TURMOIL FOR INVESTORS : Sell? Hold? Some Answers for the Edgy : Q & A
Will the plunge resume when financial markets reopen Monday? That’s what investors are wondering. And if it does, what’s an investor to do? Sell--and risk losing a fortune in a market panic? Or hold on--knowing that the value of your securities might drop in the short run?
Everyone’s situation--and portfolio--is different. But here are some questions and answers to guide your thinking.
*
Q I’m worried that my stock and bond mutual funds are dropping in price. What should I do?
*
A Think about why you bought the funds in the first place. Did you buy them for short-term appreciation, for annual income or for long-term growth? If your answer falls into one of the two latter categories, your best bet is probably to sit tight. It may hurt to watch, but temporary market upheaval shouldn’t change your plans.
If you bought for short-term appreciation, you are a speculator and ought to get used to sickening bumps. Trying to earn high short-term returns is a risky game. Markets like these underscore the point.
*
Q If this is a bear market--where stocks continue to slide for a long period--wouldn’t it be smarter to sell now and buy back in later?
*
A Absolutely. But no one really knows whether a bear market has begun, or whether this is a typical market “correction” of 10% to 15%. There’s a chance that you’d sell now and end up having to repurchase your shares at a higher price, if the market quickly rebounds.
*
Q I bought a bond fund for the high yield it pays, but now I’m worried about my principal value. What should I do?
*
A If your goal is to obtain regular income, you shouldn’t do anything. The fact is, regardless of what happens to your fund’s share price, you will still get interest earnings on your bonds. But it is true that if you bought the bond fund fairly recently--within the last year--it is very likely that your principal value has declined. If you bought the fund several years ago, when interest rates were higher, it’s possible that you’ve still got a net gain on your investment.
*
Q What if the market crashes on Monday? I’m tempted to call my fund company this weekend and tell them to cash me out now.
*
A Unfortunately, that won’t save you from any losses generated by trading Monday. Generally speaking, you would get the net-asset-value price as of the close of business on the day you call or on the following business day. In this case, that means Monday.
*
Q Am I assured that I can get my money out of a fund, even if the market plunges?
*
Yes. However, funds are legally allowed five business days to process your redemption request--which means they may not send your check until Monday, April 11, if you make a redemption this coming Monday.
Additionally, if you are redeeming securities worth $250,000 or more, there is an obscure Securities and Exchange Commission rule that gives funds the right to pay you in securities--the stocks or bonds that you invested in through the fund--rather than cash.
Of course, this has never happened--and is not likely to happen in the future, says Malin Jennings, a spokeswoman for the Investment Company Institute. It’s simply a fail-safe clause designed to deal with the possibility that a fund, facing the equivalent of a run on the bank, would not have enough cash to pay all investors.
*
Q Couldn’t that happen if the market falls sharply enough Monday?
*
Conceivably, yes. However, when the stock market fell 508 points on Oct. 19, 1987--the worst single-day decline since the Great Depression--only 2% of mutual fund investors cashed in their shares. Funds had cash reserves equal to 10% of their assets and generally had no trouble paying shareholders. Currently, funds have about 8.5% of their assets in cash on average, Jennings says.
*
Q If people have a lot of time before they need their money, it’s fine to tell them to remain calm. But I’m only a few years from retirement; I can’t risk a major loss right now. What am I supposed to do?
*
A If you need your money soon, you should cash out at least a portion now, some advisers say. But if you’ve got a few years to go, you ought to keep cool--even if the market craters Monday. By selling into a panic, you may be assured the lowest possible price. Securities prices--in good times or bad--bounce around a lot. If you’ve have the time and the constitution for it, you can wait for a bounce.
You may still lose some of your principal, but probably not as much as you would have lost if you had sold into a panic.
*
Q Q: I’ve got a lot of time before I need my money, so I’m not so worried about one day’s trading. But I am wondering whether I should continue making my regular investments. Does it make sense to stop investing for a while while I try to figure out which way the wind is blowing?
*
A Sure. Given the uncertain direction of stock and bond prices, you might want to wait a while before pouring a lot of money into stock and bond funds. But if you’ve set up a regular investment program--where you’re buying small amounts of stock or bond funds monthly or quarterly--you shouldn’t tinker with it; as the market drops, you’ll be picking up more shares. In the long run, this “dollar-cost-averaging” approach generally works well for small investors who don’t want to time the market.
T-Bond Yields Soar
Long-term Treasury bond yeilds rocketed in Friday’s shortened trading session to 7.26% from 7.08% on Thursday, as bond investors reacted with horror to the government’s report of massive new job creation in March. Investors fear an overheated economy will reignite inflation.
30-year T-bond, biweekly closes: Friday 7.26% Source: TrendLine
