Tag Archives: financial markets

psychological impact investors

Psychological Impact On Investors Across Generations

To say the least, financial markets were gut-wrenching for investors in 2011. An earthquake and tsunami in Japan, revolutions in the Middle East and North Africa, and unparalleled challenges to the Eurozone rattled nearly all asset classes and strained investor resolve. But the market volatility we witnessed in 2011 was relatively minor compared to what occurred in late 2008. As a result of these global shakeups, and those of the preceding decade, investors are unsettled about their investment practices, and are reacting to the unwelcome effects volatility can have on their emotions and investment returns.

What has been the psychological impact on investors across multiple generations during these bouts of volatility? And, why are investment strategies and risk tolerances so different from one generation to the next?

Function of age on risk tolerance

Investor reaction to two of the worst bear markets for stocks since the Great Depression is partly explained by age, according to a recent study conducted by the Investment Company Institute (ICI) and the Federal Reserve Board. It found only 22 percent of households headed by someone younger than 35 in 2010 were willing to take above-average or substantial investment risk, compared with 30 percent of such households in 1998.

Reduction in risk appetite is generally happening across the board, but most notably in the Generation Y cohort (investors younger than 35) — just when the need for higher returns is most urgent.

Investors who are now 50 to 60 years old were part of a great bull market that lasted 20 years. They made money in the markets through stock investments that rewarded them for taking risks. We now have Generations X (generally those ages 35-50) and Y who have never been actually rewarded for taking equity risk. As a result, we may have an unintended consequence of a large group of younger, risk-averse investors moving away from stocks at a time when most need the higher returns available from a healthy exposure to stocks over the long term. Increased tendencies toward loss aversion could cause many young investors to miss out on the returns necessary to meet their long-term financial goals.

Investment options for younger investors

A potential solution, especially for younger investors who may have watched their parents’ portfolios take a hit in recent years, could be taking small steps and gradually diversifying away from heavier bond or cash holdings and into stocks. Young investors may also find that company-sponsored retirement plans ― regarded by most workers as a pillar of financial security in later life ― offer gradual immersion into potentially more rewarding assets. More importantly, investors of all ages need to establish a clear and thoughtful financial plan that matches asset allocation to their objectives, time horizon and risk tolerance. A well-designed asset allocation strategy, implemented with thoughtful rebalancing, will allow investors to benefit from volatility.

Keeping emotions in check

Investors of any age who understand volatility are more likely to manage their portfolios with confidence and make effective decisions.

Volatility causes emotional distress, and that emotion can get in the way of making effective decisions about strategic asset allocation, which is one of the most important components of investment decision-making.

So what, then, can investors do to temper their emotions? Part of the answer lies in being able to acknowledge that human behavior has many layers. There are complex psychological reasons at play.

Human nature teaches us that fear is a powerful emotion and tends to overrule our rationality. Thus, in the case of extreme market volatility, investors will move in sync away from risk and toward safety. When they perceive that it is safe to get back into the market, investors get back in together, bidding up asset classes. These up-and-down market movements continue until economic conditions return to normal, or when someone or something steps in to restore order.

The key for investors is to separate the events in their lives from how they feel about their financial situation. Without drawing this distinction, emotions may lead investors to buy at the top and sell at the bottom. A professional advisor can be instrumental in helping investors create a financial plan that will allow them to better manage the emotional stress that comes with volatility. Additionally, investors need to recognize the importance of strategic asset allocation, remaining flexible in the face of rapidly shifting markets, and thoughtfully rebalancing portfolios during periods of market stress.

Mike Sullivan, CFA is managing director and regional investment manager, Western U.S. of Harris Private Bank, a member of BMO Financial Group. The firm offers a comprehensive range of wealth management services for high-net-worth individuals and families. Offices in Arizona are located in Scottsdale, Phoenix, Carefree and Tucson. Learn more at harrisprivatebank.com. Harris Private Bank is a trade name used by various subsidiary financial service providers of BMO Financial Corp. Not all products and services are available in every state and/or location.
hospital bed and xray

For Medical Building Owners, Are Lease Workouts Worth The Work?

The market is stormier these days. Many of the lease rates presented by medical building owners today would previously have been considered anomalies, but they’re now more of a trend. Nonetheless, some medical buildings have stayed afloat maintaining their asking rates successfully. So is it worth it to seek to propose or consider a modification to an existing lease within a medical building? The answer at first is simple — it depends.

As with any investment, having and understanding one’s basis of using applicable data to support a position is imperative. Because of the looming distress in the financial markets, many notes are being sold that are secured by well-performing investment properties. However, even if a subject property owner is making timely payments on its mortgage, that doesn’t mean the note-seller is weathering the economic storm as soundly. In some cases, a note discounted by a troubled lender may translate into double-digit returns for the new note-owner. Logically in such cases, lease modification requests should be approved by the owner of the building, because of the superior return on the original note to the new note owner. Nonetheless, any loan modification allowing for additional flexibility is ultimately between the owner and current note holder, and not the tenant.

The aforementioned factors are part of today’s property investment philosophy, and consequently the nature of tomorrow’s tenancy. Even so, there are medical buildings out there today that may be considered “gems,” just as there were similar “gems” in previous recessions. This begs the question for owners and tenants alike — “Is my medical building a gem in this recession?” This answer will often dictate the likelihood of one’s success in the renegotiation or a workout of a lease.

Basis Breakdown
How does one know if their building is a gem? First off, it is important to have a basis for understanding the market and how the medical building fits within that market. What classification is the building? On what standard is this classification based — BOMA (Building Owners and Management Association) or just a general opinion of the owner? Secondly, it is important to compare similarly classified buildings, their locations and amenities. For instance, in comparing two similar buildings, one may offer superior signage, visibility and may have a higher rental rate, even though they both may be Class B properties. Overall, it is important to understand that building classification does play an important role, yet it doesn’t always dictate the rental rate.

Additionally, it is difficult for a tenant to support an argument for a lower rate if only general evidence is supplied to the owner, such as hearing something about the economy on the news, or using a building rate from a completely different class of building, or even a building from a completely different submarket. Sometimes poor business/practice performance may be the only supporting evidence in justifying the request for lease modification. However, it is important for tenants to understand their liabilities relating to guarantees, current business income, personal income, etc. That being said, the owner will be likely to seek evidence of such hardship before even considering a workout.

As a building owner, it is important to understand the nature of the tenant’s request. Probing questions may be asked and supporting evidence sought.If the building is a “gem,” maybe it is better off to let the tenant default under the agreement in order to replace the current tenant with a new tenant that presents less risk. However, if the building is not a “gem” per se, it may be better to take a closer look at what the tenant is proposing and attempt to understand the basis for his or her request.

Even though the economy is in flux, it is always important to seek an edge. It is important to seek and analyze trends in the economy and how they relate to your lease(s). Being a good steward to your investment and/or business is always important, regardless of the market conditions. Recessions come and go, but the persevering have a much better chance of reaching their goals.

Arizona Businesses Succeeding

Arizona Businesses That Are Succeeding Despite The Recession Offer Lessons And Hope

Economists are the uncomfortable bearers of bad news. In recent weeks, they have been unhappily explaining that these are dark days indeed for Arizona’s business community.

But don’t tell that to businesspeople who have uplifting stories to tell amid the downdraft of Arizona’s recession.

While it’s true that Arizona’s economy is out for the count, many businesses are hardly on the ropes. They are succeeding, each in their own way.

But first, a look at that pesky economy.

It’s surprising some businesses are doing well because the experts are hard pressed to find any corner of Arizona’s economy that is untouched by the recession.

“I wish I had something positive to say,” says Tim James, a professor of economics at the W.P. Carey School of Business at Arizona State University. “It’s quite difficult to see any sector doing well … What could possibly happen to make things worse than they are? I can’t think of anything.”

James does point to one exception — discount stores such as Wal-Mart, Costco and Sam’s Club that sell the necessities of daily living. They are prospering, but “nobody will be immune to any of this at the end, as even the Wal-Marts will suffer,” James says.

Also apologetic is Marshall Vest, an economist at the University of Arizona’s Eller College of Management. Asked if there is any sector of the state’s business community that is well positioned and poised to take advantage of the recession, Vest responds, “The short answer is I don’t know. Most industries are feeling the effects of the recession.”

Yes, it’s tough out there. But there are success stories and those businesses offer lessons on how others can ride out this rough economy.

When Robert Meyer joined Phoenix Children’s Hospital in 2002 as president and CEO, the nonprofit medical center for acutely ill pediatric patients was juggling several urgent problems. Arizona was in a recession, a shrinking investment portfolio had eroded the hospital’s capital base, cash reserves were dangerously low and the organization was facing a $46 million loss for the year while incurring the cost of moving from its location within another Phoenix hospital to its own free-standing building at 19th Street and Thomas Road. Meyer, who had been through five prior recessions in health care, focused on two areas — internal operations and strategic planning — and took steps that got the hospital back on its feet.

The hospital had no internal billing-and-collection procedures, no budgeting system and a few outsourcing contracts that were axed because they offered little value in Meyer’s eyes.

“We developed our own patient accounting department, which yielded tremendous improvement in our ability to bill and collect money,” Meyer says. “We started a budgeting system. The hospital had done a lot of outsourcing with a lot of companies and some of them were terminated.”

Meyer wanted a short, simple strategic plan that covered 18 months to two years — as compared to hospitals’ standard five years — and looked outside the health care industry for a sound planning tool. He found it at The One Page Business Plan Company in Berkeley, Calif. Soon, each of the hospital’s major programs had a one-page plan within a relatively brief strategic plan, and progress was tracked online against milestones.

The payoff came as early as 2003, when the hospital generated $3 million in net income. With its books in the black, the hospital took steps in 2004 to cement future success by implementing several new clinical programs. Profits grew to $49 million in 2007.

In today’s recession, Phoenix Children’s Hospital’s primary business offers opportunities for new growth. Meyer says the number of children in the Valley is expected to increase from 900,000 in 2003 to between 1.5 million and 1.7 million in 2025. To meet the needs of its growing patient base, the hospital began rolling out a $588 million main campus expansion in 2008 — only six years after nearly succumbing to financial ruin.

Paragon Space Development Corporation, a small aerospace engineering and technology development firm in Tucson, is succeeding in tough times because most of its business comes from NASA.

“We’re a little bit out of the consumer economy’s ebb and flow,” says Taber MacCallum, CEO and chairman of the board. “What we are going to feel is the federal government’s response to the recession, not so much the recession itself.”

He expects his company’s work with NASA will continue. But things weren’t so rosy during the last downturn. Founded in 1993, Paragon initially booked more commercial than government work and was hit hard by the 2002 recession. It began playing out a variety of business what-ifs to help it prepare for bad times, and business has grown 30 percent to 50 percent annually the last three years.

“You’ve got to create your business model and then run good-and-bad scenarios and make sure you don’t cut so deep that you can’t respond to the recovery,” MacCallum says. “We call them down-and-out and milk-and-honey scenarios. You can do that with a small retail shop and you can do that with a large industry.”

Taber recommends taking advantage of opportunities that arise when other businesses downsize or close.

“This economy has presented a tremendous opportunity for us,” he says. “We’ve been able to pick up new employees and manufacturing equipment from other companies that have had to sell.”

There is also a beacon of hope in the rubble of Arizona’s mortgage industry. On Q Financial, a Scottsdale-based mortgage banking company, is growing as it serves buyers of condos and single-family homes and arranges residential property refinancing. In 2008, it opened new offices in Phoenix, San Diego and Seattle, and its Valley staff grew from 20 in 2007 to 50. In business since 2005, On Q zeroes in on what it can control, says John Bergman, president and owner.

“Every day, month and quarter, we focus on improving things internally that we can control,” Bergman says. “We can’t control the market.”

On Q strives to hire talented operations staff and constantly troubleshoots internal systems, processes and timelines. Business owners must have a firm grip on their financial performance, Bergman says.

“Every month, have financials reported to you in a manner you can use,” he says. “Look at them. You can always adapt and change according to what’s going on.”

On Q also pays close attention to customer service and market share. “We are really aggressive in offering great products to the consumer, and we negotiate for good pricing for our clients,” Bergman says. “No matter what the market does, there is always an opportunity to take a bigger piece of the pie.” Bergman says it’s critical to keep employees energized.

“Let them know that the tougher things get, the better things are when they turn around,” he says. “So you want to focus on the positives in your industry.”

Reeling financial markets commonly create a phenomenon known as the flight to quality — money moves from the stock market to the safety of bank accounts and certificates of deposit. Such is the case with the current recession, and Northern Trust Bank has seen a resulting increase in deposits and new banking relationships, which in turn has generated increased lending.

“We have, in many respects, been in a very nice situation when there has been a flight to quality in the banking business,” says David Highmark, chairman and CEO of Northern Trust’s Arizona bank. “The flip side during this liquidity crisis is that our loan volume is two to three times our normal amounts. Our earnings will be very strong, because today we are collecting so many new relationships that will materialize into new earnings down the road.”

Highmark emphasizes the importance of successful companies staying focused on their core business, a theme also repeated by Paragon and On Q Financial. Northern Trust’s primary business is lending to and managing assets for wealthy individuals and companies.

“We have never wavered from that core business,” Highmark says. “If there is a formula to survive in bad times, in our case — and I think in general in all industries — it is sticking to your knitting. Don’t vary from your core business.”