Financial experts call for patience, diversification

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By John Friedlein


By JOHN FRIEDLEIN jfriedlein@thenewsenterprise.com

HARDIN COUNTY — While area economic experts look for some local hits from the national financial market crisis, they urged patience.

“I think the effects are likely to be modest, at least for a while,” said William Davis, chairman of Western Kentucky University’s Department of Economics.

Wall Street surged Tuesday as investors bet that lawmakers will salvage a $700 billion bailout for the financial industry. After plunging 777 points Monday, the Dow recovered almost 500.

The gain wasn’t unexpected, as carnage on Wall Street often attracts bargain hunters.

Also, the seized-up credit markets where businesses turn to raise money showed no sign of relief. A key rate that banks charge to lend to one another shot higher, a tightening of the availability of credit that could cascade through the economy.

Davis said the crisis could lead to a credit shortage. He has heard of creditors — who used to give clients 90 days to pay off bills — shortening the turn-around time to 60 or 30 days. And it is more difficult for small businesses to get short-term loans.

While he said he doesn’t agree with all of the aspects of the bailout, he does think lawmakers should pass something.

Without an intervention the situation could spread, causing a significant slowdown with decreased production and increased unemployment, he said.

“It has the potential for adversely affecting the entire banking system,” he said.

But this scenario doesn’t appear to be imminent, Davis said. While there is evidence the broader economy has slowed and will remain cool for a year or two, it still is fairly strong, he said.

Davis tells students: “I don’t think you’ll ever go wrong hitching personal financial wagons to the U.S. economy.”

Still, the durable goods sector — including the locally important auto parts industry — may suffer from both scarcer credit and less discretionary spending, he said.

Some personal investments are also vulnerable. Those about to retire have already been hurt if much of their savings are in stocks, Davis said. Some investors may not have time to wait around for a recovery. Most people of retirement age, however, tend to have a more fixed income — from bonds, for instance.

Davis said a young person putting money aside for the next 10 to 20 years should be fine.

He and other experts recommended a “well-diversified portfolio.”

Also, because of a federal insurance ceiling, those with more than $100,000 in deposits should consider spreading the money around.

But Brent Ditto, a Hillard Lyons financial consultant, said Hardin County area banks are strong. Unlike the Wall Street risk-takers, they work with individual clients in the area — where they know the person sitting on the other side of the table.

A bailout would help institutions lend more.

“Now the banks are having to hold money back for fear of more losses,” Ditto said.

He advised patience and, like Davis, diversification. He also said to allow time for stocks to build back up after they’re depleted. Investors don’t want to draw money from them right after they sink.

J.C. Carroll, a financial adviser for the Elizabethtown Edward Jones office, said the major local effect of the crisis is a decline in savings through stock loss.

On a more positive note, Carroll said investors have weathered bad cycles before. Since 1990, there have been 31 bear markets followed by 31 recoveries, he said. And there is no reason to think this won’t happen again.

John Friedlein can be reached at 505-1746. The Associated Press contributed to this story.