Liz McMillan of Long Island, N.Y., boasts of the money she made from the hysteria surrounding Y2K. The mother of three bet her water- and cash-hoarding friends that nothing out of the ordinary would happen when the world’s computer calendars rolled over to the year 2000. “That event made us realize how vulnerable we are if something goes wrong with technology,” she says. But while many panicked at this possibility, she ignored it—and won her bets.
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Lately, McMillan says this feeling of unease and vulnerability has returned. In the face of terrorist threats, war, volatile oil prices, the declining dollar and other discouraging signs, many now hesitate to make important financial decisions for fear events and the markets will move against them. They find themselves struggling to distinguish between legitimate causes for concern and fleeting issues they can ignore. This time around, McMillan is not betting that the fears will prove unfounded.Not all news these days is bad: Oil prices occasionally dip; consumer confidence nudges upward. Inflation, which often goes hand-in-hand with war, remains, so far, in check. The problem, as McMillan and many like her see it, is that such glimmers of hope do not quite offset the fact that oil prices remain near record highs, the conflict in Iraq grows bloodier every day and the twin U.S. deficits—trade and budget—have ballooned to historic levels.
Mixed signals such as these have forced many investors to take a wait-and-see approach to their portfolios. “People stop listening to their gut instincts at times like this,” McMillan says. Although still actively investing, McMillan admits she is more reticent, and because she spends more time on research and due diligence, she comes to decisions more slowly. She is now considering defensive tactics—investing in funds that hedge against the dollar, for example—and, for the first time, is sending her money overseas to places such as Australia, where the currency remains strong, interest rates higher and economic trends more clearly defined.
Even before oil prices shot up in early 2004, U.S. investors had endured a series of morale-dampening trials. The Internet bubble, followed closely by massive layoffs, corporate scandals and dismal market performance, led many to question the wisdom of investing in corporate America.
Richard Grafer, also of Long Island, retired from Arthur Andersen in 1998. Since then, these broader trends have affected him on a very personal level. “I lost most of my retirement nest egg as a result of Andersen’s demise, which is attributable to Enron, et al, and the economy,” Grafer explains. “I was certainly angry for a while. But as shocking as it was personally, it was also shocking that 84,000 people around the globe could become unemployed overnight.”
Moreover, as a retiree, Grafer had dabbled in angel investing, backing several socially responsible start-up companies. After the stock market fell and the economy tumbled, about half the companies he invested in went out of business, and the other half are barely hanging on, he says.
Unlike several former Andersen colleagues, Grafer had enough money stashed elsewhere that he did not feel he had to return to work. Still, he had to learn to accept his new reality and move on. “There’s no way to rebuild that retirement fund; it’s forever lost,” he laments. While Grafer still shuffles his investments to gain a bit more income here or there, most of the time, he, like many investors, seems to be stuck in neutral.
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