In a Declining Market, Forward Thinking Could Pay Off

Don’t panic. Stay the course and focus on your long-term goals. This continues to be the rallying cry of financial gurus during today’s market mayhem.

“In the midst of fear, it is easier for people to do nothing than to try to seize upon an opportunity,” says Danny Freeman, a financial adviser with Darda Wealth Management in Winston-Salem, North Carolina. With drastic declines in the stock market, there are values out there, Freeman says. Thus, you may be able to buy shares of stock that were once out of your financial reach.

Private equity firms are likely to spend millions – if not billions — of dollars to buy stocks on the cheap and then get rid of them 10 years from now once prices rise, Freeman says. It is the familiar investment pattern of “buy low and sell high.” Historically, U.S. financial markets have suffered major downturns due to tragic events only to bounce back. Each time, sell-off levels were thought to be the worst of all until the market and economy started to recover.

No, you shouldn’t be investing money that you need to pay your mortgage or household expenses. “But for long-term goals such as your child’s education and your retirement, you should still be investing in the stock market,” Freeman says.  “The market and the economy are two different things. So, you will see the market turn up long before the economy does.”

The U.S. has seen some extreme fluctuations in the market in the last six months as much as 40% and 50%.  “You can’t be in denial,” says Gwendolyn V. Kirkland, a certified financial planner and managing principal with Kirkland, Turnbo & Associates in Chicago. But instead of shaking your head in disgust as you look at your 401k quarterly statements, “take this opportunity to look at and reassess your retirement portfolio,” Kirkland says. While you can’t protect yourself completely from downturns in the market, you can still minimize risks and maximize the returns on your investments.

Kirkland says it is crucial to always have some cash savings, some money invested in stocks, and a percentage invested in bonds. The key is to diversify even within different asset classes so that you are investing in real estate, international stock, and large cap, midsize, and small growth companies.

In the recession, there are companies that tend to do well because they benefit from people moving down on the purchase scale in search of value and lower-end costs, financial analysts say. Examples are McDonald’s (NYSE:MCD), Wal-Mart (NYSE:WMT), Family Dollar Stores (NYSE:FDO), and Big Lots (NYSE:BIG). When people begin to feel better about their financial situation and have a little more discretionary income, they will start to move back up the purchase price point to restaurants and upscale stores. That’s when other sectors will benefit, say analysts.

Freeman notes some potentially good buys can be found in such sectors as alternative energy and oil. “A year from now, oil will go up. You should see some price appreciation in that area.” What companies are producing energy-efficient products?

Kirkland suggests looking at utilities. “They have been pretty resilient. Even with a decrease in prices, there will be a recovery in that area.” However, Kirkland says she is still very cautious of investing in banks and auto companies right now.

Just remember to stick to fundamental analysis and not an emotional response. This means look to invest in companies that have financial stability, positive cash flow, and a dominant position in the marketplace, Freeman says.

“Five to ten years from now, there will stories about if you had bought these stocks during the recession of 2008-2009, these are the kind of returns you would have had,” Freeman adds. “People will scratch their heads saying, “Man I should have invested when I had the chance.’ ”