Stock Analysts Split On How To Ride Tide

April 07, 1994|By Ian Johnson | Ian Johnson,Sun Staff Writer

Ask three Wall Street gurus their advice on how to ride out the current stock market storm and you'll get three well-reasoned responses: Buy. Sell. Hold.

With answers like that, it's no wonder that many small investors are shrugging their shoulders and wondering if stocks really are more than just the big table at Atlantic City. If the pros -- who study bull and bear markets for a living -- can't agree on a strategy when stocks turn down, how can an amateur be blamed for doing nothing?

A look beyond the conflicting advice, however, shows some common threads in how the Street deals with a bear.

First is what Legg Mason's Richard Cripps calls his five-year rule of thumb. If you don't need your investment for more than five years, relax and figure that the current turmoil is the price you pay for stocks' historically high returns.

But if Junior is 15 and you need the money for his college in three years, it may be time for a painful decision, even if you've already seen your portfolio follow the market down 10 percent.

"If you have less than five years to go, even if you've taken a hit, you have to cut back your exposure. If you stay in, the market may bounce back quickly and everything will be fine, but you've greatly increased your risk," Mr. Cripps said.

To avoid getting into this bind, investors should slowly pull out of stocks as they get closer to their goal. As you hit 60, or as your child becomes a teen-ager, you should start transferring funds out of stocks.

So far, so good. But even long-term investors may want to tinker with their strategy. Wouldn't it make sense, for example, to save one's money right now and pump it in when the market hits bottom?

This is where financial advisers split into two camps.

Some have an unshakable faith in "dollar-cost averaging," a strategy that has you invest a fixed amount each month -- preferably by an automatic payroll deduction or withdrawal from your checking account. That way when the market falls, your $100 a month buys more stocks. When stocks rise, you'll have taken advantage of the old Wall Street maxim to buy low.

According to the Investment Company Institute, a trade group that represents mutual funds, about 40 percent of the $793.8 billion in stock mutual funds was invested through retirement plans, most of which take advantage of this strategy. A good chunk of the remaining 60 percent is also invested by regular investment plans set up by individual investors.

"This gives you a different perspective on the market," said Betty Hart of the Investment Company Institute. "You know your money is going further, so you're not likely to stop investing even when the market is down."

True enough, says George Shirk of the Fort Lauderdale-based Mutual Fund Forecaster newsletter, but when the market is down 10 percent, it may make better sense to hold off buying stocks. That doesn't mean you have to break your discipline of socking away a certain amount each month, but you could put that money in a money market fund or a fund holding short-term treasuries -- the most conservative funds available -- until the stock outlook is clearer.

"Dollar-cost averaging is a great idea, but the market is very, very volatile. You may be buying cheaper stocks today than you could two months ago, but the stocks you buy today could still lose their value if the market continues to fall," Mr. Shirk said.

This question -- has the market already bottomed out or will it fall another 10 percent to 15 percent in the coming months? -- is the crux of the question. If you think the market has bottomed, you can sit pat and keep buying. If not, you may do well to keep saving, but put the money in something safer than stocks, some advisers say.

The market's recent course has been of little help in divining its future. After dropping nearly 300 points at Monday's close, the Dow Jones industrial average rose 82 points on Tuesday and then was flat yesterday, sinking at first and then squeaking ahead just 4.32 points to finish at 3,679.73.

Like the market's zigzag course, Wall Street also has been sharply divided on the market's future.

Some, like John Shaughnessy of Advest Inc. in Hartford, believe that the market fundamentals are solid: Profits at most companies are rising strongly, inflation is low and the economy rising. The recent downturn has been nothing more than a healthy "correction" in an overvalued market.

Others, however, see the market so grossly overvalued that only a long-term bear market, where the market drops between 20 percent and 25 percent, can right the situation. John McGinley of Technical Trends in Wilton, Conn., said small investors shouldn't be fooled into thinking that the 1994 downturn is the same as the 1987 or 1990 drops, when the market fell sharply and then rose quickly.

"Bear markets are typically 11 months long. We've been conditioned into thinking that they just last a month or two and then we continue on as before. But that is not the case this time," Mr. McGinley said.

Like Mr. Shirk, he advises investors to sit out the current turmoil and wait for the market to hit bottom in a few months:

"That way you can still buy your stocks, but when they're 20 percent cheaper than they are now."

But to William C. Freund, director of the Center for the Study of Equity Market at Pace University in New York, this still smacks too much like trying to outguess the market. The only place for an amateur, Mr. Freund advises, is as a steady, long-term investor.

"If you're not a long-term investor, you'd better be a professional," Mr. Freund said. "If you're not a professional, get out. And stay out."

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