Don't panic, but don't fall asleep either, say investment experts

March 04, 2007|By Andrew Countryman | Andrew Countryman,Chicago Tribune

The Dow sets record after record, only to sink 416 points in a day. It then endures some big swings during the next few days before losing more ground.

Forgive people if they feel a little whipsawed. What's an investor to do?

Don't panic, financial planners and market analysts say. But don't be complacent, either. There are some steps investors can take to protect themselves and potentially profit from the current climate, these experts say.

Planners and analysts say it's a good time for investors to assess their risk tolerance and make sure their portfolios aren't too heavy in stocks after the substantial run-up of recent months. Many say long-term investors with well-balanced portfolios should simply ride out the volatility.

"Corrections happen all the time," said Alan Skrainka, chief market strategist at Edward Jones in St. Louis. "Don't make an emotional decision in market declines. It's the long-term investor's best friend," because it presents "an opportunity to buy good stocks at a reasonable price."

In fact, financial planners say, clients are already steeled for this sort of market activity, and have been largely unfazed, even when the Dow Jones industrial average sank on Tuesday.

"I only received one phone call," said William Dever, a certified financial planner at JMG Financial Group in Oak Brook, Ill., who counsels affluent investors. "Clients have gotten very used to the volatility and are becoming more savvy."

Jeff Baer, a certified financial planner and certified public accountant based in Grayslake, Ill., said his clients are focusing on their long-term goals "instead of being emotional with short-term adjustments, which is hard to do."

"They're obviously a little nervous but they're investors, not using that money for short-term savings," he said. "They just need reassurance but no one went into a panic."

Many analysts remain bullish on equities, despite Tuesday's drop.

"The environment in our minds is good for stocks in general. I just see more things to be happy about than sad," said Scott Wren, senior equity strategist at St. Louis-based A.G. Edwards & Sons Inc. "For us, what we're trying to do is to gear our clients to focus on the big picture."

Dow industrial stocks have often bounced back fairly quickly after their largest one-day point drops, and Standard & Poor's Corp. analysts predict the benchmark S&P 500 index will end the year around 1,510, up nearly 9 percent from current levels.

Helping to underpin the market, experts say, are robust corporate earnings. Growth may be slowing in the coming year, but the gains of the past years have pushed earnings to a "breathtaking level," Dever said.

"People just aren't emphasizing that enough," he said.

As a result of strong earnings, valuations remain attractive, many analysts say. S&P strategists say the price-earnings ratio for projected 2007 earnings for the S&P 500 is about 16, "well within striking distance of the long-term average," said the firm's chief investment strategist, Sam Stovall.

But some experts say stocks have further to fall in the short term.

Harry Clark, chief executive officer of Clark Capital Management Group Inc. of Philadelphia, is sticking with his pre-Tuesday forecast of an 8 percent to 12 percent drop from stocks' recent highs, calling it "very normal."

He recommends investors wait a couple of weeks, then consider buying. He believes technology, basic materials and pharmaceuticals are attractive.

Long-term possibility

Some experts see the downturn and potential volatility as a way to invest new cash for longer-term investments.

Merrill Lynch strategists say that, during periods of rising volatility, outperformers include high-quality bonds, large-cap stocks, developed markets, dividend-payers and consumer staples and health care stocks in particular.

S&P strategists see appeal in some of the sectors most battered in the downturn, including apparel, accessories and luxury goods; broadcasting and cable TV; employment services; industrial real estate investment trusts; integrated oil and gas companies; and investment banking and brokerage firms.

Wren said A.G. Edwards analysts are overweighting health care and consumer staples, while underweighting materials and consumer discretionary stocks.

Dividend-paying stocks may be a wise choice for many investors, Wren said.

Although some investors may be tempted to pull back from stocks and invest in the seeming safety of bonds in the current climate, S&P strategists don't favor that step. "While investors may seek bonds as a safe haven, in our opinion, bonds are not an attractive haven," Stovall said.

Skrainka urges investors to hold stocks that would best weather an economic downturn, such as blue chips and investment-grade bonds, and be leery of junk bonds and auto and airline stocks.

It's also a good time to break from the pack, he said.

Time to rebalance

For many investors who have seen their portfolios skewed by rising equity prices since last year, experts said it's a good time to rebalance to bring their investments back in line with their preferred allocation of stocks, bonds, cash and other vehicles.

Even with last week's 4.2 percent fall in the Dow, many investors are still holding too much of their portfolio in equities and need to rebalance, experts said.

"If they have not done it [lately], it would be a good time to do it again," Baer said. "I think people always need to look at their allocations and their comfort levels."

A common approach for rebalancing is to sell winners and reinvest in areas that have lagged.

Experts stress that investors need to keep last week's activity in perspective.

The market had gone an unusually long time without a 2 percent single-day drop, which on average happens eight times a year, according to Charles Schwab & Co. research.

Andrew Countryman writes for the Chicago Tribune.

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