Avoiding Panic Helps Long-Term Investors

by Tim Paradis

Investor Urgency Builds As Market Swoons but Answer Is the Same: Don't Panic

Don't panic.

That advice could probably serve as a stand-in for "hello" at many brokerages these days. With Wall Street stumbling -- particularly since the beginning of the year -- uneasy investors are calling on financial advisers with an urgency not seen since the start of the decade.

Like last time, when the economy was reeling from the flameout of technology stocks and the Sept. 11 terrorist attacks, long-term investors who can resist giving in and selling out will likely emerge the strongest.

But as before, the latest stock market pullback has unnerved individual investors, many of whom are ferrying money from equities into bonds and cash. In the week ended Jan. 15, when many analysts were predicting an imminent cut in interest rates, assets in money market funds ballooned by $15.96 billion to a high of $3.17 trillion, according to iMoneyNet.

And investors pulled an estimated $18.2 billion from mutual funds last week, according to TrimTabs Investment Research. So far this year, investors have shifted about $41.4 billion out of these investments.

While those who removed money out of the market after the dismal numbers seen in recent weeks might be happy, they could be left smarting if they try to time the market but miss a rebound.

"If you have a three- to five-year time horizon and longer I would say there is very little you should really do," said Dave Stepherson, senior portfolio managers at Hardesty Capital Management in Baltimore. "These knee-jerk sell decisions are extremely unhealthy at these points. In fact, you should be doing the opposite," he said.

He said he tells nervous clients to pay attention to the markets, but so that they can detect opportunities in solid investments that have sold off, not to simply react to daily ups and downs.

The Dow Jones industrial average is down nearly 10 percent just this year, and well off its October highs. The same is true for the broader Standard & Poor's 500 index -- the benchmark that many mutual funds track and are measured against. The S&P has lost more than 10 percent for the year and the technology-heavy Nasdaq composite index has fallen more than 13 percent since 2008 began.

Investors -- faced with wrenching pullbacks in the value of investments like 401(k) plans -- have watched with alarm.

Ken Jackson, 68, of Hillside, N.J., rolled his eyes at the thought of receiving his next financial statement, which is due any day now. As a mortgage consultant, he watches the stock market closely, but said he doesn't let its peaks and valleys dictate his personal spending or handling of his investments.

"I'm pretty much a steady spender. I don't worry too much about what's going on in the market," referring to his day-to-day spending.

Jackson said he remains confident enough in a market correction that he'd reprise a bet he made with a friend about 5 years ago, when the Dow sank below 9,000 points. He wagered a helping of chocolate ice cream that the index would bounce back above 10,000 points within months.

"I won," he said.

Plenty of others remained nervous. By midday Tuesday, E-Trade Financial Corp. said it saw a 25 percent spike in volume at its U.S. call centers over what the online brokerage would have normally expected. More investors were logged into its U.S. Web site examining their accounts Tuesday than at any point in the five years it has kept tabs.

Even market titans famous for their investing acumen find it difficult to correctly time the market, observers note. Billionaire investor Warren Buffett owes his success not to predicting Wall Street's tides but to sticking with long-term investment prospects.

"We buy things are cheap and we sell things that are dear," Stepherson said. "We are advising our clients that this is what they should be doing -- not necessarily jumping into the deep end of the swimming pool but wading in."

"How much opportunity cost is there if you try to time it and you're wrong? The opportunity cost far outweighs the possibility of getting it right," he said.

Michael Barron, chief executive of Knott Capital in Exton, Pa., said he sidestepped the worst of the stock market's recent convulsions by avoiding investments in hard-hit sectors like finance. But he said even investors who find themselves holding unpopular investments can re-examine the risks to their investments and then methodically shift into a more balanced long-term strategy.

He still looks askew at some of the stocks that have been beaten down and that some on Wall Street are saying could be ripe for bargain-seekers.

"It's not time to bottom fish in financials," Barron said. "I would look at my overall portfolio: Is my portfolio positioned correctly? Which sectors have the best risk-reward relationships? Given the large amounts of uncertainty and volatility in the marketplace they are usually more defensive sectors like consumer staples and health care."

Some investors have concerns but aren't blinking yet.

Connie Rink, 64, said she put her faith in her stockbroker when she received her last financial statement, a dreary account of her investments in stocks and real estate.

"If it gets scary, she'll call me," Rink said. "I'm expecting a call anytime."

Rink, a widow, put her house in Jacksonville, Fla., on the market more than a year ago and has yet to find a buyer. She's also trying to figure out how she'll live on one-third less income when she retires in a few years from her job as an activities director at a middle school for the arts.

For now, though, Rink said previous financial planning and a willingness to ride out the tough times has afforded her extravagances such as a trip to New York City with her family.

"I've gone through recessions before," she said, watching her grandchildren glide past at the ice skating rink at Rockefeller Center. "This just doesn't feel like a real, full-blown recession to me."

AP Business Writer Jackie Farwell contributed to this report.

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