Volatility may signal bulls' exit Analysts predict more big swings will roil Wall St.

'A roller-coaster ride'

Advice to investors is to diversify, don't sell in panic

Stocks

September 06, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

In the past week, the Dow Jones industrial average plunged as much as 512 points in a day, only to stage a remarkable recovery, rocketing 288 points the next. Hold on. The volatility in the market is not likely to disappear anytime soon, experts say.

"It's like a roller-coaster ride that is no longer thrilling, but sickening," said Charles A. Knott Jr., chief investment officer with Philadelphia-based Logan Capital Management Inc. "The markets can't take this type of constant volatility for any long period of time without it becoming so nerve racking that people just get out."

And the past two weeks have been belly burners.

By Thursday, the Dow Jones industrial average, a market barometer made up of 30 blue-chip stocks, had lost 851 points since Aug. 24, making it unclear whether the longest running bull market ever is dead or whether a bear market has been born.

So, how should investors navigate such a market?

Advice is wide ranging, but most money managers and financial planners say investors should do the following:

Have a diversified portfolio made up not only of domestic and international stocks, but bonds, certificates of deposit and cash as a defensive measure.

Keep expectations reasonable, remembering that stocks generally return 10 percent to 12 percent a year on average over time.

Don't panic and make rash decisions by reshuffling your portfolio, especially your 401(k) plan, when the market gyrates. Market timing, they say, is a loser's game.

"My attitude is just ignore the noise," said Laszlo Birinyi Jr. of Birinyi Associates, an investment research firm in Greenwich, Conn., that monitors stock trading patterns. "There is so much noise out there right now and so many people who have opinions that are not rooted in fact."

L But the noise can't easily be tuned out, especially when the

stock market appears to have come unglued and losses are piling up.

"A lot of people feel like they should do something, but what they end up doing is going to be the wrong thing," said Jonathan D. Pond, a financial adviser and public TV commentator.

That is why Pond and other financial advisers stress that investors should diversify their portfolios. A portfolio with a variety of stocks, bonds and cash can reduce losses when the market takes a hit, they say.

Deborah Voso, a certified financial planner at Voso Associates in Frederick, said investors who are 22 to 55 years old want to be "growth oriented," even after last week's bumpy ride. They should have money in growth stocks, such as blue-chip companies, and mutual funds that invest in small-cap and a small portion in international stocks, she said.

"I don't ever want to hear the word bond when you are in the accumulation stage," she said. "There is no growth in bonds. When you are in the accumulation stage, your goal is growth, not income."

Investors who are only a few years from retiring and will need their money to live, however, are advised to shift about 40 percent of their portfolio into something that is secure and can be quickly tapped -- such as short-term bonds, certificates of deposit or money market funds, the experts said.

The remainder of the portfolio should be weighted toward mutual funds and stocks that offer both growth and income. A small percentage of the portfolio should be in international and small company mutual funds, which are more aggressive investments.

Pond's rule of thumb is to have 60 percent in equities and 40 percent in bonds.

"A 40-year-old and a 55-year-old need growth more than income, and a 65-year-old needs both growth and income," he said.

Some people who have listened to Pond argue that bonds aren't necessary, he said.

"In the past few years I have literally been hooted and howled at by groups when I mentioned the four letter word -- bond," he said.

Bonds, however, aren't necessarily purchased to enhance returns, but to reduce risk, Pond said.

"Those who have so much money in stocks, if your pension fund manager had all of your money in stocks they would violate the prudent-man rule. They would end up in jail," he said. "The courts would look at that and say, 'What are you doing?' "

But stocks have been the big draw for millions of investors, and it is not easy watching portfolios that have returned 30 percent and 40 percent three years in a row, suddenly fall. Who wouldn't question their strategy in such a volatile market?

"What might be happening right now is people are saying, 'Oh my God, I was too aggressive,' " said Thomas Grzymala, president of Alexandria Financial Associates Ltd. "Then don't put more money into stocks and perhaps re-allocate to a more conservative mix."

But Grzymala warns investors not to touch their 401(k) retirement plans or individual retirement accounts no matter how tempting. If they are young, they can ride out the rough spots in the market, he said.

Pond said that he has advised investors to forget about their retirement plans and keep investing money as the market rises and falls. But many don't listen, he said.

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