UNC Kenan-Flagler Business School

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UNC Kenan-Flagler Business School

UNC KENAN-FLAGLER NEWS


Thriving in Tumultuous Times: Sound Advice

11/10/2008

In these troubled economic times, Christian Lundblad, Edward M. O’Herron Distinguished Scholar and associate professor of finance at UNC Kenan-Flagler, has some advice for individuals struggling to make good decisions about their personal investments. His first recommendation? “Turn off your television and your computer.”

“There’s very little one can do about the day-to-day gyrations of these markets,” he says. So there’s little benefit in following the prognostications of media experts too closely. And turning away from onscreen advice can save considerable mental anguish.

Lundblad suggests individuals step back and take stock of where they are in their careers and how close they are to retirement.

Workers nearing retirement who have seen their portfolios lose value are in a tough position, he says. “If one needs money in the near term for whatever reason — a kid going to college or imminent retirement — you need to be in bonds, and selling out of your equities, you’re going to take a pretty steep hit.”

Younger workers, though, can live through the current crisis and move forward with a well-diversified portfolio. Things may get worse before they get better, but 10 years from now, their portfolio could look quite good. He suggests a mix of bonds and stocks, commodities and real estate, domestic and international assets. And he cautions against someone tying up a lot of assets in the company for which he or she works. If a company collapses, the individual is much worse off if he or she holds a lot of company stock.

“Diversification is key,” Lundblad says. “It’s not the ultimate panacea, but it’s critical.”

It’s impossible to tell when the market will recover, he says. “Are we going to return to a period of substantial gains, or is it going to be a slow grind? One way or the other, we have to plan for the worst-case scenario, which is not a lot of appreciation in homes and equities and the other things we’ve enjoyed.” What that means for everyone — regardless of age — is that we need to start saving a minimum of 10 percent of our salaries.

While he wouldn’t advise playing the market right now, he concedes that those with the stomach to endure what could be a five- to 10-year roller coaster ride could make very substantial gains.

And while securing a mortgage may be challenging, for those with the cash for a down payment, he believes it’s not necessarily a bad time to buy a home that they will live in for some time. The home’s price could go down further, Lundblad says, but they may still be able to get the home of their dreams for a reasonable price.