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In This Market, It's Time for Investors to Act Their Age

March 29, 1998|TOM PETRUNO

The stock market isn't supposed to be easy money, but it sure has come to look that way in America since 1994.

And with two trading days left to go in the quarter, the market's reputation as a wealth generator in overdrive--a sort of national cash machine on the fritz--has only been enhanced this year: The Dow Jones industrial average, at 8,796.08 on Friday, is up 11.2% since Jan. 1, after gaining 22.6% in 1997, 26% in 1996 and 33.5% in 1995.

There have been plenty of interruptions in Wall Street's rally along the way, of course. But for the most part, patience with the stock market has paid off going all the way back to August 1982, when the Dow--then at 777--began what has become the greatest secular bull surge in U.S. history.

Whether the Dow's more than tenfold gain since then is fully justified is a matter about which everyone can feel free to voice an opinion, because there is no right answer. All anyone can say with conviction is that we're witnessing (and participating in) a period for stocks without equal, and one which, when over, may not be repeated in the lives of most current investors.

Even if you believe that stocks' returns in the next 70 years can be better than the 10.7% average annual return they've earned over the last 70 years (as measured by the blue-chip Standard & Poor's 500 index), you'd have to be incredibly optimistic to think that the S&P can sustain the 31% average annual gain of the last three years. Possible? Yes. Probable? Definitely not.


So where does that leave the typical investor who has been enjoying this tremendous ride but who also worries about where--and how--it will end?

For starters, forget trying to predict or time the market. You won't do it well (no one does, consistently), so it's mostly a waste of effort. It may be fun and interesting to watch the market and read about its gyrations, but whatever you have invested in stocks today, and whatever you plan to invest over the next five years or so, shouldn't be based on a forecast of market performance.

Rather, you should think solely about your individual situation and a logical way to balance the risks entailed in stocks with the opportunities they present.

For the sake of simplicity, let's look at how investors in three age groups might approach the what-to-do-now question:

* If you're under 40 . . . time is on your side, and that ought to be your first thought whether the Dow is up 1,000 points next month or down 1,000.

The patient investor has won since 1982 in part because patience generally wins with a diversified stock portfolio. Barring a long-term economic catastrophe, companies grow over time as the economy expands, and stocks ultimately reflect their companies' growth.

Have stocks' gains since 1994 far exceeded what companies' growth would seem to dictate? Perhaps. But then, given all the positive things that have happened since 1994--positive, at least, from the market's perspective--veteran analysts such as Jeffrey Applegate, strategist at Lehman Bros. in New York, aren't terribly surprised by stocks' surge.

"We have the best set of fundamentals ever," Applegate said, noting the decline in inflation and interest rates, heavy public buying of stock mutual funds, the balanced federal budget and the boom--at least until now--in corporate profits.

Applegate believes the Dow will reach 9,400 by year's end, a 7% rise from Friday's close and a 19% gain for the year. "We know we're forecasting the unprecedented to occur" in terms of four straight years of double-digit market gains, he said. But the fundamentals justify that optimism, he insists.

What if he's wrong, and instead of another rise the market falls 20%, 30% or even 40% from here, for whatever reason?

If you're under 40 and the nest egg you're building is for retirement, take billionaire Warren Buffett's advice about rooting for lower, not higher, stock prices over the next five years:

"Only those who will be sellers of equities in the near future should be happy at seeing stocks rise," Buffett wrote in his recent letter to his shareholders. "Prospective purchasers should much prefer sinking prices," he said. Why? So you can buy more for the long run.

* If you're between 40 and 50 . . . time is on the verge of becoming an enemy rather than a friend.

You may have three major concerns in this age bracket: First, that you haven't saved enough, which may make you feel the need to invest heavily now, in what should be your prime earning years. Second, you may have looming cash needs--for children's education, for example, or care of an aging parent. Third, your own retirement, and old age, probably are becoming less conceptual and more conceivable.


Should you still be in--and patient with--stocks, even at these lofty market heights? Yes, and here's why: If your retirement is at least 10 to 15 years away, you still have time to recoup whatever market decline might occur in the near term.

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