Market Expert Recommends Rebalancing, Calm

With the stock market free-falling Monday after the House failed to pass the $700 billion bailout plan, we asked James Dunigan, managing executive of investments at PNC Wealth Management, part of the PNC Financial Services Group (PNC), to assess what this latest development means for markets, the U.S. economy and investors' portfolios.

SmartMoney: We're in the midst of a political battle right now, but it's clear the fallout has much more wide-ranging effects. What should individual investors be concerned about, and what's safe to ignore?

James Dunigan: As we witness the political working of democracy, we get to see there's a lot of benefits to a system where everyone gets a voice, which in the long term is a positive, but in the short term, it does expose some of the less positive aspects of the system. There's a concern out there now that [Congress] is fiddling while Rome burns.

We've ratcheted up the fear index about 'How safe is my money?' and we can only test that for so long.

But we need this longer-term fix, this longer-term recovery plan, so the credit markets can get back to functioning normally and the economy can get back on its feet and continue to grow.

SM: As the markets crumble in the short term, are there any genuinely safe investment havens?

JD: For the average investor with money in the bank, the FDIC coverage is still a wonderful model. We've just seen it executed last week [during the collapse of Washington Mutual (WM)]. An individual investor with accounts under $100,000 can feel absolutely secure that their money is safe. There's little need for rash action.

The Treasury also acted last week to secure money-market funds, so that reduces the level of anxiety. It's at least close to eliminating a large level of risk around those funds, and investors can have a much higher level of confidence in this environment.

And, although interest rates aren't very high, U.S. Treasurys continue to be a risk-free investment. But you're getting down to fraction of a percentage point for yields, because right now, people are more interested in the return of their capital and less in the return on their capital.

SM: Most people do their investing through their 401 (k) plans. What should they be doing with them now?

JD: This is an opportunity to reassess your risk tolerance and go back to your plan. If the markets have caused your asset allocation to get out of balance, take this opportunity to rebalance your account and make sure it matches your risk tolerance. Make sure you don't chase performance. This is less about what happened yesterday and more about what happens tomorrow.

A natural instinct is to run to the sidelines, and typically that's not a good reaction, but it is more of an emotional reaction. What's interesting in this environment is that although there's a Category 5 storm in the financial sector, the rest of the economy is doing OK, relatively. We're not growing much, but we're not receding, either.

SM: How have you changed your firm's investment-allocation recommendations in relation to recent events?

JD: We've made no change to our balanced account allocation, which is 70% equities, 30% fixed income and 0% cash. We continue to take the opportunity to rebalance in those accounts as the markets shift. We continue to see more opportunities in equities and less in fixed income, although safety is expensive. As this crisis subsides, we'd expect to see greater risk-rewards in equities.

SM: Everyone on every television news channel is parceling out blame today. Who deserves it?

JD: Ultimately it will be important to answer that, but I think it's way too early. This is enough of a challenge to both our financial markets and the economy to see there's more than enough blame to go around.

You can point to low interest rates, you can point to policies that wanted to expand home ownership, you can point to the expansion of balance sheets at Freddie Mac (FRE) and Fannie Mae (FNM), but you'll have to dig deep to get to the roots of how this started.

Right now, while it would be nice to have one individual or group to hang out there for a public flogging, our better efforts should be on getting out of this hole, rather than figuring out how we got in.