FEATURE | FALL 2010 EFFECT

Investing in the Recovery: Personal Finance

by Suzy Frisch

People are breathing sighs of relief as the economy comes through the worst of the recession, and they might be getting ready to shift their stance from one of thrift to money-making mode. Not so fast, say financial advisors. The markets will continue to be volatile; many believe there will be more bad news stemming from commercial real estate and crushing debt around the world. Chasing after profits and the next big thing is what got many people in trouble in the first place.

Many financial professionals are counseling caution for their clients, watching and waiting, and not taking any chances. They’re looking ahead to the long term because they suspect some bad news may still be on the way.

Beyond the basics

Professional advisors still suggest sticking to the basics: pay off debt, refinance debt if possible, and save. John Wasik, author and Chicago-area columnist for Morningstar.com and Minyanville.com., says regardless of what’s happening in the economy, it’s always important to save, as long as your debt is in line.

Tony Hallada, principal-in-charge of LarsonAllen Financial in Minneapolis, Minnesota, says the rules for investors really haven’t changed drastically. “There is a lot of fear out there,” Hallada says. “But I think people still need to have some equities in their portfolio. If they are using the money in five years, it shouldn’t be in equities. But beyond five years they should have some exposure, because the markets are fairly valued right now.”

People who still feel uneasy about the stock market might consider putting their money in quality, large company stocks, because bigger corporations typically recover first from a recession. So an S&P 500 index fund may be a good place start investing again.

Wasik also favors investing internationally through low-cost index funds, such as exchange traded funds. This can counterbalance economic troubles in the United States, such as a double-dip recession or reckoning on the $13 trillion national debt. To capitalize on strong growth in other countries, the index funds should cover all market sectors and a diverse array of emerging economies, ranging from China and India to Brazil, he says.

Investing in the Recovery: Business Many businesses spent the recession paring down costs, shrinking payroll, and finding ways to be more productive and efficient. These moves paid off in strong corporate balance sheets that are sending rising revenue directly to the bottom line. More

Interest in bonds

Investors should have plenty of less tumultuous bonds in their portfolios to offset the riskier stock market. But when evaluating bonds, stay away from high-yield corporate bonds, which already have recovered significant ground since the market crashed. Instead, Hallada sees greater opportunity in high-yield municipal bonds, which fund hospitals, highways, schools, and other civic projects. There is still plenty of value to capture in that space, he says, and they are exempt from federal taxes.

Shorter-term bonds (debt maturing in less than five years) are relatively stable and affordable. But the bond market can be confusing, and potential investors may need an experienced investment advisor to guide them.

In general, many financial professionals are suggesting clients remain fairly conservative—that “slow and steady wins the race.”

LarsonAllen Financial’s Mike McConnell advises his clients to recognize that the future holds many risks, some of which we can manage and others that are out of our control. “If we manage our emotions, as well as the risks we can control, we will do much better personally, and the markets will be less volatile with fewer bubbles and crashes.”

Ready real estate

Outside of the financial markets, Hallada sees potential for investing in real estate, especially commercial properties. “For people who have the time, energy, and desire, there are all kinds of opportunities out there,” he says. “Dysfunctional markets create tremendous opportunities.”

Real estate investment trusts (REITs) are promising because they have bounced back significantly, Hallada says. They are using their improved financial health to buy up private property and expand their portfolios. Currently public prices (properties funded through the financial markets) are high and private prices (funded through banks) are low, opening doors for making money on that discrepancy. The public market will continue to ascend, giving REITs more fuel to buy more private real estate; in turn, this will drive up prices on private properties.

Hallada also sees many investors—including regional banks—trying to shed their holdings. “I like to say that when there is doom and gloom in commercial real estate, there is opportunity. When everyone is jumping in, it’s time to get out of it,” he adds. “You have to be contrarian about this stuff.”

The end or a beginning?

The financial world hasn’t come to an end, and there are smart strategies for making sure you are well prepared for the future—and the next downturn. But fears about inflation, high global debt, and volatility in the financial markets have Wasik and others scrutinizing the recovery with a wary eye.

“We’re in this period called the Great Reckoning. Things have shifted to a great degree,” Wasik says. “Many jobs that were lost are not coming back, and companies have changed forever. Companies have found out how to run their businesses with a lot fewer people, in different ways, and with more technology. It’s just not the same environment.”

So before you throw caution to the wind and dive fully back into the world of investing, consider taking it slowly and seeing which way the wind blows.

 

Tony Hallada and Mike McConnell are principals of LarsonAllen Financial, LLC, member FINRA & SIPC and are not affiliated with the author. One should not rely on this information for the primary basis of investment, tax, or financial planning. General market information does not take into account such factors as an individual’s goals, objectives, risk tolerance, tax situation, age, or time frame. We believe the information obtained from third-party sources to be reliable, but neither LarsonAllen Financial, LLC nor its affiliates guarantee its accuracy, timeliness, or completeness. The views, opinions, and estimates herein are subject to change without notice at any time in reaction to shifting market conditions. Tax laws change and investments in the stock market entail risk and potential loss of principal. Past performance is no guarantee of future results. This material may not be republished in any format without prior consent.