Facing the Bear

Fight, take flight, or just sit tight?

Nervous about the snarling bear that's been stalking Wall Street?

"Keep the faith and stay put, the market will come back," insists Joe Tigue, managing editor of The Outlook, a financial review published by Standard & Poor's Corp.

How many US stock investors would like to embrace that optimism, battered as they have been by falling market indexes?

This has not been a jolly time for Wall Street in general - and small investors in particular - with all major stock-market indexes in double-digit declines. Measured from their market peaks, the indexes have been spelling out "bear market" - that turbulent situation when markets tumble a hefty 20 percent or more.

Nor does it look like the downslide is over. "This is a difficult investing environment," says Larry Wachtel, a market analyst with investment house Prudential Securities Inc., in New York. "But having endured one full year of pain and $4 trillion of lost valuations, investors can ride the market through."

Sitting tight proved to be the basic tactic adopted by investors the Monitor interviewed. Such investor patience is likely to be tested in the short term. "We are now in a 'confessional' period when companies are making a lot of [unhappy] pre-announcements" about lower-than-expected earnings, Mr. Wachtel says.

Withdrawals from stock mutual funds are rising, he notes. And there are an increasing number of margin calls against investors who've bet the bank on favorite stocks - and lost.

Last Tuesday, the Fed cut interest rates another half a percentage point. But analysts say the tepid response from investors suggests the Fed will be forced to make additional rate cuts. "Regular corporate-earnings reports will be issued starting in early April. What we need to hear from companies is that their projections of future earnings are not getting any worse," Wachtel says. "That alone may help to start the market back up."

Standard & Poor's, for its part, is one of many Wall Street shops anticipating the market will rebound by year's end. The S&P 500 Index should end the year at about 1350 points, S&P economists say, up from the current level of about 1150.

Indeed, S&P is currently telling its clients they should have 65 percent of their portfolio in stocks, 25 percent in bonds, and only 10 percent in cash.

So far, most small investors in the US appear to be accepting the prospects of a resurgent market later this year. While some investors have cashed out, most are staying firm.

For investors in their 40, 50s, or near retirement, that is not always easy, as they watch the value of their portfolios shrink. Investors in their 20s and 30s have decades to make up shortfalls.

The Monitor interviewed four investors to see how they have coped - and what remedial measures, if any, they are taking. All are members of the American Association of Individual Investors, in Chicago, and are fairly sophisticated about finance. They also express patience. Here are their stories, with advice from experts:

'Part of the normal cycle'

Linda Maher, a homemaker in Mullica Hills, N.J., takes her investing seriously.

She reads "Investor's Business Daily," tracks finance-oriented Internet sites, peruses books on finance, and keeps up on details about both her and her husband's stocks and mutual funds.

But, she says, she is not going to panic because of the recent stock-market dive. "A bear market," she says, "is part of the normal market cycle."

So far, she is neither selling her downtrodden holdings, nor buying. But she sees buying opportunities in coming weeks as the market settles. And she's sure a rebound will come.

"Everything hinges on corporate earnings. When earnings start to rise, the market will rebound," she says, just as it repeatedly has in past downturns.

Ms. Maher, who has two children, ages 4 and 9, works occasionally as a consultant in the nuclear-engineering field; her husband is also in the nuclear industry. About 60 percent of the Maher's investments are in mutual funds and about 40 percent in stocks. She doesn't particularly like bond products.

All told, she says, she oversees some 16 mutual funds, six for herself, seven for her husband, and three for her children. She also monitors 22 stocks, including such firms as Cisco Systems, Intel, AOL, Sun Microsystems, and Microsoft.

Her fund holdings and her husband's are similar. She has an aggressive-growth fund; a large-cap growth fund; a mid-cap fund; a value fund, and two sector funds, one in healthcare, and the other in technology.

Her husband also has a fund linked to the Standard & Poors' 500 Index.

Maher refuses to give up on the market, because "history shows the stock market is the best place to make money over time," she insists. Nor is she soured on high-tech firms such

as Microsoft and Intel - "solid companies" with good track records, she says.

What Maher most laments is a lack of "good counsel." She has worked with both large brokerage firms and small discount and Internet brokers. "But it is frustrating trying to get good advice," she says.

She also feels brokers from large, well-known financial firms are trying to hawk "company products," while smaller discount firms offer little advice. In many cases, she finds that she knows far more about the market than the brokers do. So for now she is doing most of the necessary research herself.

Expert advice: David Bendix, president of Bendix Financial Group, Garden City, N.Y., believes Maher is smart to hang in there. "The market should come back by at least the fourth quarter of this year," he says. But he thinks she should diversify more, adding some bonds - perhaps municipal bonds if the Mahers are in a high tax bracket. He also recommends buying foreign stocks via mutual funds to diversify away from the US market. Europe looks attractive for growth later this year and next year, he says.

'Down cycles don't last'

Helen Sonenshine laughs when she admits that she is at a point in her life where she could happily retire. And as a resident of Virginia Beach, Va., she is close to both sand and surf.

But as a woman who thrives on activity, she doesn't see retirement happening for some time. She is administrator of a small business. Her husband, Daniel, is a college biology professor.

Ms. Sonenshine started investing in earnest in 1985. That means she has ridden out one major downturn (1987), and the explosive bull-market of the 1990s. Today, she has about 70 percent of her holdings in stocks, and 30 percent in mutual funds. She dislikes bonds, which she finds stodgy.

She says she is definitely a "buy and hold" investor and plans to hang tough with the market no matter how deep the current downturn goes.

"Some of the downturn is psychological, but a lot of it is justified; there was definitely a bubble," especially among over-priced technology firms, she says. "Down cycles usually don't last as long as up markets," so she expects a recovery in the months ahead.

She has already engaged in some buying, shoring up positions in firms she already owns, such as Sun Microsystems. Among New-Economy firms, she owns Amgen, Intel, AOL, and Cisco. She also has big-company stocks, including GE, Ford, and Citigroup. She holds no dotcoms, but has some ADRs (overseas stocks), such as Finnish cellphone maker Nokia.

To hold down investment expenses, she gets all her stocks through discount brokers on the Internet.

She admits that she is short on international holdings. She has one international mutual fund, held through T. Rowe Price. But international funds, she says, have never been "particularly successful" moneymakers for her.

The underlying US economy, she says, "remains quite strong." Sonenshine adds the market rebound will have to come, and she is prepared to wait for it.

Expert advice: "Ms. Sonenshine has an interesting plan," and is probably on target in her assessment of economic cycles, says Lewis J. Altfest, of consulting firm L.J. Altfest & Co., New York. "But it sounds as though she holds too many high-tech firms and large-cap firms."

As conservative as her plan sounds, she is somewhat of a risk-taker, he adds.

"It's still not too late to diversify ... a little." She could do that by buying a small-cap mutual fund, he says.

Still, Mr. Altfest says that she is obviously a careful investor who is investing for the long haul - a characteristic which he finds very admirable.

Profits exist for those seeking to 'short' the market

Even as a youngster, Donald Bashline liked math. So little wonder that today finds Mr. Bashline both an actuary, computing the nitty-gritty of workers compensation plans for a Boston firm, and a committed stock investor as well.

Bashline has been investing since the 1970s, coming off his "hippie days" in the 60s. With a portfolio in six figures, Bashline has a Keogh account (a retirement account from his independent-consulting days), two IRAs, a 401(k) plan, and his own trading account of stocks.

He has some US government bonds, called TIPS, linked to the inflation rate. He has one international fund - a bond fund - in an IRA. He rents a home in Watertown, Mass., and owns a small condo in New York City.

In his private trading portfolio, Bashline has some six or seven cyclical stocks, including International Paper, First Union Bank, and Lattice Semiconductor Corp. He likes to buy unique new trading instruments, such as Diamonds and Spiders and QQQ. These instruments duplicate certain market indexes. Diamonds track the performance of the Dow Jones industrial average; Spiders track the S&P 500, and QQQ tracks the top 100 companies in the tech-heavy Nasdaq index.

Again, using his skills with math, he likes to "short" the market - that is, buy certain stocks that hedge, or bet on the direction of the market.

His philosophy, he says, is simple:

1. Don't fight the Fed. When the Fed cuts interest rates, there is a good possibility that the market will eventually move back up. If it doesn't drop rates - or doesn't cut them enough - there is a good shot that the market may not rebound.

2. "Do what the market is telling you to do." You have to gauge the direction and pacing of the market, he says. When it is in the doldrums, be cautious; when it is barnstorming - barnstorm along with it to a point.

Currently, with the market in turmoil and dropping recently, he is not actively trading; but he "tweaks" his holdings, buying a little here, selling a little there. Not much activity, he stresses, just a little.

Bashline, who finds stock trading intellectually stimulating, says that this has been a very difficult market. He did very well last year; but so far, 2001 has been hard going, with his trading account down maybe six or seven percent. But, he says, when the upturn comes, he'll be ready.

Expert advice: Bashline "should limit his trading to 'what the market is telling him' to 20 percent or less of his overall portfolio," argues Lewis J. Altfest, of consulting firm L.J. Altfest & Co., New York. The reason: Momentum investing of any type - that is, moving with the market - can be very tricky and very risky.

Still, Mr. Altfest finds much that is interesting about Bashline's strategy. The TIPs are very smart investments, he says, since inflation is still a threat to the US economy. And Bashline is obviously having fun with his investing - that is, using exotic instruments such as Spiders, Diamonds, and QQQ. "But they will all probably underperform in the period ahead," he says, since major indexes are down.

Thus, Bashline should consider diversifying into an international-equity fund, to create a market presence abroad to offset the US market, Altfest says.

Investing with a vision 10 years out

When Rich Chambers tells you that he's hesitant about investing new money in the stock market, you can't help but sit up and listen.

Mr. Chambers is a personal financial planner.

But Chambers, who heads up Investor's Capital Management in Palo Alto, Calif., says that he has to tell it like it is, and right now, plunking huge bundles of new money into the stock market looks shaky at best, risky at worst.

If you do go into the market, Chambers says, put in a little at a time through the remainder of the year. That way, you even out your losses and gains in a practice known as dollar-cost averaging.

Chambers believes the market has not hit bottom, although it's "getting close."

Among equity assets, he likes beaten-down value stocks, with their lower price-to-earnings ratios, rather than hot-shot growth stocks with their high price-to-earnings ratios.

But Chambers is no fuddy-duddy. He admires New-Economy firms, including high-tech, healthcare, and biotech stocks.

His portfolio includes some 200 individual companies and four mutual funds, the latter all in foreign equities. He has a 401(k) plan from a former job that he rolled into an IRA. Currently, he says, his total holdings are 40 percent in small value stocks, 40 percent in high tech, biotech, and healthcare, 5 percent in special-situations stocks (a little of this and that), and 15 percent in foreign stocks.

For all his hesitancy about the market, Chambers believes the stock market is still the best way to invest for the future. Chambers and his wife, Bonnie, have two daughters and the family likes to travel. Their last trip was to Florence, Italy. So investing, both for the present, as well as the future, is crucial.

He says he doesn't fear volatility, looks out over a long time-horizon of 10 years or more, and buys stocks of quality companies and holds them. He also doesn't try to time the market, salts away as much as he can, and uses low-expense discount brokers.

Expert advice: "Mr. Chambers has a very good overall plan," says David Bendix, president of Bendix Financial Group. "Buying the overseas stocks through mutual funds makes special sense, since it is hard to find as much good information on non-US as US firms."

Mr. Bendix also likes the fact that Chambers holds biotech firms. Besides being one of the corporate waves of the future, many of them happen to be relatively inexpensive right now, he says.

But Bendix wonders if Chambers might hold too many individual stocks. "Even most mutual-fund managers dislike holding 200 companies," he says, since "it makes it all the harder" to track so many firms. Having that many firms can dilute overall returns, he says.

Bendix believes Chambers should narrow his individual holdings down to a more focused portfolio. Finally, when dollar-cost averaging, Bendix would put half of a lump sum amount in the market now, then ease the rest in over the remainder of the year.

(c) Copyright 2001. The Christian Science Monitor

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