How Are Investors Coping with Market Turmoil?

Michael Farr, president and chief investment officer at Farr, Miller & Washington, an investment counseling firm in Washington, D.C., talks with Michele Norris about investors' reactions to the global market turmoil.

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MICHELE NORRIS, host:

With all the instability on Wall Street, investors on Main Street are wondering what, if anything, they should be doing to protect themselves. For one perspective, we turn now to a financial adviser. Michael Farr is president of Farr, Miller & Washington, an investment counseling firm in Washington, D.C. Welcome back to the program.

Mr. MICHAEL FARR (President and Chief Investment Officer, Farr, Miller & Washington): Thank you very much. Glad to be here.

NORRIS: This must have been a very busy day from - for you. We just heard from day traders, those so-called momentum players.

Mr. FARR: Right.

NORRIS: What are you hearing from your clients right now?

Mr. FARR: We heard a fair amount of concern from our clients, which is a bit odd. Our clients are usually focused more on the long term. They don't get upset by the short-term moves. Today was very unique, particularly with overseas markets in Asia and in Europe, down five and 10 percent. It had a lot of them nervous.

NORRIS: Nervous enough to pull back or do most of them saying they'll ride this out? Did they see opportunities perhaps?

Mr. FARR: Well, most of them asking if they should pull back. Very few asking if we were seeing opportunities. So one of the things we do is go back to our experience in 1987 and we can think about the drop in 2002. The people that really got hurt were those that get so uncomfortable that they sold out at the bottom. If you, in 2002 for instance, looked at the market down at 7800 and said, I need to go to bonds, you wouldn't have run, owned stocks when they went back up above 14,000. So patience and a calm head really are the most important order of the day.

NORRIS: How does the real estate market factor into their thinking? The downturn in the housing market - the subprime mortgage mess - does that change the way that your clients think about their finances?

Mr. FARR: I think that essentially, yes, but not a whole lot in that the U.S. consumer - their biggest asset is their house. Real estate is our biggest asset, and for many years, it's been a piggy bank. We could go and get home equity loans. We could get lower mortgage rates, and we had more cash to spend. That was really inflated housing prices. So as those housing prices are now coming down, people feel sort of the reverse of what we call the wealth effect.

You hear that your neighbors' price is - house has been on the market for a long time and they're lowering the price. You don't feel really good. You have things that are more expensive now at the supermarket, at the gas pumps for heating fuel and everything else. Consumers are kind of stretched right now. And investors are concerned because the consumer really has been supporting the economy, supporting business and expansion for some time.

NORRIS: Let me just ask you quickly about different kinds of investors. What if you're looking to retire, say, within the next 10 years? What should you do if you fall in that category?

Mr. FARR: If you're looking to retire 10 years from now, you're in great shape. If your investment plan is intact, it's - you shouldn't really do a thing. In 1987, we got through it, 2002 we got through it, you'll get through this, too. Long term, investors really make money and earn their stripes by enduring times like this. Now, if you're facing a retirement in 10 years and you hadn't done much for it, you really need to meet with a counselor or planner and figure out what you're going to do to get your ducks in a row. You need a strategy. But to think that you need to make some shift short-term because of today's gyrations would probably be a mistake. Emotion is the foe of the long-term investor. If you can stick with your plan and try and be somewhat dispassionate about it, you'll do well over the long term.

NORRIS: Very quickly, Michael, before we let you go. What about the small-time investor, those that only have a little bit of money to put in the market? Is this a good time to get in?

Mr. FARR: I think it probably is. Now, that said, this market could continue to go lower. The economy is weakening and it could continue to drift down, so this might be something of a trap. But I would say that after a 20 percent pullback, five years from now, you'll be pretty happy with prices you paid today.

NORRIS: You sound very optimistic.

Mr. FARR: Well, I think, as an investor, you're optimistic. You expect things in the future to be better than they are today. So I expect that at a 20 percent discount, we'll be happy five years from now.

NORRIS: Michael Farr, thanks so much.

Mr. FARR: Thank you.

NORRIS: Michael Farr is president of Farr, Miller & Washington. That's an investment counseling firm here in Washington, D.C.

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