Bull or bear, know your goals and risk tolerance Some think conditions don't now portend a long market slump

July 28, 1996|By Jerry Morgan | Jerry Morgan,NEWSDAY

OK, let's deal with the fear first.

What if we were wrong? "We" being the financial media, the mutual fund companies, the stock brokerages, the financial planners, the retirement specialists. You know, the people who pushed you into investing more heavily in stocks than you may have been comfortable with, by saying that unless you did, you were going to have a long, financially challenged retirement.

You responded, admirably. And by doing so, pushed the various stock markets and indexes up dramatically as you poured trillions, not billions, into mutual funds, mostly stock funds.

You took the money out of money market funds, bond funds and guaranteed investment contracts in your 401(k) plans and moved into equities. You took the risks, and you were rewarded.

Stock mutual funds were up about 35 percent on average in 1995, so you plunged in this year. In the first six months of 1996, you invested $138 billion in stock funds, eclipsing the record set in 1993.

Suddenly, market volatility is making you feel queasy and worried.

Did the Dow peak in May, when it hit 5,778? Is the bull market over? What if we have the 1987 crash again? Or the 1990 bear market? Or worse, the 1973-'74 bear market?

For more than five years, the stock market has been very, very good.

"We have had a very unusual run," said Arnold Kaufman, editor of the Standard & Poor's Outlook investment advisory newsletter. "We did not have a 5 percent dip in the last 18 months, until now. And since 1991 we have not had a 10 percent dip, which is an all-time record."

The fact that we haven't had a bear market since 1990 doesn't mean we will have one tomorrow, or that we won't. They are part of the cycle.

"You can't outlaw bear markets," said Thomas McManus, an investment strategist at Morgan Stanley. "After the weather has been hot and humid for a long time, you need a thundershower to clear the air."

The three big dips of the past 23 years were all characterized by rising interest rates. The worst, in 1973, added inflation, an oil embargo and a sluggish economy.

In 1973 the S&P 500 index was at 120. It fell to 68 in 1974 and didn't get back to 120 until 1980. The 30-year Treasury bond was in the range of 14 percent to 15 percent in 1980, when inflation was rampant.

The crash of '87 was prompted by high interest rates and a hugely overvalued stock market. The market crashed, became undervalued and came back in 1988-'89, only to run into rising interest rates, an impending recession and the Persian Gulf war, which brought higher oil prices.

All of that led to the short-lived bear market in 1990, when the market was down about 20 percent.

But that bear metamorphosed into today's bull. And right now, economic conditions don't look as if they will lead to a bear market.

Inflation is still relatively low, and interest rates have been in a narrow trading range around 7 percent. The economy is growing moderately and may slow down next year, according to some estimates. Corporate earnings are good.

In short, "We don't see the conditions [of the previous bear markets] playing out right now," said Merrill Lynch investment strategist Douglas Cliggott.

But Cliggott and Kaufman, as well as others, believe that in the short term, the return on bonds may be better than that on stocks.S&P's Kaufman agrees, but suggests that investors not sell out their stocks to buy bonds or bond funds now. "They may want to put their new money into high-quality government bonds," he said.

The basic rules, even in uncertain markets, still apply. Know why you invested, what your goals are and whether your risk tolerance can handle the changes.

Don't be too quick to dump stocks or stock funds that have made you money, just because they have dropped a little. The hit you take on capital gains taxes may mean an even bigger loss.

For example, if your stock investments have doubled in the past five years, from $50,000 to $100,000, you would have to pay about a 28 percent capital gains tax on the $50,000 profit. That's 14 percent of the total you have now. And that money is gone to the government forever.

So if you don't think the market will drop 14 percent, maybe you shouldn't make a quick move. Even if the market does drop 14 percent or more, it can always go back up.

If you don't sell, you still have all your shares.

And, the advice about stocks still seems to hold. "For the next three to five years," Cliggott said, "it is still very much equities as the preferred investment class."

Pub Date: 7/28/96

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