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Surviving Today's Weird Economy

By: Source: AARP Bulletin Today Date Posted: 2002-04-01 10:31:00-05:00

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You've weathered what you think is the worst of it: the great bear market of 2000-2001. You've taken some hits along the way, but for the most part you've held firm: You didn't panic. You held onto your portfolio.

Now you're assessing the damage, finding your stocks down much more than you would like—and deciding you must act. You want to catch up, recover lost ground. Right now. You figure you should jump back in the market. And buy—big time.

Slow down, advises personal finance expert Jane Bryant Quinn. "Some people try to get more aggressive at this point, because they think, 'Gee, I have to make it back fast.' "

But you could be making matters worse, Quinn warns. "You could be digging a bigger hole for yourself. At this point, maybe it'll work. But the more aggressive you get, the greater the chance you'll lose money."

Quinn, 63, whose popular finance column appears in Newsweek, has always stressed prudence and common sense in investing. Now she wants investors, particularly those in or near retirement, to be especially careful.

Even while granting that the economy is recovering—making fast, catch-up buying tempting to some—Quinn sees new unknowns at play in the market. And they are worrisome.

The unknowns, she says, revolve around the fallout from two economic bubbles. First is the long-punctured "tech bubble" that since March 2000 helped push down the Dow Jones averages at least 10 percent and the tech-heavy Nasdaq more than 60 percent.

"The bursting of the Nasdaq bubble wasn't a shock for me," Quinn told the AARP Bulletin in a telephone interview. "I'm old enough to have seen this before." What surprised Quinn, and what she thinks holds new threats for both the economy and the stock market, is the scandal over corporate accounting practices triggered by the Enron debacle.

"This is a second bubble that is just starting to burst," Quinn says. The danger, she adds, is that no one knows which "good" companies may be using accounting practices that are inflating earnings—and stock prices.

But all this doesn't mean, she says, that people shouldn't be "in the market," assuming they're careful.

In the aftermath of the bear-market and Enron shocks, "I think people should go back to the [basic investing] principles they grew up with," says Quinn, author of "Making the Most of Your Money" (Simon & Schuster, revised 1997).

Here are Quinn's seven principles for success in today's stock market:

1. Don't let any one stock make up more than 5 percent of your portfolio. In a word, diversify. "The Enron lesson, loud and clear, is the danger of owning too much of a single stock," Quinn says, "and that's something people still don't fully appreciate."

You're at your highest risk if you count on a single stock, she says. "You're at your second-highest risk if you count on a handful of stocks, because you can't be diversified with just a handful of stocks. And you're at your third-highest risk if you invest in only one sector of the market.

"The only strategy for surviving is good diversification. And I define that as owning mutual funds that adequately represent the American economy as a whole and then the international economy as a whole."

Quinn adds, "You buy big stocks, you buy small stocks. You buy international stocks. All these are also available in index funds. Then you buy bonds or bond funds. You've got it."

2. Beware of fads. Why did some people lose 50 or 60 percent of their portfolios in the bear market? Probably, Quinn says, they were in technology stocks or funds that overloaded on tech stocks.

"Or they were buying growth funds under the assumption that they were diversified funds," Quinn says. But investors may not have realized that their particular growth fund focused heavily on tech stocks.

"Before you buy a mutual fund you need to find out what it owns," she suggests. "Look at the annual reports that go to shareholders, and see if they are heavily skewed to one section of the market or another.

"This time it was tech. Next time it may be something else."

3. Don't wait for the market to recoup your losses. If you're looking for a way to rebuild your savings, "you can't just sit back and say, 'The market will bring it all back to me,' " Quinn says.

Maybe it will and maybe it won't, she observes. But what you need to do is clear: "You need to add more money to your savings.

"You need to save more, and you may need to work longer, or you may need to settle for less income in retirement than you had anticipated. There really aren't any other choices." Moreover, "the time to attack the problem is now," she says, because if you wait for a market that doesn't come back, "then you'll be five years older and [your situation] will be that much more discouraging."

4. Don't be positioned only for good news. Quinn says she shares the hopes of others that the market bottomed out after Sept. 11. "This is the conventional wisdom today, and there's nothing wrong with it. But what if it's wrong?"

What, in short, if there's another shock to the economy? "Things like this could happen," Quinn says. "And if you're positioned only for good news—which is what many people were in March 2000—you could get really killed on the downside."

People should be asking themselves, "Am I well enough diversified? Do I have enough savings? Have I a good, solid position in bonds and bond funds?" Quinn suggests. "That's the thinking that I would like to be doing rather than just trying to guess which way the market is going."

5. Gird yourself for the unknown. "We have no idea what's going to happen in the next 10 years," Quinn says. "And so people are going to need a safety net."

She advises building a reserve fund so that you've got three years' expenses covered, between your cash savings, your pension and your Social Security. "You can see it right in front of you, paid. You're okay."

6. Find an adviser who understands your goals. The kind of adviser you don't need, Quinn says, is one who promises to make you 20 or 25 percent a year. "That's just not the way to do it."

Instead, she says, you need somebody who grasps the potential downside of the market and will say to you, "You know, maybe the market will do 20 percent and maybe it won't, but this is your position: You're 55 years old. You've got these responsibilities. Your last kid is still in college. You can't afford to take the kind of risk of being 100 percent in stocks."

You need someone who talks to you that way, Quinn says, someone who understands your life and what you can and cannot risk.

7. Don't abandon the market. And what about investors who cashed out during the bear market? Or who now refuse to buy and are sitting on a lot of cash?

"I just don't think people should be all in cash," Quinn says. "They've gone too far. They were all in stocks, they got hit, they went all cash. I would probably start moving back somewhat into stocks and into short- and medium-term bond funds.

"You never have to do everything all at once," she says. "One of the reasons people can't pull the trigger is that it feels like all or nothing. So you do it gradually."

People continue to think they know more than they do. "We never know," Quinn says. That, paradoxically, is why it would be a mistake to walk away from the market. "Because if you're abandoning the market, again, you think you know.

"And that's why you need to be prepared for the unknown. That is my central message."