Advisor Today > > June 2001 Managing Money: What's Wrong with the Stock Market?

Managing Money: What's Wrong with the Stock Market?

We need to remember what we should have learned over the years.

James P. Ruth, CFP

Did the 1990s cause us to permanently strike the words "bear market" from our vocabulary? Did investors really believe there would not be a major market correction sometime? Why, then, are so many people caught off guard with the major market declines so far this year after an already rocky 2000?

First, let's take a look at what we know for sure about the stock market:

It goes up and down
Over time, the trend is usually up

Now, consider what we think we know about the stock market: Picking the most opportune time to buy or sell is pretty easy. After all, we live in the Information Age. We can just check the Internet. Right?

Then we need to remember what we should have learned about the stock market over the years: The market is most dangerous when it's least apparent and least dangerous when it's most apparent.

And finally, let's not forget some basic laws of human nature. Investors are often influenced by the twin emotions of fear and greed.

It's easier to understand the panic among Generation X-ers. After all, most of these 20-somethings have never seen the market head toward the equator for more than a day or two, much less over a period of months. They were able to get away with buying high and selling higher during the second half of the '90s. Day trading was raised to an art form by the media fueled by seductive advertising and $6 trades. Unfortunately, most of these traders exchanged four or five years of early retirement for a longer career.

Talking about investors who tried to time the market, Don Connelly of Putnam Funds says: "They started with a light heart and a heavy pocketbook and ended with a light pocketbook and a heavy heart." The X-ers wanted us to believe the fuel for the engines that drive the stock market in the U.S. and abroad had changed and that hits on a website were the high octane that gave a company value regardless of its revenues. They ignored a lesson learned by most college students in Econ101-that hits on a website are no substitute for good old-fashioned product sales by corporations-at a profit. New technologies will survive and prosper in the future because they will propel Old Economy companies into the new century.

More difficult to understand, though, is the reaction by some of the Baby Boomers. Because the media created fear and doubt, an attitude of "It's different this time" seemed to prevail.

ntoxicated by media headlines, they wondered if the market would ever recover. Boomers were aware of the Great Depression in 1929 because they heard about it from their parents and grandparents. The Baby Boom generation was just graduating from high school in the 1960s when the Dow was trading in the 600 to 800 range. They had front row seats for the market crash of 1987. One day, the Dow was trading at 2,200 and the next day it was at 1,800. Some wondered if this was the beginning of the U.S. economy's collapse. Others figured that maybe it was the beginning of a worldwide economic meltdown. Eighteen months later, though, the Dow had regained the high ground at 2,200 and was soaring to a new altitude of 10,000. All this was occurring at lightning speed-about 13 years.

The road to recovery

So where does all of this leave investors? One thing is fairly certain: stocks are available at discount prices in both Old and New Economy companies right now. Have market prices bottomed out yet? No one knows for sure. The recovery is likely to take a while. Alan Greenspan lowered interest rates in mid-April and Congress will likely offer some form of tax relief later this year. Both of these actions will aid our recovering economy. The largest boost to recovery, though, will be when consumers regain their confidence. This could take a little longer. Until this occurs, the ride might continue to be a little bumpy.

In the meantime, don't overlook the effectiveness of dollar cost averaging as a good way to invest in an uncertain market. If you have $12,000, invest $1,000 on the same day each month for the next year. At the end of 12 months, you're fully invested, but at average market prices. Of course, any time during the year you could change strategies and invest the balance as a lump sum or fold your cards and pull out of the market altogether.

So what's my point? Sometimes, investors have very short memories. The events of the last five years offer evidence. Investors still succumb to the twin emotions of fear and greed, reminding us once again that the laws of human nature have not been repealed. They thought buying and selling stocks and mutual funds was pretty easy when the market was rocketing into the stratosphere.

They forgot that the market is most dangerous when it's least apparent and least dangerous when it's most apparent.

Which takes me back to my first point. All we know for sure about the market is this: It goes up and down. Over time, the trend is usually up.

James P. Ruth, CFP, is a registered representative and president of Potomac Financial Group, in Gaithersburg, Md.

He can be reached at 301-948-3900 or pfgroup@erols.com.

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