WHAT happens to high-quality stocks in a bear market? Blue-chip issues decline, but not as sharply as low- and medium-quality stocks. And high-grade issues recover quicker.
This morning, the Dow Jones industrial average stands at 8,803.05, up 894.80 points, or 11.31 percent, from New Year's Day. If you fear a stock market tumble from this stratospheric level, should you sell most of your time-tested, high-quality stocks? No.
Why not? For one thing, we might not suffer a major setback. If stocks did plunge, the decline could precede a fast recovery, as after sharp dives of Oct. 19, 1987, and "Bloody Monday" of Oct. 27, 1997.
If you sold high-grade stocks, you would be in a poor long-range position. Further, you would pay brokers' commissions to sell, and more fees if and when you buy back.
You also would pay federal and state capital gains taxes, both of which are unnecessary expenses. It would take a stock market free-fall of about 30 percent before you would break even.
What could cause a sharp decline?
Stocks are vulnerable at lofty valuation levels; any adverse event could cause a market setback. For example, interest rates might spike upward because of a high demand for money; a recession could dampen corporate earnings.
In addition, younger investors, many of whom have never experienced a bear market, might panic and dump their stocks and funds in a selling stampede.
But there is room for optimism. Inflation and interest rates remain low, our economy is robust. the U.S. dollar is strong, unemployment is low and new home sales are increasing.
With most of that good news reflected in today's prices, stocks could tumble.
If you feel apprehensive, why not trim your big holdings rather than sell a major portion of your portfolio?
HANG IN THERE: "You make money in stocks by being on the right side of major moves, and not panicking short-term." (Martin Zweig.)
"Long-term results from stocks are far superior to those from bonds." (Peter Lynch in "One Up on Wall Street.")
"The best results come from buying good quality stocks and holding them over long time periods." (Professor Burton Mailkiel, Princeton University.)
Pub Date: 3/20/98