WHO'S AFRAID OF THE BIG, BAD BEAR?

CUPBOARDS ARE EMPTIER. BOOM YEARS, A DISTANT MEMORY. AFTER THE LONG RIDE DOWN, CAN YOU EVER TRUST THE STOCK MARKET AGAIN? MORE IMPORTANT: SHOULD YOU?

By Karen Feldscher

Financial headlines these days are nothing if not alarming. “Job cuts hit six-month high.” “Landmark ‘down’ day for NYSE.” “Dow plunges 355 points on jitters.” “Nasdaq at lowest level since ’96.” “Once-rebounding U.S. economy losing its bounce.”

The bursting of the 1990s high-tech bubble has left what seems to be fiscal catastrophe in its wake, as some investors watch their holdings fall by 50, 60, or 70 percent. Layoffs have been rampant. Hiring is flat. Accounting scandals like those at Enron and WorldCom have not only cost thousands their jobs and wiped out thousands of pensions, they’ve made millions of Americans skittish about investing in any corporation.

According to a U.S. Census report in September, last year the nation’s poverty rate rose to its highest level since 1974, and median household income declined. The possibility of war with Iraq? The specter of future terrorist attacks? Little seems conducive to restoring investor confidence. For months, there’s been no clear indication of when or how the faltering economy will come around.

Swimming in such dire straits, the average investor is at a loss, both literally and figuratively. Northeastern registrar Linda Allen, MEd’75, has taken to shoving her monthly mutual fund statements into a pile, unread. “This is probably not a good approach,” she admits. A mournful Summit Mutual fund manager was quoted on CBS.MarketWatch.com in late September: “People just don’t want to own stocks now.”

If you’ve paid any attention to the news and you’ve got any money in the stock market, you’re probably wondering what you should do. Get out while you still can? Go on a stock-buying spree in anticipation of the market’s shooting back up? Stick your head in the sand, and pray the bad times go away?

“What makes it so difficult right now,” says Emery Trahan, associate professor of finance and insurance, “is that the market is down and interest rates are down. Even if you’re conservative, there’s not much to invest in.”

Still, despite the tidings that appear very gloomy, financial experts say you shouldn’t despair. Have faith in the stock market, they advise. Invest even more—though carefully. The worst thing you could do, they say, is give up on the market entirely.

Robert Levine, MBA’62, a partner with the Los Angeles–based Associates in Financial Planning Group, agrees: “If there’s any time people should be fully invested in the stock market, it is now.” His assessment: “The economy is recovering.”

If established patterns are the best predictors, investors clearly have cause to relax. “History has shown us the stock market is rising a lot more than it’s falling over time,” says Jonathan Pond, once a Northeastern lecturer in finance, now a financial-planning guru with books, newsletters, and television specials to his credit. “The stars will come into alignment and start to reward prudent risk once again.”

So take heart. Here are five reasons to be optimistic—
judiciously so—about your investment future.


1. Yes, the economy's sluggish—but it could be a whole lot worse.

A financial strategist quoted by CBS.MarketWatch.com in early September pronounced the U.S. economy in the midst of a “super bear market.” The Standard & Poor’s 500 has declined more than 30 percent since the late 1990s, and—unless the Dow jumps dramatically by year’s end—stocks are on track to record their first three-year decline since the Great Depression. But don’t be fooled: This is not the Depression, by any stretch.

“Things are not devastating,” says Levine. “The economy is growing, although sluggishly. Productivity has and will continue to increase, because technology has created so many tools to help us do things better and faster. Even with all the layoffs and with unemployment still inching up, the unemployment rate is at 6 percent—what used to be considered the norm.”

Besides, Levine says, “unemployment is a lagging indicator. Long after a recovery is well under way, unemployment can still go up. Corporations drag their feet on hiring because they like the new profitability. So rising unemployment is not necessarily a bad thing.”

Put the current situation into context, Levine advises. Though the nation’s economic news is dreary, it’s not so bad when compared to even the relatively recent past. Consider the challenges of the early to mid-1970s: Watergate, the Nixon resignation, the oil crisis, gas lines, wage and price controls, 15 percent inflation. “Now, those are problems,” he says.

Barry Bluestone, the Stearns Trustee Professor of Political Economy, agrees. “Before 1973, the economy was based on cheap oil,” he says. “After that, firms had to find a way to become more fuel-efficient; they had to rebuild their infrastructure. Plus, they had a huge productivity slump during the 1970s.

“We don’t have that problem today,” he continues. “Now we have relatively low oil prices and very strong productivity growth based on all the new technologies and changes in the economy. The high productivity tells us we have the potential for future growth.”

Bluestone says what’s holding back the economy now is that consumer demand isn’t high enough to keep unemployment from rising. And much of the decline in demand is a byproduct of the uncertain stock market.

But only about half of all Americans are investors, he says, and most of them don’t have significant money in the stock market. “So the crash in the stock market and the Nasdaq has not had as much of an impact on the economy as you might think,” he says.


2. In the long run, investing in stocks will always be better than stuffing your money under a mattress.

William Tedoldi, BA’52, a lawyer and accountant who’s a long-time student of the stock market, says if you want to play it safe right now, you could buy CDs for the short term and wait for the market to show more signs of life before maneuvering into it. But even he—an admitted conservative when it comes to financial decisions—says owning some stocks is still the way to go, as long as they’re “dividend-paying stocks.”
“If you buy selectively, stocks are always good,” Tedoldi says. “Even if the market contracts, they won’t contract that much.”

Pond agrees there are always companies worth investing in. “Verizon, General Motors, Johnson & Johnson, Kodak, Bristol-Myers. Companies like these aren’t bereft of problems, and they could run into problems in the future,” he said in early September. “But at least at this stage, they’re financially strong, fairly dominant in their industries, and they pay an attractive dividend. So that’s not bad.”

Out of all the financial advisers interviewed for this article, not one said you should abandon stocks as an investment option, even when the market generates measly returns, or no returns. “As someone who’s trained as a CPA, I’m always pessimistic,” Pond says. “But people are going to be rewarded for investing in stocks in reasonable proportion, there’s no question. I can say with considerable certainty that, ten years from now, you’ll be darned glad you were in stocks.”

Rosemarie Boyd, LA’70, PAH’80, who with her husband, John, runs Boyd Financial Strategies in Worcester, Massachusetts, says, “Right now is a wonderful time for investing—you can buy many shares at lower prices. Unless you absolutely believe this country will totally collapse and never come back, you should invest.”

Assistant accounting professor Diana Falsetta echoes Boyd’s advice. “Stock prices are so cheap now for companies like Oracle, Cisco, Intel, General Electric,” she says. “These are good companies that are solid.”
But how do you know which companies to invest in? Associate accounting professor Timothy Rupert says, “Think about what types of products you’re interested in, or services, or goods. If it’s something you want to buy, it’s probably something other people would want to buy, too.”

“The worst strategy,” says Paul Greeley, a Fidelity Investments vice president and branch manager, “is to wait till the market turns around, then try to jump in, because usually you miss some of the growth you could have had.”

Pond agrees. “Bear markets tend to turn around very quickly,” he says. “That’s the danger of getting out.”


3. If the stock market shows any elevation over the next year, it's likely to happen during the next few months.

According to Levine, winter tends to be the stock market’s strongest period. Since 1950, over 90 percent of the market’s annual gains have occurred between October and April.

“We’re walking right into the best months of the year,” he says.

That means if you’ve stayed invested in stocks, you shouldn’t run away from them now. In fact, with prices so low and the market in a trough, it’s probably a good time to invest more. “In our opinion,” says Levine, “it is a buying opportunity.”

The market also stands to benefit from the fact that 2002 is a midterm-election year, says Levine. Since 1932, the average increase in the Standard & Poor’s 500 from the low point in the midterm-election year to the high point in the subsequent year has been 51 percent.

“Think of why,” Levine says. “The good old president, he’s doing everything he possibly can to get elected [by doing] everything positive he can for the economy. [The midterm-election year is] such a good indicator. Only one time has it not been positive, and that was in 1932, in the middle of the Depression.”

True to form, President Bush has been talking about the economy recently, floating such options as reforming retirement plans, making changes to the capital gains tax, and lowering taxes on dividends.

From his perspective, Northeastern’s Bluestone believes the economy would be aided by another interest-rate cut and additional government investments in health care, housing, and research. He’s doubtful a war with Iraq would provide much of an economic boost. “It’s not the best way to rebuild,” he says.

Another quick jolt to the economy could come from the recent flurry of home refinancing by property owners, enticed by the lowest mortgage rates since 1971. As Levine explains, refinancing acts like a tax refund, which consumers tend to spend quickly. (By the way, experts counsel, if you haven’t refinanced your mortgage lately, now’s the time.)

Levine acknowledges the stock market is taking its time to bottom out. “After a decline of almost thirty months, it appears that the process may take a few months rather than a few days,” he wrote on his website, <www.managedmutuals.com>, in late September.

But Levine also quoted Forbes columnist Kenneth L. Fisher, who declared in the magazine’s September 16 issue, “Big ‘bear’ markets are followed by big rallies. There are no exceptions. Following all the big market drops came twelve-month advances ranging from 29 percent to 65 percent, with a 50 percent average. That’s big and beautiful.”


4. If you build diversification, returns will come.

Okay, so the market may not be a field of dreams right now, but it’s not fallow either. The best way to take advantage of growth—what little there is—is to make sure your holdings are diversified.

According to Pond, that means investing in several categories of stocks, including large-cap growth, large-cap value, small and midsize company stocks, and international stocks. It also means investing in several categories of bonds—municipal, U.S. government, corporate—and maintaining short-term investments such as money-market accounts, CDs, treasury bills, or credit-union savings.

The idea is simple: As long as your money is spread around enough, losses in one area tend to be offset by gains in another. Pond crunched some numbers not long ago and discovered that if at the beginning of 2000 investors had 60 percent of their holdings in stocks and 40 percent in bonds—an often-recommended split—and they owned average-performing mutual funds that covered all the categories mentioned above, they would have seen a 1 percent return by April 2002.

Terrible, you say? “I’ll tell you—people would trade their first-born to have made 1 percent during that time period,” Pond says. “Many people are down 20, 30, 40 percent.”

Paula Ficarra Krapf, AS’87, is one of those investors who trust in the wisdom of diversification. Though a bit nervous about the market, she’s pretty confident her choices will work out in the end. “We’ve mixed some aggressive stocks with some more low-key, stable stocks,” she says. “We figure the bad economy can’t last forever.”

Those who diversify, Pond cautions, won’t do spectacularly—at least not immediately. “You can’t brag with the guys at the country club when they’re calling you a dope for investing in bonds,” he says. “But, right now, you can hold your head up. And by the way, you can pay your country club dues, which a lot of those other guys can’t.”


5. Realizing you can't get rich quick is good for you.

There’s no denying the heady days of double-digit returns were an awful lot of fun. Yet, as Trahan says, the mammoth yields of the 1990s were “a kind of unreality.”

“Bizarre” is Boyd’s description. “We know now the outrageous returns were built on outrageous lies,” she says. “The good news is, I think, we’re now going to have healthier companies.”

Allen understands the losses of the past few years are just correcting the manic explosions of the previous decade. “To think it was going to keep going on that trajectory was a little unrealistic,” she says. Nonetheless, “it was nice while it lasted.”

Boyd believes today’s economy has made people more fiscally conservative, which she thinks is a benefit. “They’re trying to become debt-free,” she says. “And I’m seeing very young people coming in and starting to save. That’s been a really nice trend.”

If nothing else, today’s market is a wake-up call for those who haven’t looked at their investments lately. It’s not enough to create a diversified portfolio—you have to examine and rebalance it now and then, to keep your stock/bond ratio in the right proportion.

For instance, if you started the wild 1990s with a 60/40 split and never rebalanced, your stocks soared more quickly than your bonds, probably moving your allotment to 70/30, or beyond. That meant you lost more when equities went south. The lesson: Pay attention to where your money is, and every year or so make the necessary adjustments.


EVEN AS THE EXPERTS preach a kind of learned optimism, the average investor reeling under the barrage of bad news can be forgiven a little paralysis mixed with a dollop of denial.

Ingrid Ball, an administrative assistant in Northeastern’s Board of Trustees office, says she has trouble stomaching what she reads and hears about the market. “It makes me ill,” she declares. Though she’s found “the daily market report is hard to avoid,” she says she tries “not to go into depth with it.”

During the boom years, James Sarazen, financial affairs and technology director in the College of Arts and Sciences, set his computer so the start-up screen flashed an update of his investment portfolio. He enjoyed seeing the numbers rise every day: Several years in a row, he averaged a 30 percent return.

Now he says of the plummeting pop-up, “I try not to look at it. It’s not healthy.

”The irony, though, is that all those averted gazes may just be fueling the sense of despair. And breaking free of investment depression may be as simple as adopting a new sense of financial responsibility. Sarazen, for instance, has realized he needs to have a general awareness of what the market’s doing. “It’s good to reexamine your financial plan, to see if it still works,” he says.

And, despite having lost a lot of money over the past couple of years, he plans to take the plunge and buy more stocks. “You’re never going to get it cheaper,” he says. “I know I can’t buy enough to make a substantial difference [in lessening the losses’ sting]. But I will be buying—soon.”