Smart Money Moves in a Tough Economy

From the Fall 2010 issue of Reaching Higher: The Binghamton University School of Management Magazine


By Steve Seepersaud

When the economic outlook was rosier – a more distant memory with each passing day – Robert Kline ’86, MBA ’90 had most of his portfolio in the stock market. For many people in their 40s, that was playing by the book. However, the way things work in theory is often different than in real time.

After the stock market dropped precipitously in the fall of 2008, half of Kline's retirement nest egg vanished. Even though he still had time on his side – about 20 years to go until retirement – he chose to be proactive, making moves that eventually brought his portfolio back to 80 percent of its pre-recession value.

Despite its volatility, the stock market is still a good place to be, says Kline and several SOM faculty, especially if investors have a long horizon before retirement and they're spreading the wealth around.

Kline, a 46-year-old certified financial planner with The Bay Ridge Group in Endwell, N.Y., estimates that about 80 percent of his money was in the stock market two years ago. After suffering heavy losses, he was concerned that the market would only inflict more pain in 2009. So, he moved 30 percent of his stock investments into real estate, gold and commodities. Kline also put 20 percent into the municipal bond market, figuring it wouldn’t suffer another once-in-a-lifetime correction anytime soon.

"The theory is that when these alternative categories zig, the stock market zags, and vice versa," Kline says. "I timed it right because those particular categories did very well, and the stock market also rebounded."

To say gold has done well is an understatement. Over the past four years, prices for gold futures have consistently tracked upward, while the stock market has done just the opposite. Gold is now at the highest levels ever seen and, according to, Goldman Sachs analysts predict that prices will climb to $1,300 per ounce early in 2011.

Murali Jagannathan, associate professor of finance, says gold is often considered as a hedge against other assets, especially stocks. However, a hedge implies that its value should go up when stock prices fall. While there is some evidence of negative correlation between stock markets and gold, he says it's unclear whether this explains the changes in price over the past few years.

"Its value should derive from its use in the manufacture of electronics or costume jewelry," Jagannathan says. "Indians are one of largest consumers of gold and their appetite for buying gold appears to increase with how well their economy is doing, But, if gold's increase in value over the last few years is solely driven by investors worried about the stock market – and I do not think so – we may be in another bubble. Do your homewor, and think about whether the price you pay is worth it."

Those who are more comfortable with the tried and true should find the stock market yielding returns of five to six percent, according to School of Management Dean Upinder S. Dhillon. Expecting returns of 10 or 12 percent is simply not reasonable in today's environment, he says.

"Don't try to pick stocks. More than 50 percent of the money managers don't outperform the market so that should tell you something about individuals trying to do that," Dhillon said. "I'm not in favor of picking sectors because I think the market is smarter than I am. I've seen money managers get killed because they picked the wrong sector."

Although diversification is one of the most elementary financial lessons, one of Kline's clients serves as a living example of how easily the concept can be forgotten. A widow in her mid 70s, she had the bulk of her wealth invested in one particular bank stock, which carried sentimental value because she inherited the stock from her husband who bought in many years ago. Despite Kline's repeated warnings that she was overinvested in the stock, she held on, figuring the investment would carry its value perpetually. In the span of one year, she watched her $800,000 in bank stock turn into $100,000. While she still receives dividend checks, she's one crisis away from being wiped out.

"People get greedy. They see stocks going up and don't want to take the money off the table, and they don't want to pay the capital gains taxes," Kline says. "But, they're so much better off doing that than watching the stock decline in value."

Kline has been encouraging clients in their 50s to move existing money in their 401(k) accounts into more conservative funds, while investing new contributions more aggressively. He says fixed annuities are popular with this age group, as people like the idea of locking in and being shielded from market losses. In 2009, investors purchased a record-high amount of equity-indexed annuities, seeking similar safety.

"People will trade growth potential in return for that guarantee," Kline says. "Younger people, say in their 30s and 40s, are asking about these funds, but I steer them away from them because they're younger and have plenty of time to work with."

The bond market ? where people typically invest money they don't want subjected to the volatility of the stock market ? is of particular concern to Jagannathan and Dennis Lasser, associate professor of finance. That's because inflation has been little to nonexistent. After a summer of falling prices, deflation, which could drag down the economy for years, emerged as a distinct possibility.

"I look at yields and see that IBM issued three bonds at one percent," Jagannathan says. "And corporate bonds are taxable, so that's not much return. What worries me is that people need returns from their investments. How are they going to survive the next decade?"

In addition to deflation, economists are concerned about the economy bottoming out again. Fears of a double-dip recession came to the surface when Federal Reserve chairman Ben Bernanke told Congress on July 21, "The economic outlook remains unusually uncertain." Lasser says that while we're not out of the woods, a double-dip is not likely. Instead, we should continue to see growth, but it will be slow and steady.

"The recovery is taking longer than I had hoped, but we're coming out of the biggest hit to the economy in about 80 years," Lasser says. "Look what happened in 1929, and it took 10 years to get back out of that."

Last Updated: 1/15/14