At times of stock market volatility as in the last few weeks what’s an individual investor to do?
What not to do is worry, as long as you’re in the market for the long term.
“Before we hit the next 300- or 800-point-drop week, you need to be prepared to be invested at least one to two years,” said Mark Lindon, a principal with Century City-based Hollister Asset Management. “Invest money you can afford to ride through a storm.”
Storm indeed. Consider these recent headlines: “Dow Average Drops 512 Points; High-Tech Stocks Hit Hard” (Sept. 1). “Dow Leaps 380 for Biggest 1-Day Point Gain Ever” (Sept. 9). In early September, 80 percent of all common stocks on the New York Stock Exchange and more than 95 percent of Nasdaq stocks had dropped 20 percent or more from their 52-week highs, according to Merrill Lynch.
As the market recovers a bit, investors would be wise to get out of their more speculative stocks and target companies with solid earnings, Lindon said. Speculative stocks are those he would classify as “emerging” or “turnaround” or belonging to companies with weak or no earnings.
On the flip side, investors can take advantage of the market’s volatility by preparing a wish list of stocks they’d like to own at a particular price. If those issues hit the mark, investors may buy with reasonable comfort.
Several financial planners recommended dollar-cost averaging as a good long-term strategy investing a set amount in, say, a mutual fund each month. That way the investor buys more shares when the price is low, and fewer shares when the price is high.
“It mitigates the risk of buying too high or too low,” said Eric Wolf, owner of Financially Responsible Educators. “Right now, I would not put lump sums (into stocks), but do dollar-cost averaging. The key is having a lot of shares at higher prices than what you bought into.”
Also, dollar-cost averaging allows an investor to steadily accumulate more shares, which is desirable in the long run.
“At times like this, it increases what you’re going to end up with. So it’s a good time if you’re long-term,” said Chuck Wada, a financial advisor with American Express in Glendale.
If you’re going to need to spend the money you’ve invested in less than two years, “you shouldn’t have been in the market in the first place,” Wada said. “If you’re looking at three to five to 10 to 20 years down the road, even if your statements look bad, it’s going to work out to your benefit in the long run.”
Investors nearing retirement age may want to diversify and be more conservative.
“Obviously, it does provide an opportunity for an individual to determine their tolerance to risk,” said Gordon Peay, chairman of the Los Angeles Chapter of the Society of Certified Financial Planners.
Peay advises all his clients to complete risk profiles. Some of those in their early 60s don’t want more than 20 percent of their investment in equities, while younger investors often place 100 percent of their money in stocks.
The problem with fleeing the stock market during volatile times is that you have to make three decisions: when to leave, when to get back in, and what stocks to go back into.
“It’s awfully difficult to make all three (decisions) correctly,” Peay said.
Jane Bryant Quinn, the syndicated personal finance columnist, outlines the two surest rules for earning long-term capital gains: Buy well-diversified, stock-owning mutual funds and hold on.
“Don’t try to move money in and out of the market when you think stocks are going to rise or fall, because you’ll so often get it wrong,” Quinn wrote in a recent column. But she also cautioned that there’s no easy answer to asset allocation. While there are guidelines that tell you what percentage of your money to allocate to stocks, bonds and money-market funds depending on whether you’re a conservative, moderate or aggressive investor they may not fit each person’s life situation.
Quinn also recommends that, if much of your retirement money is in the stock of the company you work for, move a portion of it into diversified mutual funds to protect against those shares falling.
Those who are self-employed and subject to cash-flow problems should also consider putting 50 percent of their money in safer, fixed-income investments. Likewise, people with large debts should also invest more conservatively, Quinn said, and direct some of their discretionary income into reducing their debt load and the accompanying interest expense.
Wada, who weathered the October 1987 downturn, said he isn’t too concerned about the recent market fluctuations. “Because I’ve had experience with the market drop and seen it come back, I’m not that worried,” he said.
He and others believe the market will recover in the next two or three years, especially as baby boomers continue to invest and sustain prices. Another factor that may provide a short-term boost to the market is a possible interest-rate cut by the Federal Reserve.
Despite the fundamentally solid long-term outlook, caution is always warranted when it comes to investing in equities.
“You need to be careful in what you buy. Not that you should refrain, but do your analysis,” Lindon said.