With financial markets around the globe facing one of their most tumultuous weeks in recent memory, investors can be forgiven if they're reaching for the rip cord right about now.
The news over the weekend was truly trauma-inducing. Lehman Bros. Holdings Inc., one of Wall Street's best-known investment banks, was teetering on the brink of bankruptcy. Merrill Lynch & Co., another faltering blue-chip name, was seeking salvation through a shotgun marriage to Bank of America Corp. Insurer American International Group Inc. was looking to sell assets and borrow from the Federal Reserve to raise cash.
But many market veterans contend that dumping stocks now would be a mistake, even though the U.S. stock market -- already down 20% or more from its highs of last autumn -- may have further to fall.
"The basic rule for investors is to never panic," said A.C. Moore, chief investment strategist for Dunvegan Associates Inc. in Santa Barbara.
"And never means never."
That advice can be hard to stomach when 401(k) plans or personal investment portfolios are taking on water. It may be especially tough today. Futures trading Sunday night was indicating a sharply lower opening on Wall Street, and a bankruptcy filing by Lehman would probably trigger a new wave of selling, especially among other financial stocks.
But for investors whose portfolios are properly diversified among stocks, bonds and cash, selling now would lock in losses and reduce the chances that they can profit when the market eventually rebounds.
"I've talked to financial planners recently who have put their customers totally into bonds," said Nancy Langdon Jones, a financial planning consultant in Claremont.
"I just think that's stupid. There are opportunities out there. You've got to stay the course."
Bonds, along with cash investments such as money market funds, are typically seen as a haven from the volatility of the stock market. But over the long run, their returns have lagged behind those of the stock market, and many investment advisors generally tell clients to keep at least some of their money invested in stocks even after they enter retirement.
In fact, even investors who didn't have their portfolios balanced with the mix of stocks, bonds and cash appropriate to their age may simply have little choice but to hang in there.
"I think the time to sell has already occurred," said Kevin Marder, president of Marder Investment Advisors Corp. in Los Angeles.
Marder is among those who see buying opportunities in the market's choppy waters. He's dabbling in healthcare stocks, which he thinks could be leaders in pulling the market out of its doldrums.
Keith Wirtz, chief investment officer of Fifth Third Asset Management, agrees that now is the time to be buying, not selling.
"It's most rewarding to buy when the market feels the least comfortable, and it feels really uncomfortable right now," he said.
He advises 401(k) holders to keep making their payday contributions but to shift the investment mix a bit away from cash and bonds and more toward stocks. One caveat: Wirtz suggests reducing exposure to foreign stocks. He thinks Europe and Asia are just beginning to deal with economic problems that have been plaguing the U.S. for several months, and markets in those regions may take longer to recover.
One thing seems certain: Financial stocks won't be the catalyst for a market turnaround. They're simply too beaten up for that, though Marder and Moore think that even that battered sector holds some promise for picky investors.
Big regional banks such as Wells Fargo &. Co., Northern Trust Corp. and US Bancorp Inc. all hit bottom months ago, Marder said, and retail brokerage Charles Schwab Corp. appears to have avoided many of the problems plaguing its industry.
If Lehman does file for bankruptcy protection, the firm's stock probably will become worthless. Lehman bondholders should fare better, though how much they receive for their holdings would have to be determined during the bankruptcy proceedings.
Lehman is a member of the Securities Investor Protection Corp., created by Congress to help shield investors from losses if their brokerage firm goes belly up. The protection corporation insures that customers receive all stocks and bonds registered in their name at the failed brokerage, and insures remaining claims up to $500,000 per customer, including a maximum of $100,000 in reimbursement for cash accounts.
In addition, the Securities and Exchange Commission said Sunday night that it was "taking actions" to protect Lehman customers and "to reduce the potential for dislocations from recent events."
Even with these reassurances, however, Lehman account holders could still face considerable inconvenience should the firm fail.
According to the protection corporation's website, it generally takes one to three months for securities to be returned to their owners -- longer if there are problems with the firm's record keeping.