Rough Seas

Strategies to help investors chart a safe course through the stock market's

October 28, 2001|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

A year ago, it was only about money.

Investors fretted whether the steep decline in their high-flying-technology stocks would reverse itself, or whether the bubble had finally burst.

Now, the worries are much greater.

Some economists say the Sept. 11 terrorist attacks tipped the already anemic economy into a recession. Consumer confidence last month fell to a six-year low and the drop in retail sales was the steepest in nearly 10 years. Job losses are mounting, with the airline industry alone shedding about 100,000 positions shortly after the attack.

And there are signs of cooling in the Baltimore-area housing market, where only months ago bidding wars broke out over homes in highly desired neighborhoods.

FOR THE RECORD - Tal Daley of Legg Mason Inc. was misidentified in a photo caption in Sunday's Business section. The Sun regrets the error.

Investors, too, are nervous as the United States embarks on a war against terrorism.

"There is a psychological impact here that is really fraught with uncertainty. People just don't know what to do," said Tal Daley, director of Legg Mason Funds Marketing in Baltimore.

The attack in New York's financial district shut down the stock market for several days. Its first week of reopening was the worst in history, with $1.4 trillion in market value erased.

The damage showed up in U.S. stock mutual funds, which lost on average 17.8 percent in the July-to-September quarter, reported fund tracker Lipper. That's the worst quarterly performance since the October 1987 market crash.

The technology-heavy Nasdaq composite index and the broader Standard & Poor's 500 index have since regained what they lost after the attack, and the Dow Jones industrial average nearly has recovered.

Despite a stock rally, there "still is a wariness out there," Daley said.

Even before Sept. 11, investors were uneasy. The market was poised for another year of negative returns. Many investors were forced to readjust their market expectations. Some had to make other changes, such as postponing retirement because of shrinking portfolios.

"I have more in cash then I have had in many years, just because of the uncertainty. Where is the bottom?" said Mark Luterman, chief financial officer of Stone Care International in Baltimore.

His shift to cash also is due in part to his plans to buy a new home in the next four to six months, and that money can't be risked in the market.

Luterman was among those investors in the late 1990s who got caught up in the Internet euphoria. Over two years, he saw his Internet shares rise on average 70 percent. Then the bottom fell out. His 110 shares of PSINet, a company now under bankruptcy court protection, are worth pennies a share.

That experience and the current environment shapes his investment outlook.

Luterman said that before the attack that he was more confident that the economy would recover in the first or second quarter of next year. "That's the greatest unknown right now," he said.

He said he expects the unemployment rate to continue rising, and the recovery now may depend on the type of economic stimulus package the federal government adopts.

"If I was preparing to retire, I would be a lot more concerned right now because of the uncertainty behind the war and this whole scare of anthrax," said the 36-year-old who sticks to blue-chip stocks in his 401(k).

"I don't think anyone can tell you, based on the war, what type of effect that will have on the market. I don't even think [Federal Reserve Chairman] Alan Greenspan can tell you that."

For some investors, the answer to uncertainty in the market has been to bail out of stocks. And, for some, that may be the right move.

"Anyone who has gone through this and is getting ulcers and can't sleep at night, yes, they can afford to be out of the market. Life is too short," said John Bogle, president of Bogle Financial Markets Research Center and founder of the Vanguard Group mutual fund company in Malvern, Pa.

But stocks still offer the best opportunity for long-term growth, and many investors should remain in stocks to reach their financial goals, Bogle and others say.

For these investors, experts say, the best strategy in uncertain times is to stick to the basics.

"The basics are the basics because they work," said David DeRosa, president of DeRosa Research and Trading in New Canaan, Conn.

That means making sure you have the right mix of stocks and bonds so you can meet your goals and still sleep at night, investing in different types of companies, investing regularly and paying attention.

A good place to start is to review your asset allocation - how you divide your money among stocks, bonds and cash.

"The biggest mistake investors have made is not giving enough thought to their asset allocation, thinking stocks will go up forever," Bogle said.

As a result, investors ignored bonds during their love affair with technology stocks, although bonds could have preserved much of the wealth recently lost. "They are boring, and nicely so," Bogle said. "They do create income, and income has been the forgotten man."

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