Jittery equities investors who rush and retreat may miss a market surge


November 13, 1994|By New York Times News Service

While new money continues to pour into stock mutual funds, many investors have moved in and out of equity funds this year, trying to time the market as common stocks have see-sawed.

But these participants have often run headlong the wrong way, rushing in on rallies and retreating during corrections.

In March, June and September, when stock prices fell, jittery "market timers" moved out of stock funds and into money market funds, figures from the Investment Company Institute show.

The biggest monthly move came in March, with a net $3.7 billion being taken out of stock funds as the stock market was bottoming.

Only in October 1987, the month of the stock market crash, was more money transferred out of stock funds. But the record for transfers into equity funds was set in August, when $2.9 billion was invested as stocks approached the year's highest levels.

Several recent studies show that the risk of an investor missing a big market surge while trying to avoid a tumble is great enough that experts urge stock fund owners to stay the course, or keep their switching to other equity funds.

"It's not just knowing when to get out," said Jeremy J. Siegel, professor of finance at the Wharton School at the University of Pennsylvania. "It's knowing when to get back in. That's why staying in the market is usually the best bet for the small investor."

Roger Hertog, president of Sanford C. Bernstein & Co., an investment research firm in New York, added, "Going from stocks to cash is a losing game because so much of the returns are clustered into a very small amount of time."

The firm analyzed monthly returns of the Standard & Poor's 500 index from 1926 to 1993 and found that in the best 60 months, returns averaged 11 percent. In the other 756 months, the average was 0.01 percent.

A study of the 1983-1992 bull market by Nicholas-Applegate Capital Management of San Diego found similar clustering, with average annual equity gains of 16.2 percent nearly halved if only the 20 best days of the period were missed.

Mr. Siegel examined almost 200 years of financial markets' performance and found that in the worst 30-year period, starting just before the crash of 1929, sitting tight on stocks beat bonds by a margin of 6 to 1, and Treasury bills by more than 10 to 1.

Implicit in these observations is a long-term perspective. "If you've got a time horizon greater than 10 years, it's just absolutely compelling to be a buy-and-hold investor," said Donald J. Peters, vice president of T. Rowe Price Associates in Baltimore.

This is true for many reasons. In several shorter periods, 'N including the Great Depression and the bear market of the 1970s, stock prices have fallen 40 percent or more and taken years to recover. Taxes are a factor, with investment profits subject to the 28 percent capital gains rate.

Yet another is the power of compounding. Neuberger & Berman Management Inc. of New York studied the S&P 500 from 1963 to 1992 and found that someone investing $2,000 on the worst day each year of the first decade, and then sitting pat, would outperform someone who started 10 years later but picked the best day annually for 20 years.

The former's portfolio would have finished at $264,000, while the latter would have amassed $256,000, despite having invested twice as much money.

"The earlier you start, the better off you are, regardless of when you put in the money," the president of Neuberger & Berman, Stanley Egener, said.

If staying in equities for the long haul is the way to build wealth, however, "that doesn't mean you should leave your portfolio static," said Daniel P. Wiener, president of the Fund Family Shareholder Association. "Now's the time to rebalance."

Mr. Wiener's group publishes newsletters tracking the funds offered by Vanguard Group and T. Rowe Price. Since the end of 1991, he said, his index of value-oriented funds has risen 33 percent, while the growth index is up less than 10 percent. "It's probably time to take profits in value funds and recycle them into growth," he said.

Markets move in cycles, and the auto-pilot way to buy low and sell high is to trim exposure to richly valued investments and put the proceeds into less expensive ones.

"Asset allocation accounts for 90 percent of wealth generation over time," Mr. Hertog of Sanford C. Bernstein said. "Relative valuation should be taken into account, and then modest shifts made."

Another current option: Move from risky classes of funds, like aggressive growth, into less volatile ones, like equity income or growth and income funds.

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