Jerold Warner The Fred H. Gowen Professor of Business Administration and professor of finance at the Simon School
鈥淚 don鈥檛 think what鈥檚 happened over the past year changes anything as far as the kind of investment advice that financial economists have to offer,鈥� says Warner. 鈥淚t鈥檚 just that recent events are a powerful wake-up call to remind us about general principles.鈥�
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 鈥渋f your view of risk hasn鈥檛 changed, you should be getting back to what the allocation was聽before.鈥�
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 鈥渋t鈥檚 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鈥檛 try to time the market.鈥�
Investors should be wary of market forecasters, including mutual fund managers following active strategies. 鈥淚t鈥檚 hard to do better than low-cost index funds.鈥�
For some high net-worth individuals, tax considerations may dictate a different strategy. 鈥淵ou can鈥檛 beat the market, but you can beat the government in terms of good, tax-managed strategies.鈥�
Daniel Burnside A lecturer in finance at the Simon School
People too often confuse their personal financial planning with what鈥檚 going on in the stock market, Burnside says. 鈥淭hey think these things are strongly linked together. People don鈥檛 understand that the decisions they have to make very rarely are impacted by what鈥檚 going on in the market.鈥�
You don鈥檛 need to watch financial news or read personal finance magazines鈥攁nd you may be better off without them. 鈥淭he most common word that you鈥檒l see on the cover of those magazines is 鈥楴OW鈥欌�攚hat to do with your money NOW,鈥� says Burnside. 鈥淭hat squeezes out any discussion of things that are evergreen true.
鈥淵ou shouldn鈥檛 be trying to figure out, 鈥榃ill TARP work? What will happen to Bear Stearns? Will China want to hold U.S. dollars?鈥� If you鈥檙e trying to do that, you鈥檙e on the wrong track.鈥�
All the basics of personal finance鈥攄iversify your portfolio, keep expenses down, minimize taxes, set aside emergency cash, insure against big losses鈥斺�渁re just as true as they were five years ago, or 10 years ago. It鈥檚 kind of like eating well. The rules aren鈥檛 that much different from last year.鈥�
And reviewing your investment allocation once a year is plenty, he adds. 鈥淭he 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.鈥�
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.
鈥淥ver time, there are significant dividends,鈥� as well as major variances. 鈥淚f you鈥檙e into stocks, you鈥檝e got to have a tolerance level for periods like this.鈥�
Richard Ryan A professor of psychology, psychiatry, and education in Arts, Sciences, and Engineering
鈥淔or most people in a stagnant economy, the things that make them happy are still free,鈥� Ryan says. 鈥淭hose are relationships with other people, giving to community, and pursuing your own growth and learning.鈥�
Considerable research shows that once people are above the poverty level, further material gains don鈥檛 produce a lot of added happiness. 鈥淲hen people start to lose income, it鈥檚 not the loss of buying power that produces unhappiness. It鈥檚 more the sense of insecurity, and also the blow to one鈥檚聽ego.鈥�
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, 鈥渢his is a good time to be reaching out.
鈥淕o out and do something for others. It will both make you happy and it will do others some good, too.鈥�
鈥擧ilary Appelman
Hilary Appelman is a Rochester-based freelance writer.