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Analysts' Advice: Ride Out Slump
Kane County Chronicle (Jonathan Bilyk)

Dave Brady doesn't like stock market declines any more than anyone else.

That is why Brady, a financial advisor and owner of Brady Investment Counsel in Geneva, has not enjoyed watching Wall Street the past few days.

"There is certainly a lot more volatility in the market than we've seen recently," Brady said. "And unfortunately, lately that's meant it's gone down."

But for those holding a 401k or IRA, and others invested in the market long term, Brady and other market analysts had simple advice:

Ride it out.

"So many people get caught up in the day-to-day ups and downs," said Sal Veltry of the Elgin office of Plante & Moran, a business advisory firm with offices in three states. "They make emotional decisions that shouldn't be determined based on short-term spurts in the market."

Unlike past downturns, the tidings could be more grim for many seeking to borrow against their homes. For them a solution may not come so easily.

Fueled largely by concerns that problems with subprime mortgages could continue to cause banks and hedge funds to lose money, the New York Stock Exchange turned sharply down this week.

After closing at 14,120 in mid-July, the Dow Jones Industrial Average closed Friday at 13,239. It closed up 0.49 percent for the week.

The losses were most pronounced Thursday and Friday, when the Dow dropped from more than 13,600 to less than 13,100 in early trading Friday before a late-day rally.

However, that rally only became possible after the Federal Reserve Bank stepped in to supply banks with more than $30 billion to ease concerns over subprime mortgage losses.

Jim Baird, chief investment strategist with Plante & Moran, said the downturn has undoubtedly concerned many investors.

And Baird and others do not expect the market to end its downward trend anytime soon.

The market, Brady said, is simply too awash in bad debt right now.

He said banks in particular took on too many subprime mortgages - loans made to those who under traditional lending rules might not be approved - in recent years.

In the past, the banks had been able to sell those mortgages to secondary buyers on the market.

But as more subprime mortgages are foreclosed upon, banks have found it more difficult to find other financial entities willing to buy them.

And that, Brady said, has set off a chain reaction in the financial world, leading to the market decline of the past month and the decision by the Fed to inject cash into the market.

Brady predicted the troubles would persist at least until the end of August.

Others have predicted the market could again be rocked this fall as the next round of subprime mortgages adjust and more foreclosures ensue.

"It could be that some funds that we thought were worth, say, $1 billion, may in fact be worth only about $250 million," Baird said.

He and Veltry declined to estimate how long the downturn might last. But they said the situation bears monitoring because it could affect consumers' behavior.

Baird said that in the past few years, rising home values and increased home ownership helped many consumers "feel wealthy."

But as the market has cooled, it has become harder for consumers to borrow against their homes.

Thus, consumer spending has moderated and could decline further, he said, affecting the national economy, which is reliant on consumers to generate two-thirds of all economic activity.

"It's a very real concern," Baird said.

On the investor side, Baird and Brady both noted that the market downturn is not all bad news.

"This could represent a great buying opportunity, particularly for those invested long term," Brady said.

"It may be just the right time to go out there and diversify your portfolio."

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