Don't Get Swamped by Stormy Stock Weather
With Wall Street engaged in some of its wildest moves ever - record setting declines, advances, and trading volumes - the question for individual investors is whether to join the wildness or stand pat.Skip to next paragraph
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And about the only reasonable answer is to think carefully and heed your investment plan.
If you don't have one, treat this as a wake-up call to get started.
The latest stock market losses have wiped trillions of dollars from portfolios throughout the world, including the United States. And you should expect more volatility for the remainder of 1997, says Hans Stoll, a market expert at Vanderbilt University in Nashville, Tenn.
"Volatility tends to occur over time, not just one day or two," he says.
High-speed computer systems now enable global investors, especially institutional traders, to jam millions of shares into the markets, sending them into a tailspin or onto an upward tear.
Your own involvement depends on whom you ask and on your own circumstances.
Professor Stoll, like many financial professionals, does not believe that the capacity to make instant changes should impel small investors to sell their stock funds during a downturn.
Many investors took that "in-for-the-long-term" view and stayed put last week.
"I'm impressed by the ability of individual investors to look beyond market turmoil," Stoll says.
He believes that in most cases, small investors should now "pretty much sit tight," although "they might want to make some minor adjustments or changes on the margins of their plans," perhaps fine-tuning their asset allocation - their mix of stocks, bonds, and cash instruments. The composition of that mix, however, will differ among individuals.
"Don't act in a panic environment," says Michelle Smith, managing director of the Mutual Fund Education Alliance in Kansas City, Mo.
"If your goals, risk-tolerance, and time-horizon have not changed, there is no reason to change your strategy," she says. "These are the times we keep telling investors about - that there will be down days as well as up days. But investing should be based on long-term considerations. The evidence is clear that over time, stocks will always provide a greater return than will any other [type of] investment."
Experts agree that in most cases an investor in stock mutual funds should stick with "dollar-cost averaging" - buying in regular increments, such as a little each month. That approach avoids two risks: (1) putting all your money in at a market peak and (2) never putting it in at all.
Your asset allocation should be based mostly on your age, financial goals, and risk tolerance, experts say. Thus, an investor close to retirement might go for a 50-50 split between bonds and stocks. An aggressive young investor might put 90 percent into stocks.
"If you are currently near retirement, or in retirement, and you have substantial assets saved, you might want to pull some of your money out of the market," to protect it if the recent downward pressure on stock prices continues, says John Graham, a professor of finance at Duke University in Durham, N.C.