Don't Get Swamped by Stormy Stock Weather

With Wall Street engaged in some of its wildest moves ever - record setting declines, advances, and trading volumes - the question for individual investors is whether to join the wildness or stand pat.

And about the only reasonable answer is to think carefully and heed your investment plan.

If you don't have one, treat this as a wake-up call to get started.

The latest stock market losses have wiped trillions of dollars from portfolios throughout the world, including the United States. And you should expect more volatility for the remainder of 1997, says Hans Stoll, a market expert at Vanderbilt University in Nashville, Tenn.

"Volatility tends to occur over time, not just one day or two," he says.

High-speed computer systems now enable global investors, especially institutional traders, to jam millions of shares into the markets, sending them into a tailspin or onto an upward tear.

Your own involvement depends on whom you ask and on your own circumstances.

Professor Stoll, like many financial professionals, does not believe that the capacity to make instant changes should impel small investors to sell their stock funds during a downturn.

Many investors took that "in-for-the-long-term" view and stayed put last week.

"I'm impressed by the ability of individual investors to look beyond market turmoil," Stoll says.

He believes that in most cases, small investors should now "pretty much sit tight," although "they might want to make some minor adjustments or changes on the margins of their plans," perhaps fine-tuning their asset allocation - their mix of stocks, bonds, and cash instruments. The composition of that mix, however, will differ among individuals.

"Don't act in a panic environment," says Michelle Smith, managing director of the Mutual Fund Education Alliance in Kansas City, Mo.

"If your goals, risk-tolerance, and time-horizon have not changed, there is no reason to change your strategy," she says. "These are the times we keep telling investors about - that there will be down days as well as up days. But investing should be based on long-term considerations. The evidence is clear that over time, stocks will always provide a greater return than will any other [type of] investment."

Experts agree that in most cases an investor in stock mutual funds should stick with "dollar-cost averaging" - buying in regular increments, such as a little each month. That approach avoids two risks: (1) putting all your money in at a market peak and (2) never putting it in at all.

Your asset allocation should be based mostly on your age, financial goals, and risk tolerance, experts say. Thus, an investor close to retirement might go for a 50-50 split between bonds and stocks. An aggressive young investor might put 90 percent into stocks.

"If you are currently near retirement, or in retirement, and you have substantial assets saved, you might want to pull some of your money out of the market," to protect it if the recent downward pressure on stock prices continues, says John Graham, a professor of finance at Duke University in Durham, N.C.

But younger investors should stay put, Mr. Graham says. Corporations expect their earnings to grow substantially in the next year, he notes, citing a Duke survey, that he directs, of Fortune 500 executives.

If you decide to make some adjustments now, consider tax consequences.

In a tax-sheltered retirement account, you won't pay capital-gains taxes if you sell some shares. But you will pay taxes in a taxable account.

An important twist: Many stock funds make payouts of capital gains late in the year, notes Tim Schlindwein, who heads mutual-fund consulting firm Schlindwein Associates in Chicago.

So if you buy into a fund now, you may pay taxes on capital gains that the fund made before you bought it. Consider waiting until January to buy, Mr. Schlindwein says, or check with the fund to find out the payment date. Then buy afterwards.

Finally, if you have spare cash, don't be reluctant to commit it, says Sheldon Jacobs, editor of the No-Load Fund Investor in Irvington-on-Hudson, N.Y. He argues that market dips are an opportunity for selective buying.

Coming off a downturn, you should buy "well-diversified, sector-neutral funds," Mr. Jacobs suggests, as opposed to a single-industry "sector fund." Examples include growth or growth-and-income funds poised to take advantage of broad-based upturns in the market.

Sector funds require a bit more caution. The challenge is knowing which industries, sectors, will weather the storm.

Jacobs also recommends bond funds now, especially short- to intermediate-term funds. He is wary of long-term bonds, which are very sensitive to interest rates.

Show Discipline; Don't 'Sell Low, Buy High'

Market volatility provides the ultimate test of an investment strategy. Here's some advice from the experts:

Start with a strategy. You need a long-range plan, says mutual fund expert Tim Schlindwein. Investing for the college tuition of a toddler needs a different approach from funding retirement if you are 55 years old.

Don't sell during a panic. Selling is not necessarily the wrong choice, but it needs to be a rational choice. Make sure you are composed and thinking clearly, says James Fraser of Fraser Management Associates, Burlington, Vt. Get away from the din of the moment. Selling should be planned in advance and perhaps triggered by actions in the market.

Even though a fund is down, that doesn't mean it should be sold. Check out its market potential. If economic conditions suggest it could return to strength, then hold on. But if conditions change, it may be time to switch fund strategies.

Review your financial plan. Make sure it's in step with current circumstances. Bond funds may now be attractive. Do you own some? Keep a mix appropriate to your age and circumstances, Mr. Schlindwein says.

Don't be skittish about buying. When prices are down, that's the "point of opportunity," one expert says. They will eventually go up.

Avoid "sure bets" from market experts. Buy products you understand. If a tip sounds good, check it out. Good investing requires homework.