Originally created 08/12/02

Investors encouraged to remain in market



NEW YORK - With mutual fund performance going from bad to worse to really dreadful, dutiful investors have a persistent question: What should I do?

As nearly all types of funds continue to turn in disappointing performances, many investors have been selling shares. By the week that ended Aug. 1, investors had pulled $56.2 billion out of U.S. equity funds since the start of the year, according to TrimTabs.com, a research firm in Santa Rosa, Calif. At the same point in 2001, investors had put $4.7 million into U.S. stock funds.

But fund experts are advising investors not to sell - and even to keep investing. Here's how four pros suggest investors deal with the bear market.

  • Don't panic.
  • Throughout this protracted bear market, financial planner Peter H. Calfee has been telling his clients: "Don't panic. Remember why we got into equities in the first place. Equities over time are the place to be."

    The Cleveland planner also said he reminds clients of the market's historic average annual return of about 10 percent.

    And, if investors want to remain invested in the stock market for the long term, Mr. Calfee said, they have to accept that there are some things they can't control.

    "How can you control Europeans and Asians selling (U.S. stocks)? How can you control the program trades put into computers? How can you control hedge funds managers?," Mr. Calfee said. "You can't explain or manage or handle any of that. So, you have to step back, and say, 'The value of equities is over the long haul."'

  • Re-examine your goals and your risk tolerance.
  • "The advice people should take today is the same they should have taken a year ago or two years ago or five years ago: every portfolio should be designed to reach the need for return and the willingness to take risk," said Paul Merriman, president of Merriman Asset Management in Seattle and publisher of FundAdvice.com.

    Mr. Merriman said that investors must determine how much investment income they need and how long they have to reach that amount, whether it is to pay college tuition bills in five years or fund retirement in 20 years. Then, investors must decide how much risk they are willing to take or need to take in order to achieve their goals.

    There are several ways investors can determine how much risk they can handle, which will help determine how invested they should be in stocks compared with safer options such as bonds.

    Financial planners often have their clients fill out a survey that asks questions such as, How much of your principal are you willing to lose in a year? Risk tolerance also is addressed in materials from fund companies such as Vanguard and Fidelity, and in many 401(k) retirement account enrollment forms.

  • Stay the course.
  • If you had a plan to invest a certain amount of money every month or every quarter, stick to it, said Scott Cooley, editor of Morningstar's Mutual Funds newsletter.

    Try to remember that in a bear market such as this, you can buy more fund shares for the same amount of dollars invested in a bull market, Mr. Cooley said.

    "You want to buy at a low price, rather than a high price. So, if you are at the accumulation stage of your investing life, a bear market can actually help you," he said.

    But Mr. Cooley admitted this is tough advice to follow, saying: "I get the same nauseous feeling in my stomach when I get my 401(k) statement in the mail. I don't say, 'Gee I did get a lot of shares at a cheap price."'

  • If you must sell, do so strategically.
  • Don Cassidy, senior research analyst at Lipper Inc., a fund research firm, said he believed there were only a few reasons to sell: "No. 1, it's a fund that has been a really bad performer against its peers or, No. 2, to take a tax loss to buy another equity fund."

    Investors might be hesitant to reinvest the cash, but Mr. Cassidy urged them to stay the course.

    "Hang in there. Get some tax losses," he said. "But don't use that money for a money market account, buy another equity fund."