have no idea what to do.
It is people like Polley, Derr and Pavlick that will help consumers like Erwin and Patrick through this recession. By knowing the ins and outs and being able to strategize and make the right decisions for themselves and others, they will be able to pull through. As Polley said, “this recession, too, will end.” It is because of this positive thinking that people aren’t all going mad during these trying economic times. Consumers need to think of these people instead of giving up on the economy and worrying about their investments.
All investors need to remember that there are experts out there to help them figure out what they should do. Investors are not alone; people are out there to willingly answer all questions and find a smart solution. In fact, it is Derr’s daily duty to deal with these people and be a sort of psychiatrist that is able to put them at ease.
“I have certainly dealt with some nervous clients and at times it felt as if I acted as a counselor or psychiatrist. However, this is all understandable,” says Derr. These officers understand what the consumer is going through and are more than willing to help. Though the economy may be falling, it can’t go on forever, and it is these people that will help it stop.
“The economy will again begin to grow. We just have to have confidence in ourselves,” Polley says.