Taking stock in a downturn
Stay calm, learn to adapt and don't do anything drastic, local investing experts say.
March 13, 2001
By DIANA McCABE
The Orange County Register
What do I do now?
That's
what some individual investors might be asking today after Monday's
dramatic sell-off on Wall Street, which left the Dow off 4.1 percent
and the Nasdaq down 6.3 percent.
Local financial experts are
quick to say "don't panic,'' which is probably easier said than done.
So here are their answers to some questions jittery consumers might
have about their investments.
Q: Monday's market drops really make me nervous. What's one thing I can do now to settle my nerves?
A:
For starters, make sure you have a contingency plan in place, says Don
Wilkinson of United Planners' Financial Services of America in Newport
Beach. For example, right now a conservative investor might want to
increase his or her cash position.
"When the market drops 5 percent to 10 percent, increase your cash position by 5 percent to 10 percent,'' Wilkinson says.
And
if you're losing sleep at night, it might be time to look at how much
you've got hanging out there in stocks and in what sectors, experts
say.
If you're properly diversified - and that doesn't mean merely owning 20 different Nasdaq stocks - you shouldn't be worrying.
Q: What about my 401-k?
A:
What about it? "I really wouldn't base a decision on just Monday,''
says Sandra C. Field, a certified financial planner at Asset Planning
Inc. in Los Alamitos.
Since we really don't know where the
bottom of the market is, consumers who are thinking about changing the
mix of their assets should be making small adjustments, she says. Also,
check the holdings in your retirement funds now. You might be surprised
to learn you don't have as much exposure to some declining sectors as
you thought. "Many managers have sold off technology and are moving
into defensive positions such as health care and utilities,'' she says.
But the big point? Continue to make your contributions, Wilkinson says. "The stock market is on sale.''
Q: Why do I have to do anything at all?
A: You might not have any adjustments to make, but you need to check your attitude and expectations.
"People have to be willing to adapt,'' says Ryan Kelly, chief executive of Spectrum Asset Management in Newport Beach.
Investors
used to be able to simply buy an index fund or stock and it would
usually go up, in what Kelly calls an investing market. "Now, we're in
a trading market and the rules have changed,'' he says.
Investors
might have bought a stock at $18, but instead of holding it and hoping
it hits $50, they might have to let go at $30, Kelly explains. He
encourages investors to use "stop loss'' orders, which tell brokers
when to sell a slumping stock.
Q: I've saved money for a down
payment on a house. I hope to buy in less than two years, but I'm
worried about putting my money into the stock market.
A:
You're right to be worried. "You have no business risking that money in
the market right now,'' Field says. She suggests tucking away the
savings in a Roth IRA, where you should choose some stable investments,
such as bonds or cash (CDs or a money-market fund) or perhaps value
stocks. You'll also be able to take out your contribution for your
first home and not worry about taxes or early-withdrawal penalties.
Q: Is there a way to take advantage of the Nasdaq's slide?
A:
Aside from looking at the slide as a buying opportunity, you could look
at mutual funds that "short'' the Nasdaq, Wilkinson says. This strategy
is for the aggressive investor, he points out, but the idea is simple.
You invest in a fund that gains when the Nasdaq loses. He recommends
Rydex Dynamic Venture 100. When the Nasdaq drops 5 percent, this fund
goes up twice the loss, or 10 percent. Of course, if Nasdaq goes up 5
percent, the fund drops 10 percent. But for aggressive investors
looking to recoup some losses, shorting the Nasdaq is working right
now, he says.
Q: I'm retired and know I need to be in the market, but I'm afraid now.
A:
If you're newly retired, you're right that you can't afford not to be
invested. "A lot of people in their 60s think they just need to move
all of their retirement money to bonds,'' Field says. "But they might
live another 40 years. If you think you'll stay in bonds, your money is
not going to last 40 years,'' she says. She suggests keeping two years'
worth of cash in short-term corporate bonds, money-market accounts or
certificates of deposit. The rest goes into the market but in a mix
that the investor is comfortable with, she says.
Q: OK, so if I get out of tech stocks, what sectors should I be looking at?
A:
Kelly and others like energy. "It's been on a nice run for the past 12
months,'' he says. He also suggests health care -- and keeping a
portion in cash.
A good bond is also something to consider.
For example, a California municipal bond with a AAA or AA credit rating
might yield around 5 percent now. But if the economy continues to slow,
its total return might rise to 8 percent to 10 percent, Kelly says.
Q: How long is this turmoil going to last?
A:
Well, that's the big question. The interest-rate cuts of the past few
months won't really have any impact on the economy for several more
months. Wilkinson thinks the ride on Nasdaq will be bumpy all the way
through June.
"There are no clear directions and that's what's confusing.''
But the Dow has basically been flat, so don't expect any major drops there, Wilkinson says.
"Overall, people are concerned with weak earnings and there's just this kind of fear that spilled over.''