***OFF TOPIC***Secrets of the stock market. Stocks can go DOWN as well as UP.
(The real secret is knowing when they will go down or up, but the writer is keeping that secret to himself.)
If you're good at technical analysis, or possibly fundamental analysis, setting a loss limit is supposed to be a safety check. But personally I think the loss limit idea sounds better than it works.
PS: Maybe the disk drive sector will be experience a market recovery like US stocks did after the bear markets of 1969-70 and 1973-74. But it doesn't look like it will happen today.
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Tuesday August 11, 10:25 am Eastern Time
Risk Gets Real in Asia Funds
By CHET CURRIER
AP Business Writer
NEW YORK (AP) -- As the Asian financial crisis keeps
punishing investors in Pacific Region mutual funds, it also can serve as a wake-up call for anybody who invests in stock funds of any kind.
Yes it's true, the message declares, stock-fund investments can lose money -- a lot of money -- and the wait for a recovery from those losses can take much longer than you bargained for.
On Lipper Analytical Services Inc.'s list of the worst-performing funds for the year from mid-1997 to mid-1998, there is an ''emerging Asia'' fund that lost 75 percent; a Malaysia fund that dropped 74
percent; a Korea fund that fell 69 percent, and a Russia fund that lost 62 percent, among others.
The 25 poorest performers in the Lipper universe, all with Asia connections, each slashed the value of their owners' investments by more than half in just 12 months' time. The names of the funds on this
losers list include famous brands like Morgan Stanley, Merrill Lynch (NYSE:MER - news), Montgomery, Invesco and Guinness Flight.
Perhaps these funds now represent tremendous bargains. Maybe they will yet rally to reward the faith of their long-term holders -- or maybe they won't. Returns for several Lipper categories of Pacific
funds are now negative for the past five years, and Japanese funds show a 10-year loss.
But what might happen from here on out is not the issue we want to address here. Rather, it is what can be learned from coming face to face with the real-world losses that have already occurred.
One lesson the experience presents, says Seattle investment adviser Paul Merriman, is that the possibility of loss should always be considered at the outset when you invest your money -- and some plan should be developed for dealing with that loss should it occur.
''History shows that investors can lose 70 percent in volatile investments such as Southeast Asia funds and U.S. small-cap funds,'' Merriman says in his monthly Fund Exchange newsletter. ''In
theory, an investor committed to buy-and-hold should be willing to endure those losses on the way to the eventual rewards. But in reality, few people have that much risk tolerance.
''One solution is to set a loss limit when you make an investment. Think of it as a pact with yourself, along the lines of 'I will pull the plug on this investment and cut my losses if it goes down 30 percent. But as long as I haven't lost that much, I'll stick with it.'
''The figure could be any percentage, of course. But it should be appropriate for the investment you are considering.'
If you pick something like a Pacific Basin fund that is prone to extreme volatility, Merriman says, you can't set too narrow a percentage limit. If you do, you run a big risk of hitting sell signals that will prevent your investment from having the time it needs to pay off.
Alternatively, you may decide that you don't want to set a loss limit at all. In that case, you might instead commit yourself to stay with the investment, no matter what happens, for a specified period of time, such as 10 years.
With a plan like that, you need to be reasonably sure that the money you invest won't be needed for any other purpose before the allotted time has passed.
Perhaps most important of all, you need to keep your overall investment plan diversified enough to cushion the shock of unpredictable losses.
The question that naturally arises when you look at Asia fund losses, Merriman adds, is ''Can this experience happen in U.S. stock funds? Unfortunately, the answer is yes. That's not just theoretical,
it's based on precedent.''
The market collapse from 1929 to 1932 provides one historical example. A more recent one, Merriman notes, occurred in the bear markets of 1969-70 and 1973-74.
''Small-cap stocks lost 83 percent of their value from 1969 through 1974,'' he says. ''From 1969 through 1974, large U.S. stocks fell 49 percent.''
Investors who held on through all those troubled times were subsequently rewarded, in spades, by one of the biggest bull markets in history starting in 1982. But hanging in there took long years of
patience under pressure.
Copyright c 1998 The Associated Press.
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