Investors learn lessons from market drop

Her goal, in addition to making some money, was to learn about investing. And she's the first to admit she's had quite an education.

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A founding member of the Blue Chip Women's Investment Group in North Andover, Mass., Ms. Haddad watched the group's holdings grow to $44,000.

Today they're at $24,000, and club membership is down to 11 from 19.

"We didn't sell when we should have sold," says Haddad, who recently retired from a career as a nursing teacher. "When things started going bad, we should have been more aggressive about getting out of losers and back to firmer ground."

Millions of Americans, wooed into the stock market by the seemingly endless rise in the 1990s, have learned a painful lesson from two years of dramatic losses.

But not everyone took a severe hit – investors who diversified their holdings or had a defensive strategy suffered less damage, as did those who took their profits and got out of the market in time.

Larry Byars limited his losses by selling his company stock. That move turned out to be crucial in fulfilling his dreams – it allowed him to retire from a high-stress management job in manufacturing and move to rural Black Mountain, N.C., where he plans to pursue his hobbies: woodworking and tending bonsai trees.

Mr. Byars says he and his wife, Claire, had been savers all of their adult lives, in part because of the Depression-era mentality of their parents.

His company had an attractive 401(k) retirement program, with matches in company stock as well as a share-purchase program. He also had his own investments, mainly in stock mutual funds.

In the past couple of years, "my small pile took a hit, like everyone else's," he says. "I can't say it didn't bother me, but I still have enough to see me through."

He credits advice from James. P. Kniffen, a certified financial planner in Cary, N.C., with helping him emerge relatively unscathed from the market's plunge. One step Mr. Kniffen took was to advise Byars to keep his lump-sum pension payment out of the stock market this spring "because the market was too queasy."

Kniffen's biggest worry with Byars's portfolio was that "he was so heavy in his employer's stock." Kniffen wanted him to sell it, Byars wanted to wait for the best possible price.

"I told him he had to have some 'sell' rules," Kniffen says. "When it gets to so-and-so, we sell. It got there. I called him and asked if he had liquidated. He said he wanted to wait a couple of days. It was at $84. I said, 'if it goes down to $82, will you sell?' He said 'yes.' A couple of days later, it was headed to $82. I called and said, 'You're selling tomorrow, right?' And he did."

Another client Kniffen advises is Barbara Newman, a nurse for death-row inmates at the North Carolina state prison.

He had advised to her husband, Jim, who died last year, and has helped her maintain a relatively conservative portfolio of large-cap value stocks, high quality short- and intermediate-term bond funds, and a fixed annuity purchased with the proceeds of her husband's insurance.

Ms. Newman says friends suggested she take some of her investments and pay off the mortgage on her house and a home-equity loan – but she decided to stay in the market.

"I've been watching it, and I've lost some money," she says. "But I told Jim [Kniffen] I wasn't ready to pull my money out. I was willing to ride it out. But I told him, 'You need to turn this around now.' "

Kniffen believes that "long-term, equity investing – and by that I mean owning well-managed companies – is essential to building wealth."

With that he adds some caveats: In a turbulent market, you should have a "sell strategy," deciding at what point you'll get out of stocks, and sticking to that strategy.

Kniffen also urges investors to diversify. "You need to look at asset allocation, which means you should have some of your money in stocks and some in bonds," he says.

That's a lesson the Blue Chip Women's Investment Group has learned. Haddad says the group's members plan to "park" their new contributions in a balanced mutual fund with conservative bond and cash components "until we feel secure investing in the stock market again."