With unpredictability the only certainty about the current market, opinions about the best course of action vary, but the consensus seems to be "stay the course."
Most market analysts agree that the stock market drop was an overdue correction. "Stocks got higher and corporate profits were slowing," explains Gail Ludvigson, senior vice president at Schroder and Company Inc., a Westwood brokerage firm headquartered in Britain. "That's not a good combination."
Political and financial instability in Asia, Russia and Latin America -- not to mention anticipation of the Starr Report release -- fueled the uncertainty, and the result, says Ludvigson, was that "it was time for a pause."
"This is very normal when we have had the kind of upswings we've had," says Steven Holtz, an independent certified financial planner in Westwood, who says this kind of correction normally occurs one in every three to four years.
Ludvigson, Holtz and others concur that, despite problems abroad, the U.S. economy remains strong. "The economy in our country is good. Companies are doing well. Devaluation is deceptive," says Mark Levin, managing director for Imperial Capital, a Beverly Hills-based broker-dealer specializing in high net worth investors. Levin says that the decrease in valuation is inconsistent with current domestic trends, making this a good opportunity to buy.
Holtz agrees. "Things are going on sale," he says. Investors who have a long-term time horizon can look at this as a buying opportunity because prices "will be higher in five years, and higher still in 10 years," says Holtz.
The message is that investors should stick with their long-term investment plans, and not let market fluctuations drive their decisions. Analysts caution that each individual investor needs to look at his or her personal situation before determining the best course of action. Investment strategy should take into account the individual's time frame for needing to have money in hand, tolerance for risk and ultimate financial goals. Investors with shorter-term goals, or those near retirement, would take a different course from those in for the long-term.
"Stay the course as long as you have good quality stuff," advises Ludvigson. "This is the way you create real wealth."
Holtz agrees. "There are two ways to protect yourself from the movement of the market," he says. "Be invested for the long term... and develop an asset allocation that takes into account your long term goals and desires and your ability to handle volatility." Holtz also suggests investing "across various asset categories," -- varying the mix of investment vehicles to include stocks, bonds, treasury bills, etc. -- in order to minimize risk.
The danger with the kind of volatility we have recently been experiencing is the temptation for investors to try to make a quick profit, which analysts insist is a chancy business. Those who try "are the ones who come out losers," says Eric Sussman, a faculty member of UCLA's Anderson Graduate School of Management. "Stay the course. Invest for the long term. If you have a long-term perspective you'll come out fine," Sussman advises.
Holtz concurs. "For the average person to try to predict which way the market will go is a huge mistake. People with decades of experience have no idea which way the market will go," he says. Ludvigson shares the same sentiment. Her advice: "Buy quality and hold a long time." In addition to the inherent riskiness of trying to time the market, transaction costs and tax consequences make this strategy quite costly, Sussman cautions.
Although most investors know, at least in theory, that the market grows over time, it is sometimes difficult to translate that knowledge into practice when the market is behaving erratically.
"There is much emotion involved in the movement of the stock market," says Holtz.
"The mentality is: Is this it or is there more?" says Ludvigson. "Any correction and people get fearful," she says.
The recent ups and downs seem to have made many investors forget that the market is, at press time, about where it was eight months ago. "Things aren't going badly. Just not as well," reminds Ludvigson, noting that the market went up between 17 and 18 percent between January and July of this year. Now, "we've given that back," she says. "Investors still have plenty of gains if they've been in the market the last five years," she says.
Less Money, Less Giving?
Despite these gains, the analysts agreed that the market's volatility would adversely affect charitable giving. Sussman felt there was "no question" that charitable giving would decline, noting that studies tie stock market movement with personal spending. "Uncertainty leads to inaction," he says. "People will hold off giving... until the uncertainty passes."
"When you're worried about the future, you're less likely to give," Holtz says.
But Jewish Federation Executive Vice President John R. Fishel remains optimistic. "There are four months before the end of the year. A great deal can happen," he says, noting that many donors have "made a lot of money over the last couple of years."
When asked if she thought investors would be reluctant to part with disposable income, Ludvigson answered, "You bet. [There will be fewer purchases of] all the things you would think of as discretionary: vacations, luxury cars... "
"Personally, I'm not going to buy a new car," says Levin, "I'd push that back one to two years." But although Levin anticipates a "dampening on Rodeo Drive" due to lower spending by both domestic and Asian consumers, he notes that "in this city, people go overboard regardless of the economic cycle."
According to Ludvigson, the thing to remember is that stocks have produced a 10 to 12 percent annual return on average over the last 70 years. The high performance that marked the last two to three years were an anomaly, but "people got used to it." The S & P (Standard & Poor's) 500 Index rose an average of 31 percent during 1995 through 1997, giving investors a false impression. "It started to look easy," Ludvigson says.
Even though she believes we are in for "a period of sloppiness," she projects that "probably the worst is over."
So what's a bewildered investor to conclude about the wild ride on Wall Street? That patience and a strong stomach pay off. As Ludvigson says, "In five years the market will be higher. Next week or next month is anyone's guess."