Investors urged to stay in for the long term
With trouble in the markets causing pain, from the financial district of New York to the suburbs of California, the isolation of mountain life is insulating many local residents from the worst of the crisis.
From the local banks with few, or no, connections to the biggest institutions, to the large banks with local branches, concern about the markets is at a minimum.
“If you happen to be a bank that has ties to Wall Street through a securities portfolio, then that could be a problem,” says Ashley Burt, president of Gunnison Bank and Trust. “Independent banks like us don’t have those ties, so the issues that are being reported by the media about the situation on Wall Street do not directly affect us.”
Independent local banks make most of their investments in local companies, leaving them disconnected from the unpredictability of publicly traded stocks. But throughout the market, some areas are feeling the pinch more than others.
“There’s a general weakening of credit conditions nationwide and there are pockets where it is worse,” says Burt.
“It’s not serious for us at this point and not serious in the valley, really, although there are pockets,” says Burt.
Part of the protection for local borrowers is the personal connection they have with their bankers.
“We know the people that bank with us and the people we make loans to. We see them in the grocery store and go to PTA meetings with them,” says Burt. “So we don’t want to see them make choices that will get them into trouble.”
Jeff Buehler, president of the local branch of Community Banks of Colorado, agrees that it is the personal connection that has kept the balance sheets at his bank strong, but says the bank’s underwriting policies have helped it maintain a low number of defaults by its customers.
“Community Banks of Colorado is a state-charted independent bank with no direct ties to any of the national banking institutions and we lend money in the various Colorado communities in which we serve. But the bank has always maintained strong loan underwriting and as a result the quality of our loan portfolio remains strong,” Buehler says.
According to many bankers, some of the fear that has developed around the credit market has more to do with perception than reality. Buehler says in his experience, the belief that people will default on loans is actually more widespread than the actual defaulting.
Since one of the ways banks make their money is on the interest paid on loans, the slowing economy is having a real effect on the number of loans being issued, and some banks are seeing smaller but more consistent profits as a result.
“Along with the slowing of the markets, loans remain on our books longer than expected and continue to earn interest,” says Buehler.
Even the local branches of national or regional banks are finding ways to thrive in the current environment and turn a profit.
Bank of the West, which has branches in Crested Butte, Mt. Crested Butte and Gunnison, is based in San Francisco. And while they have a greater level of exposure to the fluctuations in the market, the company grew by 11 percent in the last quarter.
To minimize the potential risk, Bank of the West has adjusted the credit score criteria for loan applicants, but only slightly, according to corporate communications officer John Stafford.
“The criteria to qualify [for loans] have tightened, but not a lot. We are slightly more restrictive than we had been in the past. We’re still eager to make loans of all kinds,” he said, adding that each branch has a great deal of autonomy and can adjust or override fees for customers, which gives the bank added flexibility and security.
Like all banks that are connected to the national market Bank of the West is seeing an increase in the number of loans that are being defaulted upon. But to make up for that, the company has seen more savings accounts being opened and more money being deposited in those accounts.
“We’ve heard a lot of stories about people bringing in very large deposits of cash that they have pulled from other places, to protect it from the downturn in the market,” says Stafford. “Our money market accounts earn 3 percent interest so they are pretty popular.”
Most people should avoid these types of large cash transfers, says Jason Lewis, a financial planner and owner of Lewis and Associates Financial Services, LLC in Crested Butte and Gunnison. One reason is that a money market account earning 3 percent interest can never outpace inflation, which has historically been around 3.2 percent a year over the past half-century.
“The important thing to understand,” says Lewis, “is that even though these are hard times, it is not the end of the world. When things get bad in the market, people want to sell and they forget that there has to be a long-term focus. It would be better to keep their money in a place so that it can outpace inflation and taxes.”
Lewis has seen panic in people who have had their retirement savings shrink by 20 percent during the recent downturn in the markets. Whether savings are in a 401(k) retirement plan or in a traditional stock portfolio, funds can be adjusted away from riskier stocks.
“Textbooks tell us to stay invested for the long-term but there is an emotional side to investment. People want to protect their money and that only makes sense. So you have to ask, what do you really need to have long-term to take care of expenses, and make the adjustments to your portfolio,” says Lewis.
A retirement savings invested in a 401(k) has special protection from taxes, but by removing money from a volatile market by liquidating the account, that money is no longer protected and taxes will have to be paid on it.
But by pulling out only what is needed every year, people can pay fewer taxes and still give their money a chance to rebound when the markets recover.
“There are reasons to be concerned out there, but right now you have people running for the hills and as long-term investors, people can see that as an opportunity. Someone in that position can say, ‘I can go in and buy cheap,’” Lewis says, pointing out that people should be aware that the market never comes back as fast as it went down.
And this year’s economic trouble isn’t the first time investors have panicked after seeing a 20 percent loss in the market, nor is it the largest dip that has been seen.
Before this year, the markets ran into trouble from 2000 through 2004, which was the result of the “dot-com” bubble bursting in March 2000. At that time the markets grew artificially large on the backs of technology companies and the markets responded by losing 11.5 percent over the next five-year period.
Prior to that, the markets experienced “Black Monday” in October 1987, which, to this day, is the largest one-day drop in the worldwide stock market history in terms of percentage.
On its heels came the savings and loan crisis of the 1980s and ’90s, which led to the government bailing out banks that had far more debt than capital, similar to what has been seen in the last few months.
Then there was the Great Depression, which led to an annual loss in the markets of 11 percent and 12 percent between 1929 and 1933. In every example, the markets rebounded in a shorter period than a long-term investment would last.
“The problem is that there is so much analysis in the news and so much information out there that people are paralyzed by it. It’s hard because there is so much information. People need to look at fundamentals of their investments and look at their portfolios,” says Lewis.
“The perception is that we’re at the end of the world. The markets went higher than they should have. Now that it has come to fruition, panic has pushed prices down to an unrealistic low. But it will come back up,” says Lewis.