The stock market may have regained some of its equilibrium in the seven weeks since the big crash, but the events of late October have left permanent scars on the psyches of many individual investors.
"Once you've felt what it's like to be in a falling elevator, you never have quite the same confidence in elevators again," said Stuart Kessler, a tax attorney with the New York law firm of Goldstein, Golub, Kessler & Co.
For most investors, however, giving up on investing altogether is no more feasible than hiking up and down stairs to get between floors. Instead, many feel a compulsion, given the murky economic outlook, to shift into conservative investments to protect their assets.
Investment advisers say the shell-shocked who want to play it safe still have a range of choices, from certificates of deposit (CDs) and money market mutual funds to defensive stock and bond mutual funds. The slightly more adventuresome might want to set aside a share of their assets into higher-quality foreign securities, precious metals or even real estate investments.
The experts say that now, more than ever, is a good time to diversify your investments to hedge against abrupt economic shifts that would upend some segments of the economy. While the economy has been giving mixed signals since the market's collapse, market plunges have presaged recessions eight of the 13 times they have occurred since World War II.
"Until Oct. 19, the job of balancing risk versus reward seemed like some sort of intellectual exercise for a lot of people," said Larry Biehl, a director and co-founder of the Bailard, Biehl & Kaiser money management firm in San Mateo, Calif. "Now that they've seen what can happen, it's easier for them to understand why you do that."
For investors who don't have much faith in their ability to anticipate turns in the economy, Biehl recommends dividing assets into a mix of 20% cash and cash-equivalents (money market funds, CDs and short-term Treasuries); 20% long-term domestic bonds, weighted toward 20-year Treasury bonds; 20% U.S. stock mutual funds; 20% in international securities funds, and 20% in real estate, in the form of limited partnerships and real estate investment trusts.
All the same, people who are still heavily invested in the stock market should not be panicked into selling off shares of solid companies if they can afford to hold them for several more years, most professionals say. Over a period of years, an investment in the stock of companies with sound fundamentals is still likely to be among the best of investments.
Since the market's collapse, investment professionals have kept a close watch on Washington and other world capitals as they calculate their next move.
Richard F. Goshert, vice president of Financial Network Investment Corp. in Torrance, has been recommending that conservative investors in top tax brackets hold 30% of their assets in cash for the next few weeks. "If it turns out the government is serious about cutting the deficit, and if retail sales look good, we'll start putting that money back to work," he said.
Investment professionals say that until it's clear whether a recession is ahead, it may be wise to keep a substantial share of your assets--20% to 35%--in cash-equivalent investments. If you have sold off some stocks in the recent panic, you may want to keep the proceeds of those sales in such liquid investments for a while.
Money market funds, which burgeoned to a collective value of over $300 billion after the crash, are now offering rates up to 7.3%, while money market bank accounts average about 5.3% in the Los Angeles area. One-year CDs are offering returns that average about 7.2% in Southern California; one-year Treasury bills, the safest of the lot, have recently been yielding around 6.8%.
Investors may want to divide their cash into several CDs so they mature at different times of the year, said tax attorney Kessler. This "laddering" gives the investor access to a portion of the funds at various times of the year.
Kessler is a fan of an old standby that has new appeal in these turbulent times--U.S. Savings Bonds, which currently yield 7.17% at their five-year maturity. The Series EE bonds are particularly appealing for people nearing retirement because federal taxes on the bonds are deferred, and they are exempt from state and local taxes.
On maturity they also can be rolled over into another Treasury bond, the Series HH. These bonds pay interest on a portion of the Savings Bond principal at a time, thus allowing some further deferral of federal taxes, Kessler said.
The features that make mutual funds desirable in bull markets also make them attractive in bear markets. They offer convenience, professional management and reduce your risk by diversifying your holdings among a number of stocks.