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Market Veterans Say Stay Put: Don't Let the Bear Scare You

By: Erin Schulte

The Wall Street Journal, June 29, 2002

For investors who've never come eyeball-to-eyeball with the likes of a bear market, it's been an ugly -- and scary -- couple of months.

Terri Lewis, a 34-year-old college counselor in Springfield, Mo., has watched the value of her employer-sponsored 403(b) pension plan and her Roth IRA drop by about third to around a combined $35,000.

"A lot of us 30-somethings, when we became familiar with the stock market, it was always the bull market. I know plenty of people who got rich off the tech stuff," Ms. Lewis said. "Now when I'm trying to figure out my retirement, it's going downhill."

Ms. Lewis has decades until retirement, but she recently was considering cutting her normal 403b contribution to $300 a month from $1,000.

"This past month I put in close to $2000 in, and when I checked my account it shows a balance of what I put in this month of negative $625," Ms. Lewis said. "College counselors don't make a lot of money, and that's a chunk of change. To see $2,000 turning negative is unnerving."

She's not alone in her unease. A growing number of panicky investors are cashing out of stocks or cutting back on the amount of money they're putting into the market. According to AMG Data Services, investors withdrew a net $11.1 billion from equity funds in June, the largest monthly outflow since last September.

The exodus accelerated in July. Net cash equity-fund outflows for the week ended July 24 were greater than the entire month of June -- $12.2 billion, according to AMG. While money's rushing out of stocks, investors are seeking a safe haven in money-market funds. During the week ended July 24, money-market funds saw inflows of $10.8 billion.

As investors turn tail, perhaps it's more than just fear showing. In some cases, it's novice as well.

That's because buying high and selling low is about the worst thing investors can do, and many professionals say it's likely that the market -- though it may not see gains like it saw in the '90s for decades -- has suffered the worst of the declines for now.

"There's an old Wall Street adage that says 'If you're going to panic, panic early,' and it's not early," said Bob Streed, an equity portfolio manager for Northern Trust, which has more than $330 billion assets under management. "There may be more of a decline in the market ahead over the next couple weeks or months, but we're much closer to the bottom than we are to the top."

From their highs in early 2000, the Nasdaq has tumbled 75%, while the Dow industrial average has lost 26% and the S&P 500 has declined 44%.

But in their attempts to escape any more fallout, investors are choosing alternatives that historically have lower returns than stocks. Moreover, the current yield on money-market funds is around 30-year lows of 1.28%, according to iMoneyNet Inc.

The timing's not the best for bonds funds, either, which have performed well in recent years as interest rates dropped (prices move in the opposite direction from rates). Strategists expect the very low interest rates to start to rise again, and when that happens, investors are likely see a scenario similar to that of 1999, when rates rose and the average long-term government bond fund lost 5.7%.

Cautionary Tales

Many investors with years of experience are vowing to doggedly stay the course, despite being unsure whether the market has hit its final bottom. They're betting that dollar-cost averaging (or holding contribution levels steady and getting more shares for the money as prices drop) will help them win out in the end.

John Mitchell, a 57-year-old retired U.S. Navy officer who now works for a defense contractor in Catonsville, Md., watched his investments tumble by more than $50,000 during the second quarter alone. To make matters worse, one of the few individual stocks he owned was Enron, the bankrupt Texas company that set off a chain reaction of accounting scandals.

However, he's not giving up; in fact, he's putting more money into stock-index funds. Why? To avoid making the same mistake twice. During the 1987 crash, he was relatively new to investing, and now regrets the choices he made.

"I cut down the amount I was investing, because I got scared by the drop," Mr. Mitchell said. "But the recovery was reasonably quick, and as I look back I think it was really stupid to reduce your investments when the prices were low ... that's backward," Mr. Mitchell said. "I had some friends who threw in the towel completely, sold low and lived to regret it.

"I set up an asset allocation and said come hell or high water, I'm going to grit my teeth and invest the money."

Professional investors applaud Mr. Mitchell's backbone and say those who duck for cover in money market accounts may be ill-served.

"Most people who sell [mutual funds] won't get back at a better price," said Mr. Streed, who has been managing money for 20 years and runs the Northern Select Equities Fund, which Morningstar gives five stars. "Let's say they own a mutual fund trading for $10 and it goes to $9, so they sell. They won't buy it back until $11 or $12."

Val Jensen, chairman of Jensen Investment Management in Portland, Ore., and co-manager of the five-star Jensen Portfolio, started out as a broker in 1958 and says it's not hard to talk a jittery investor off the ledge during times like these, once they realize the opportunities a low-priced market holds.

"They say 'I can't stand it anymore, this is not anyplace for serious money,' and of course, those are the great opportunities to make a fortune," Mr. Jensen said.

Because of the market's slide this year -- the broad S&P 500 index is down 26% for the year -- stock prices have been flattened to levels that are newly attractive. The 12-month forward price-to-earnings ratio for the S&P 500 index stood at about 17 as of Friday, according to Thomson Financial, slightly above the average of 15 but way below the level it hit during the tech bubble -- 29.

"The more nervous you are, the better time it is to go do your homework," Mr. Jensen said. "[Investors] just want reassurance. I tell them that we can buy great companies at very reasonable prices."

Even those who took their lumps when the tech bubble burst have new wisdom to apply.

"I had this idea based on what was going on at that time that I could double my money. Instead, I halved my money," said Joe Wilkerson, a 63-year-old retiree from Olney, Ill. "I don't feel that I'm in that situation again, because I'm in diversified funds." He's not selling.

Still edgy? Market veterans recommend focusing on what action you'll take when the market calms down.

"What people should be planning to do, and this is once you feel more comfortable with the market, is to look at your stock allocation versus bonds," Mr. Streed said. "Look for stabilization. Stabilization with lower volume, that's indication that the sellers are done."

After Wednesday's screaming rally, when the Dow industrials surged 488.95 points in its second-largest one-day gain ever, major indexes seemed to be doing just that. Thursday, techs took a moderate hit, but the Dow industrials ended just points lower. On Friday, major indexes notched modest gains.

While the market might not be quite ripe for it yet, Mr. Streed said "investors should be focusing on when to sell the bonds and buy the stocks." (Wall Street Journal columnist Jonathan Clements recently said he was making that very move.)

For the record, Ms. Lewis, the college counselor, is tentatively sticking with her plan to sock away the maximum contribution. Part of what convinced her was encouragement -- though given the nature of bulletin boards, perhaps "derision" is a better word -- from participants on Motley Fool.

"Mostly what I got was 'Are you nuts, because this is what's on sale right now!' So that's what I'm going to do. I almost changed my contributions, but I didn't."

Write to Erin Schulte at erin.schulte@wsj.com

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