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If Bad Days Were Few, They Should at Least Have Taught You Something

November 29, 1998|PAUL J. LIM

If it doesn't kill you, it's supposed to make you stronger.

If that's true, then it should follow that a bear market that doesn't wipe you out should knock some sense into you. At the very least, it should remind you of some of the basic truisms of investing--such as the fact that stock prices can go down just as easily as they go up.

But given the speed with which the market has climbed out of the hole it dug for itself in August and September--both the Dow Jones industrial average and the Standard & Poor's 500 index of blue-chip stocks returned to record territory last week--one has to wonder:

Did we really learn anything this time around?

Ron Meier doesn't think so.

"I don't think this correction was really long enough to teach people the kinds of lessons that they really need to learn," said Meier, who teaches at the College for Financial Planning in Denver.

If you need any convincing, just look at how investors have recently bid up Internet stocks. Shares of almost every company with a ".com" after its name are at least as pricey as they were in July, yet their earnings outlook (for those that even have earnings) hasn't improved.

With the Dow and S&P 500 poised for an unprecedented fourth straight year of 20%-plus returns, "it's really difficult to teach people anything," said John Rekenthaler, director of research for Chicago-based fund tracker Morningstar Inc.

Difficult, maybe, but certainly not impossible.

"Think of this as a car crash that you were almost in and you weren't wearing a seat belt," Rekenthaler said. "It's time to get religion." So buckle up.

And let the sudden rebound in stocks, financial planners and market strategists say, remind you of the following:

* It's hard to time the markets. So don't try. "Market timing can seem like a seemingly logical solution" to avoiding volatility, Rekenthaler said. "The only problem is it's so hard to know when to get back in."

Consider the experience of some 401(k) investors. The small minority who moved money during the summer market slide began consistently shifting out of stock funds and into fixed-income funds in the first week in August, according to Hewitt Associates, an employee benefits consulting firm. That's when the Dow was around 8,500 points and was falling.

In other words, they "sold low." But this money didn't begin to shift back into stock funds, at least in earnest, until mid- to late November, when the Dow climbed back above 9,000 and was on its way up. This means these investors bought back in when the market was significantly higher.

* Stick to your discipline. Some of you, to be sure, were smart to shift into safer investments in recent months. Perhaps you realized that your risk tolerance was not as high as you had thought. Perhaps you had neglected to re-balance your portfolio in previous years, so that stock investments had come to represent a much larger portion of your holdings than you had been really aware of. But for others, the market's recent gyrations demonstrated that those "who stay the course" are rewarded, said Michael Chasnoff, president of financial planning firm Advanced Capital Strategies in Cincinnati. Indeed, many of the mutual funds that came out well in the rebound were those that stuck to their discipline, such as White Oak Growth Stock and Torray, neither of which sold any stocks at all during the market slide. Since blue chips bottomed on Aug. 31, Torray is up more than 20% and White Oak Growth is up more than 37%.

* Most investors--but especially those seeking capital appreciation--need to be in the stock market, and in diverse parts of it. Look at what small-cap stocks did in the four weeks between Oct. 8 and Nov. 5. During that short period, small caps made a powerful run, as the Russell 2,000 index of small company stocks gained 29%. That was about twice the Dow's gain.

True, large cap stocks have retaken leadership in this bull market. But this only goes to show that if you're not in small caps at all times, and small caps rally, you're likely to miss most, if not all, of their gains, notes Prudential Securities analyst Claudia Mott.

* Rebalance your portfolio annually. Those who waited to re-balance their accounts when the stock market dove ended up selling at the bottom, Chasnoff says.

* Stash some cash. Not only did cash prove to be a cushion when the market fell, it also proved useful when the market began to surge. How else could you have picked up bargains when the market was still near its recent lows? It's not a bad idea to keep about 10% of your holdings in cash, says Rich Maroni, editor of the Dow Theory Forecast newsletter in Hammond, Ind.


Do you have ideas for mutual fund and 401(k) topics for this column? Times staff writer Paul J. Lim can be reached at

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