Investors Losing Faith in Buy-and-Hold Mantra
By TOM PETRUNO, KATHY M. KRISTOF and JOSH FRIEDMAN
LA TIMES STAFF WRITERS
July 19, 2002
Invest for the long haul. Don't try to play market swings. Keep most of your money in stocks because they'll beat the alternatives over time.
These are the rules that millions of individual investors accepted as gospel in the 1990s. But amid the worst stock market decline in a generation, and a severe crisis of confidence in the financial system itself, many investors are no longer sure they believe the old rules. It's a shift with enormous implications if it gathers momentum.
With each drop in share prices--which fell broadly again Thursday--some people even are questioning whether the once-unchallenged investing tenets were a sham to begin with, a conspiracy on the part of powerful and greedy Wall Street and corporate interests to sucker Main Street into the biggest bubble in market history. Listen to Les Greenberg, 59, a semiretired attorney and private investor in Culver City: "There's the corporate elite and then there's the rest of us, going to Versailles Palace and shocked by what we see. People are realizing that a game has been played in the financial markets."
Or this posting from an investor on the Web site of mutual fund tracker Morningstar Inc.: "While riding from Los Angeles up the I-5 to Stockton, you pass a section where there are thousands of cows that will soon be slaughtered. It made me think of the millions of honest, hard-working people 'investing' for retirement in high-cost 401(k), 403(b) plans. Most of whom will most surely be financially slaughtered."
Even some professional financial advisors are having second thoughts about repeating the mantra on the long-term superiority of stocks, and why investors should just stay put, no matter what.
"I don't know that investors feel betrayed, but I'm sure there are a fair number that wish they didn't believe what they have always read about investing being long-term," said Margie Mullen, a fee-only financial planner with Mullen Advisory in Los Angeles. "Sometimes, I wish I didn't either. I can name the people who called me a year ago, asking if they should get out of the market--and I talked them out of it. In hindsight, I wish I hadn't done that."
Indeed, for many investors the market has made a mockery of the idea of never selling stocks, especially in the case of the technology names that had been small investors' favorites in the late 1990s. In 28 months, the tech-dominated Nasdaq composite index has sliced through four millennium marks, from 5,000 to 2,000.
All the way down, most Wall Street analysts exhorted investors to hold on, or to buy more. Now, at 1,356, Nasdaq has lost a stunning 73% from its peak, the worst decline for a major market index since the Great Depression years. And no one can guarantee that prices won't go much lower.
"I have lost my trust in a lot of it," Savena Skeehan, a small- business owner in La Crescenta, said of the market. "If you are just an average investor like I am, it feels like it's rigged."
To be sure, this flood of emotion and doubt is viewed by many Wall Street veterans as the strongest sign that the longest bear market since the 1940s is nearing an end.
But that argument has been heard for almost two months--and at various points in the last two years. Yet the market continues to slide. Stocks fell across the board again Thursday, with the Dow Jones industrial average losing 132.99 points to 8,409.49, the lowest since September.
The broader Standard & Poor's 500 index of big-name shares fell 2.7% on Thursday to a five-year low, and is down 42% from its peak.
Even among investors who want to believe that stocks eventually will rebound, the risk that this time might be different--or that the "long term" might be too long to wait--is causing trepidation.
After the market crash of 1929, it took the Dow index until 1955 to get back to the '29 peak.
Carlos Chavarria, a criminal lawyer in Los Angeles, said that in the last month he sold many of the stock investments he had held in retirement accounts and shifted that money into cash accounts.
"You like to think it's for the long term, but you don't want to break even in the long term," said Chavarria, 45. In the past, he said, "people thought that [the market] was going to stall and dip a little, and then start going up again." Now, he said, "I don't think it's going to happen for a long time."
Chavarria said President Bush's assurances about the economy's stability have done little to bolster his confidence about making new stock purchases. "If it goes down, is he going to reimburse me?" he said.
The chilling reality for many buy-and-hold investors is that they have made almost no money in stocks for the last five years. That may not be the "long term" in the minds of financial advisors, but it's long enough for some people with mortgages to pay, college expenses to meet and retirements to fund.
The return on the S&P 500 since mid-July 1997 works out to about 1.5% a year. An investor would have been far better off buying a five-year U.S. Treasury note in July 1997: That risk-free security would have paid 6% a year in interest since then.
"Our clients are not panicking, but they are getting tired," said Judy Lau, a financial planner in Wilmington, Del. "This is different than 1987, when the correction was sharp, quick and over before you knew it. This is dragging on and on and on. The wall of regrets is getting very high."
Most investors now recognize that the late 1990s market was a bubble of immense proportions, as technology stocks routinely doubled and tripled in the course of a few weeks or months. But probably few people believed that a cherished new-economy stock like computer networker Cisco Systems could collapse as it has, from $79 at its peak in 2000 to about $14 now.
Worse, some small investors might have wanted to sell their highfliers in 1999 or 2000, but nearly all of what they read from market "experts" in the media was about holding on. No less than Federal Reserve Chairman Alan Greenspan was still giving glowing reviews in early 2000 to the technology-led new economy, and cheering its potential.
The revelations this year of massive corporate book-cooking in the boom years, and allegations that brokerage analysts routinely skewed their stock recommendations just to keep their corporate investment banking clients happy, have been salt in the wounds of many investors who have stayed with the buy-and-hold strategy.
So Wall Street is holding its breath, fearing that Americans en masse will turn their backs on stocks--not all at once, but over the next few years. That could severely limit investment capital available to U.S. companies. And if millions of people shift their money to low-paying bank accounts or bonds, they may guarantee themselves a much poorer retirement than they had planned.
Yet amid the gloom, many investment advisors and individual investors insist that it makes no sense to give up on the idea of making money in stocks in the very long term. Buying stocks, after all, is buying a piece of the economy. If it grows, the market should too, over time.
The oft-quoted number is 10.7%: That's the average annualized return on blue-chip stocks over the last 75 years, according to data firm Ibbotson Associates.
Despite the plunge of the last two years, the average annual return on blue-chip shares over the last 10 years is about 11.4%.
Stocks still may be overvalued today, analysts allow, but even if the return over the next 20 years averages, say, 6% a year, it will beat the current returns on savings accounts and other safe havens.
Financial advisors say the question for most people isn't whether to own stocks, but how much of their money to have in the market, given their tolerance for risk.
"When things were rocking and rolling, we had to fight to keep people from putting all their money in stocks; now we have to keep them from taking all their money out," said Mark Brown, a partner at Denver planning and investment firm Brown & Tedstrom. "You definitely see some people who were doing it all themselves, who didn't understand that the market is risky."
Nick von Gymnich, a 28-year-old real estate consultant in Los Angeles, said he continues to believe that "if you invest consistently over 30 or 40 years and you don't go out on a crazy limb, over the long term you'll be OK. That was true over the last 100 years."
Financial advisors say it's easy in retrospect to say people should have sold their stock on the way down, to lock in profits or limit losses. But even if they had, they face the agonizing decision of when to get back in. Timing the market's swings on both ends has proved to be impossible even for most pros.
After the market crash of 1987, "There were a lot of people who got really scared and got out," Lau said. "Ten years later, they were still out--and they'd missed an incredible opportunity."
" 'Buy low and sell high' is still the thing--but I just don't know where the low is," said Jack Rollow, 73, an architect who works as a consultant for the Los Angeles Unified School District.
But if many investors sense that now is a better time to be buying stocks for the long haul than selling, it's still difficult for them to overcome the extremely negative psychology of the moment.
"I was buying on the dips but I weaned myself off of it last October or November," said Cynthia Mason, 40, a vice president at a mortgage company in Los Angeles. "Basically I'm just riding where I am now. I understand that when the market goes up again I'll say, 'Why didn't I buy more when it was cheap?' But it's not so easy to do.
"I know I should be doing that, but the market is like a big headache at the moment, and I don't want to think about it."
________________________
Times staff writer Kelly Yamanouchi contributed to this report. |
