As the stock markets gyrate and economists talk of recession, these are scary times for small investors no less than large ones, and many wonder what will happen next. Be of good courage, says Mellody Hobson ’91, and be smart. Hobson is the president of Ariel Capital Management, the largest African-American-owned capital management firm in the world, and a regular contributor to ABC’s Good Morning America. She spoke with PAW about the financial crisis in mid-October, on a day when the Dow Jones Industrial Average plunged more than 7 percent.
When the markets are tumultuous, is it time to panic?
Just the opposite. This is when you have to try to go inside of yourself and find that calm, because that’s the only way you will have the opportunity to recover from the bear market that we are in. You’ve already ridden through the bad part. You need to stand firm so you can benefit from the rebound, which is inevitable. All bear markets are followed by bull markets, but when we’re in them we forget.
Is this economic crisis different from what has happened in the past?
Every bear market is different, but the difference here is that we have not seen this kind of liquidity crunch and the credit markets being so frozen. It is very hard right now to get a loan, even for blue-chip American businesses, and we have not seen that before. Every excess overcorrects. Three years ago, it was so easy to get a loan, and now we’ve overcorrected the other way. As Warren Buffett said, credit is like oxygen — you don’t realize you need it until you don’t have it.
If I have a lot of money in the stock market, should I get out when values fall, at least in the short term?
Absolutely not. If you look at the stock market from 1963 through 2004, American stocks gained [an average annual return of] 10.8 percent. But people who missed just the 90 best days during that 41-year period enjoyed a return of only 3.2 percent. So less than 1 percent of trading days accounted for 96 percent of the market gains. And no one knows when those days are going to come. It’s like the old lottery slogan: “You have to play to win.” Even with a long list of horrific things that have occurred over the last 80 years — wars, oil embargoes, the Cuban missile crisis, the crash of ’87, 9/11 — the American stock market has outperformed all other investments. Consider this, as well: When you want to be great, look at the best. If you want to be a great golfer, watch Tiger Woods. If you want to be a great investor, watch Warren Buffett. Warren Buffett has not liquidated his stock portfolio in times of severe panic. Emulate that which has worked.
How do I protect my 401(k)?
You don’t want to make any rash moves. Make sure your 401(k) is diversified. Don’t stop contributing, which is one of the inclinations people have when the value of their account goes down. If your employer matches 50 percent of your contribution, you have a 50-percent return already. It’s free money. If you are diversified, you should be fine.
If I’m trying to save for my child’s college tuition over the next, say, five years, how should I be investing my money?
Five years is a good amount of time to live through ups and downs. Over that period, you should still have the majority of your assets in stocks, but you can offset that by investing in less-risky bonds. If you need the money sooner, put more in bonds and less in stocks.
A number of big banks have failed recently. If my money is in a checking account, is it safe?
The FDIC now insures bank accounts up to $250,000 per individual. No one has ever lost a penny of their savings in an FDIC-insured bank. The Treasury Department recently has guaranteed all money-market accounts, with no dollar limit on the amount. That is unprecedented. So the system is working. I understand that there is a crisis of confidence in the banking system, but there are some real governmental controls that should reassure people.
If I have an adjustable-rate mortgage, what should I do?
Lock in the rate, if you can. If you have a hard time getting a mortgage and locking it in because of your credit score, sit down and think of how you can shore up your credit.
The real estate market is down, and so is the value of my home. What should I do?
Sit tight. For many people, their home is their principal asset, but they forget that it has another purpose — it’s a place to live. It’s a roof over your head, and let’s not discount that.
Interview conducted and condensed by Mark F. Bernstein ’83