Smart investors don't let the news dictate moves


September 01, 1991|By JANE BRYANT QUINN | JANE BRYANT QUINN,1991, Washington Post Writers Group

NEW YORK — .TC New York -- Thousands of investors woke up to the coup in the Soviet Union last week and, in knee-jerk reaction, did the wrong thing. They sold out their stock-owning mutual funds, dumped the proceeds into money-market funds and sat down to wait.

4 Here's what their errors have already cost them:

They lost money the day they sold their shares (shortly after the market opened last Monday, stocks were off 107 points; they closed down about 70 points). As the coup unraveled and stocks shot back up, these investors sat on the sidelines -- thus locking in their losses. Meanwhile, yields on taxable money-market funds edged down. By the end of the week, they were paying less.

"Sure, Quinn," I hear you sneering, "and what, last Monday, would have made your crystal ball so clear? Had the coup succeeded, the stock market might have kept on falling, and we would have had the last laugh."

But I think not. Investors who sell in a panic are slow to buy when stocks are down. Typically, they wait for the market to rise again. That's a classic whipsaw; you sell at a low price, then buy back in at a higher price. It's a loser's game.

No sensible investor runs his or her investments by the daily news. You need a program -- and a mental set -- that's immune to unpredictable events.

Here's what the Soviet "chicken coup" can teach you about how to immunize your money:

(1) Be a long-term investor who puts money into stock-market mutual funds and leaves it there.

By "long-term," I mean five years or more. If your mutual fund matches the stock-market averages, you have a 94 percent chance of making money over five years, according to Ibbotson Associates in Chicago. Over 10 years, your chance of making money is 99 percent. Over 20 years, it's virtually 100 percent.

So it doesn't matter where stock prices will be tomorrow or next week. All you care about is where they will be in 10 or 20 years -- and the answer to that is, almost certainly, up. Way up.

(2) Take advantage of panics. To me, the market drop the day of the coup was like a department-store clearance sale. Stock-owning mutual funds were suddenly on sale at a #i handsome discount. In a panic, a long-term investor BUYS.

(3) Sign up for the telephone-order service offered by most mutual funds. Once that is in place, you can take advantage of selling panics by placing an instant order to buy. Such orders are usually fulfilled at the market price at the end of the day.

If you haven't arranged to buy by phone, the fastest way to enter an order is by overnight delivery service, such as Airborne or Federal Express.

(4) Buy widely diversified mutual funds. You cannot predict when world events will cause defense stocks to rise or airline stocks to fall. Investors who focus their bets on a single industry can take a beating. You need a fund that participates in many different industries, in order to keep all the bases covered.

The same rule holds true for buying international stocks. Recent wisdom has said, "Buy Germany, sell Japan." But had the Soviet coup succeeded, the outlook would have dimmed for European companies aiming to sell to Eastern Europe. Furthermore, the cost and risk of reclaiming eastern Germany would have risen.

Japan, by contrast, would not have been much affected by a Soviet coup. For reasons like these, conservative investors own international mutual funds that invest all over the globe, not just in a particular area.

With the coup apparently history, investors have refocused on the state of the U.S. economy. Business conditions are so fragile that it's hard to say for sure whether the recovery has begun or not, in the view of Allen Sinai, chief economist for the Boston Co. But inflation is running lower than expected (in the 3 percent-to-4 percent range), and interest rates are likely to drop further. Both are positive developments for U.S. stocks.

Many investors ignored the coup or moved aggressively to buy. In almost any sudden crisis, that's the strategy that's right.

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