DANVILLE — Economy in crisis

(This is the third in a multi-part series looking at how the sour economy is affecting the Danville area.)

American workers have felt the panic this autumn watching the stock market fall on a nearly daily basis.

Those who planned to retire this year or next may have pushed their last day at work back a year or two. Younger workers are unsure whether staying with a 401k is worth losing so much money in downturns like this one.

But experts have some advice that could be hard for investors experiencing anxiety to swallow: stick with it.

“It’s OK to be fearful — we all are, but it’s usually never a good idea to act on your fear,” said Merrill Lynch wealth management adviser Dean Crandall.

“Unfortunately, we come out of the factory wired the wrong way when it comes to investing. We tend to buy when we should be selling and sell when we should be buying. We are our own worst enemy.”

Too often, people forget that economic downturns are a normal part of any economic cycle, Crandall said.

“We forget that we’ve been here before,” he said.

Dollar cost averaging — which means investing a set amount of money each month at the same time — can be very effective once the economy turns around, Crandall said.

If someone invests $100 a month and the price of a stock share is $10, $100 buys you 10 stocks. If the price goes to $5 a share, that $100 buys you 20 shares, he said.

“If the price goes back up, you made a lot of money.

“Volatility can be your friend,” he said.

Martha Yusko, an investment representative with Raymond James Financial Group, said investors should think like consumers.

“They have to remember that everything is on sale right now,” she said.

Dollar cost averaging saves people from trying to “time the market,” she said. The adage is sound: it’s not timing the market, it’s time in the market.

LEARN FROM THE PAST

Crandall pointed out a hypothetical investment example published in a document by MFS Fund Distributors, which details what would have happened to a Standard & Poor 500 investment of $10,000 through the economic downturn of the early ’70s.

The investment was worth the full $10,000 on Dec. 31, 1972, but during the downturn of 1973-74, its value plunged.

On Dec. 31, 1974, it was worth $6,273.

If the investor had pulled the money out of the market and invested in a six-month certificate of deposit that averaged 9.9 percent for the period, after 10 years, the investment would have been worth $16,131.

If the investor had chosen to leave the $6,273 in the market, the gains would have been much more.

After 10 years, the stock would have been worth $24,969.

With a little more faith in the system, the investor could have amassed even more wealth.

By beginning to add $50 a month starting Jan. 1, 1975, the stock 10 years later would be worth $36,823.

YOUR STRATEGY

No matter what the economy is like, people should always have a rational investment strategy.

“If people are unable to sleep at night, they’ve got an incorrect asset allocation or too much money in stocks,” he said.

A general rule some people follow is to subtract their age from 100. The number is the percentage they should have in stocks.

For those curious about solid investments, Crandall recommends companies that produce “defensive” products and services — such as those with health care, food, medicine or other consumer goods.

But those who don’t want to play with risk also can go with a time-honored route that works well.

“If someone does 50/50 stock-bond allocation all their lives, it’s probably not such a bad idea,” he said.

But he also advises investors to take a break from listening to the noise in the national media.

“Turn off CNBC and MSNBC. Go on a media fast for a week,” he said.

And people should stop checking their 401k values every day.

“I’m in the business, and I check maybe four times a year,” he said.

People also should remember that the investment system we have works well in the long run.

“Have a little bit of faith that the system we’ve got, while not perfect, tends to work in the long run,” he said. Although the recession is bad, it could start to turn around as early as next year, he said.

Yusko reminds people of the Y2K scare of 1999.

“People thought we wouldn’t see 2000,” she said. “Then January 1 of 2000 came and went.”

The recession that followed 9/11 also scared many people into believing the economy would never recover, she said.

“I tell people every hour of every day, some days are better than others. If you’re really worried, get a little more conservative, but try to remember you’re in it for the long term,” Yusko said.

THE REAL RISK

University of Illinois clinical professor of finance David Sinow has overseen hundreds of millions of dollars throughout his years in private industry.

The lawyer-turned-professor is executive director of the Office of Risk Management & Insurance at the U of I. His professional background includes founding a professional money firm and financial counseling.

His lengthy experience has taught him that people tend to worry about the wrong things when it comes to investing.

“There is certainly financial risk in the market,” he said.

The biggest risks aren’t the prices of stocks. People should be most worried about longevity risk and purchasing power risk, he said. In laymen’s terms it means outliving money and inflation.

Sinow points out that the percentage of the population growing the fastest is people between 91 and 100.

“A person born today is likely to be living into their 80s. A person who is 65 today has a 50 percent chance of living into their 90s,” he said.

Using the old “rule of 72” — dividing 72 by the rate inflation to get the number of years it will take for the dollar to buy half what it does now — shows how quickly buying power lessens over time, he said.

Doing the math using 6 percent for inflation, today’s dollar would buy about half what it would buy today in 12 years.

“Once we understand that, we have to look at what kind of financial securities we can invest in that deal specifically with purchasing power and longevity risk,” he said.

The problem is, most people can’t develop a mindset of 30 to 50 years in the stock market, he said.

“You have to be sort of what I call a legacy investor,” he said.

Those nearing retirement in five or 10 years shouldn’t have all their money tied up in stocks, but 20-somethings should, he said.

Sound financial planning means deciding what you’re comfortable with between the allocation of stocks and fixed income — like insured certificates of deposit, U.S. treasury bills and high quality corporate bonds, he said.

Today’s 20-year-old who lives to be 90 could be in the market for 70 years, so he or she could safely put 100 percent of their retirement savings into stocks, he said.

But no matter the age, courage still counts.

“Stock market investing is not for the timid,” he said.

“You have to accept these downturns.”

While older workers are looking at putting off retirement, Sinow advises younger workers to look at this recession as an opportunity.

The money they invest every month will buy more.

“Every month when you’re investing, you’re buying more shares. The stock market is a share accumulation game, not a price accumulation game,” he said.

“He or she who accumulates the most shares at the end of the day wins. When you’re in the accumulation phase, you want prices to be low.”