Don't panic over last week, experts say
Careful review of investments may be a good idea, but avoid overreaction
dallasnews.com
04/16/2000
By Pamela Yip / The Dallas Morning News
Investors who've put in an order to dump their stocks when financial markets open Monday morning should heed some advice from investment experts:
Get a grip.
Selling now could be the worst move you could make if you're doing it pell-mell and with a rising sense of panic.
"Take a deep breath," said Woody Young, a partner and financial planner at Quest in Dallas.
If you sell your stocks wholesale now, you'd be dumping them in a falling market.
"We've had a market that's obviously shaken a lot of confidence," said Scott Marcouiller, market strategist at A.G. Edwards & Sons in St. Louis. "There's a lot of blood in the streets, fear and scared people now running around."
In times like these, you have to break away from that pack and review your investments. It may call for you to sell some stock - if you're going to need cash in the near future, for example - but you would be making this move after careful consideration, instead of from following the herd mentality.
"If you don't have a plan that tells you what to do in times like this, don't do a thing, because chances are you're going to regret it," said Ed Rosenbaum, director of research for Lipper Inc., a financial research firm.
Your analysis may convince you to hold tight and make no moves at all. Or even to buy some stocks that have been beaten down in recent days.
"We've learned consistently that more money is lost [by selling stocks] in anticipation of a correction or during a correction than is ever lost by keeping a longer-term perspective," Mr. Young said.
If investors can hold on, they'll find that the market is heading toward bottom soon, Mr. Marcouiller said.
"The best thing they could do right now is not to sell," he said. "You should hold tight. Almost all of the ... conditions are in place" to indicate that the market has hit bottom.
Alarmist news stories about the stock market will spur more selling Monday, "but we think that will be the final straw on the camel's back, that we could put in our bottom on Monday," he said.
If you have a favorite stock that you've wanted to buy which has been beaten up, take a half position now," Mr. Marcouiller said. "We think you're not going to look at much worse than 10,000 on the Dow and 3,000 on the Nasdaq."
If you have to sell, you should first review your portfolio carefully to determine which stocks should go first. For instance, this is a good time to determine if your investment portfolio is well diversified. With the recent obsession with technology stocks, many investors are over-concentrated in that one area of the market.
"If someone had all their money in AOL or Microsoft - if it's still concentrated, go ahead and sell some and put it in Procter & Gamble or some other class of investment," Mr. Young said.
Finding yourself with too much money in one investment isn't so far-fetched these days, considering how well the market has done and how many companies now pay their employees partly with stock options.
"If someone has more than 50 percent in a stock or a sector, they definitely should review the portfolio with an adviser," Mr. Young said. "If it's over 75 percent, definitely make that reposition."
But investors shouldn't dump all technology stocks, said Nick Sargen, chief investment strategist for J.P. Morgan's private clients group.
"While they should be careful not to overweight tech stocks, investors shouldn't flee the sector either, as it contains many companies with strong long-term prospects," he said.
Make sure you have a good mix of small and large stocks, as well as some international holdings, analysts said.
"While international markets are no longer as cheap as they once were, they still could outperform U.S. markets," Mr. Sargen said.
Not dead yet
Despite last week's mayhem - the Nasdaq, for example, suffered through its worst week ever - many analysts remain convinced that the stock market isn't dead yet. The U.S. economy is still healthy, despite the ominous inflation report that spooked investors on Friday.
"The economy is in terrific shape," Mr. Marcouiller said. "The inflation picture is still very positive."
While he believes that Federal Reserve Chairman Alan Greenspan and the Fed will raise rates at its next meeting May 16, the wounded market has lessened the chances of more multiple rate hikes, Mr. Marcouiller said.
"He's been a gradualist all along, and I don't think he's going to want to stray from that," he said.
If anything, the stock market's wild ride has driven home to investors the importance of having a financial plan already in hand. During a crisis is not the time to have to ad lib your financial life.
People have lost sight of that in the euphoria over becoming overnight millionaires, Mr. Young said.
"What the public doesn't realize is that trees don't grow to the sky," he said. "Nothing goes up forever."
Your plan should give you a clear idea of how much time you have before you will need the money you have invested in the stock market.
Once you know that, you will know how much investment risk you can shoulder.
"If you have a short-term [five years or less] need for this money, it needs to be out of the market," said Karen P. Schaeffer, a Certified Financial Planner and co-founder of Schaeffer Financial in Silver Spring, Md. "We've been spoiled because the market's just been great."
Emergency funds
If you'll need the money soon, consider putting the funds in a money market mutual fund or conservative bond fund.
You should always have an emergency fund you can tap to pay bills.
Many people don't, Mr. Young said.
"We're starting to see not as many people keeping cash as an emergency," he said. "Fifteen years ago, everybody we worked with said, 'What type of CD should you have in the bank to let you sleep comfortably?' Today, it's almost never said."
If you don't have an emergency fund, designate a mutual fund or individual stock that you could sell to tap the money, Mr. Young said.
"Know where you will go first," he said.
The best strategy is to designate a certain value threshold for that investment at which you will sell if the investment hits that mark, Mr. Young said.
"For example, if it goes down 25 percent, I'm going to sell," he said. "That becomes my emergency fund."
As for having to pay any capital gains tax on that sale, "take the tax hit and never look back," Mr. Young said.
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