Regulators trying to figure out what caused last week's stock market free-fall

Small investors need to focus on the big picture

May 10, 2010|By Eileen Ambrose, The Baltimore Sun

Within two hours of the Dow Jones industrial average plunging nearly 1,000 points Thursday, the call volume jumped about 40 percent at Baltimore's T. Rowe Price Associates.

Anxious investors phoned to say, "The market is falling. I can't afford to let that happen," says Christine Fahlund, Price's senior financial planner. Callers were advised to hang tight. And Price representatives were instructed not to speculate on the cause of the plunge with clients because no one knew what was happening, she says.

Days later, we still don't know the reason for the Dow's free-fall before it snapped back to regain all but 348 points on Thursday. Then the gyrations continued as the Dow retreated Friday, but jumped 404.71 points on Monday — its largest gain since March 2009 — to close at 10,785.14.

Initial rumors that a trader accidently entered a huge incorrect sell order by hand — a so-called fat-finger trade — have largely been dispelled. Some blame the sell-off on fears that Greece's debt crisis could spread across Europe and here. Regulators met with the various stock exchanges Monday to consider the role that the highly computerized but fragmented trading system might have played. And a congressional hearing on the market slide will be held today.

Meanwhile, small investors have been carried along without any say. Most of them can't avoid some exposure to stocks if they want to finance retirement and maintain their standard of living in the future.

The key for them is to develop an investment plan to meet financial goals, while making sure they aren't taking on so much risk they lose sleep over days such as Thursday. And then they must try to ignore fluctuations in a market that has grown much more volatile these days.

"We told them to stay focused on their long-term investment goals," says Fahlund. "Stick with your asset allocation. Stick with your plan. You just don't want to find yourself selling when stocks are low. It's a paper loss. Once you sell, you have secured the lost."

Calls to Lombard Securities on Thursday didn't stop until after 5 p.m. Clients weren't panicked but wanted to talk about what was happening.

"Clients in the market now are pretty inured to this," says Daniel T. McHugh, president of the Baltimore brokerage. "We didn't have anyone call us from the ledge."

Dozens of clients even called in search of bargains, but McHugh says "it was a little too volatile that day" to buy.

Even if you wanted to buy then, it might have been impossible.

Tom Taylor, an accountant and financial adviser with Chesapeake Financial Advisors in Towson, had been watching Apple's stock that day for a client wanting to buy shares once they fell below $240. Taylor was trying to buy shares just after the plunge started and couldn't execute a trade for around 20 minutes. He waited until Friday to buy.

Some firms sent e-mails to clients Thursday.

"We basically said everybody is focusing on what is going on today and overlooking the fact that stocks have gone straight up since March of 2009 without having any break whatsoever. That is actually the odd part of this," says Ted Toal, a financial planner with Rockwood Wealth Management in Annapolis.

David Berman, an adviser with Berman McAleer Inc. in Timonium, expected the phones to ring as stocks tumbled.

"We got not one call, which was almost eerie," Berman says. He speculated that clients were prepared because his firm had warned since the end of last year to expect a market pull back.

But even some professionals were disturbed by the rapid descent.

"It scared the hell out of me," recalls Saxon Birdsong, chief investment officer with Baltimore-Washington Financial Advisors in Columbia, who watched the market fall 50 points at a time. "It was frightening. … Short of a nuclear attack, there's no reason for that kind of 9.2 percent intra-day movement."

Birdsong predicts once Thursday's events are fully investigated, the industry will see more regulations.

If the cause is a flaw in the trading system, better to uncover that now than in the darkest days of the recession when the market was more fragile, says David Straus, senior portfolio manager with Washington–based Johnston Lemon Asset Management.

"It's a time when earnings are really strong and banks are better positioned today than two years ago," he says.

eileen.ambrose@baltsun.com

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