usatoday.com
08/31/2001 - Updated 11:12 PM ET
Important lessons for investors
By Sandra Block, USA TODAY
According to a Welsh proverb, three things make us stronger: sleeping on
hairy mattresses, breathing cold air and eating dry food. Investors may want
to add a fourth: surviving the bear market.
One of the keys to survival is learning from your mistakes. Some important
lessons for investors from the market collapse:
• Diversify. In the late '90s, some investors thought diversification meant
owning stocks in several big tech companies instead of just investing
everything in Microsoft. In reality, diversification means owning large-,
medium- and small-company stocks and funds, along with bonds and money
market funds. Your investments should cover several sectors of the economy,
including those that are out of favor, says Dee Lee, a financial planner in
Harvard, Mass.
• Don't load up on company stock. Employees at Lucent Technologies are
suing, alleging the stock was an inappropriate investment for the 401(k) plan.
The stock has tumbled more than 88% since March 10, 2000.
Dell Computer's stock has fallen more than 57% during the same period.
Both companies have announced layoffs, which illustrates why owning a lot of
company stock is risky. If your employer falls on hard times, you could lose
your job and see your retirement portfolio collapse.
• Make realistic retirement plans. During the bull market, many investors
believed they could earn annual returns of 12% or more. Some assumed
returns of up to 20%. By plugging these projections into an Internet
calculator, they envisioned a comfortable retirement at age 40.
The lesson from the bear market is that you can't control investment returns,
says Grant Rawdin, a financial planner in Philadelphia. His firm uses an 8%
average annual return when estimating clients' returns. That forces clients to
focus on what they can control: how long they'll work and how much they'll
spend in retirement.
• Understand margin risks. When you invest on margin you borrow money
from your broker to buy stock. During rising markets, it can increase your
profits. But as many investors are now learning, it can compound your losses
when the market declines.
You may be required to put up extra cash if the price of your stock falls — or
your broker may sell at a loss to meet a margin call.
Andrew Stoltmann, an Indianapolis attorney who represents investors in
arbitration cases against brokerage firms, says about a quarter of his cases
involve margin agreements. "There's no better way to magnify your losses"
than by investing on margin, he says.
KJC |
