As Many Opinions as People

Will small investors continue to ride the market’s waves? Do they believe last week’s events were a temporary blip or a sign of trouble to come?

We turned to past participants of our Money Make-Over series, both advisors and clients, in search of answers, bringing them together for a discussion Saturday about the markets.

A year ago, the Los Angeles Times began examining small investors’ finances through the series. Most Tuesdays, another family or individual would share their financial hopes and dreams with a financial advisor and learn about investment strategies and managing money.

The majority of our panelists were sanguine about the future of the markets and about their own choices.

“We watched the markets with amusement,” said investors Linda Kung, 26, who with her husband, Jon LaBree, 25, places $300 a month in the T. Rowe Price Spectrum Growth Fund (five-year average annual return: 18.5%) and $300 in T. Rowe Price Spectrum Income Fund (five-year average annual return: 9.6%), a bond fund.

“We’re in it for the long run,” Kung, an environmental engineer, added, saying she and her husband hope to buy a home in Orange County in the next few years. For now, she’s such a believer in stocks that she expressed disappointment about the market’s failure to stay down: She wanted to go bargain-hunting for individual issues.

Kung’s bullish spirit was heartily endorsed by both Preston Caves and Brent Kessel, fee-only certified financial planners who participated in the discussion.

“These declines benefit the steady saver because you keep adding to your portfolio at lower prices,” said Caves, who is based in Manhattan Beach.

John Orcutt of Culver City is holding off before he fiddles with his portfolio. The 41-year-old assistant grocery store manager pulled more than $50,000 out of stocks two years ago and has been keeping it in a money market fund since then, fearing a stock market correction or crash. Only when his fear comes true will Orcutt put that money back into stocks.

“I think this past week is only the beginning of the shakeout,” Orcutt said, adding that he doubts the stated resolve of people to hold firm, especially if the market should fall more than 20% in one day, as it did in October 1987.

“Once the market starts to slow down and people start heading toward the exits,” Orcutt added, “the market is going to come down so fast there really won’t be an exit. If the market goes down 30% in the course of a few days, I don’t think people will be bargain-hunting; I think people are going to be very afraid.”

Nonetheless, Orcutt admitted to moments when he regrets missing out on the greater gains that the money in his low-earning money market fund could have brought him.

“It’s just painful for me to sit on the sidelines watching everyone else make all that money, but it’s just out of control,” he said of the stock market. “I don’t think I could stomach watching a market drop and not even [be able] to get through to my brokerage company because they don’t have enough phone lines.”

Orcutt’s wife, Jean Mills, 41, a bank executive who maintains a financial portfolio separate from her husband’s, keeps most of her money--and all of her retirement savings--invested in growth mutual funds that buy the stocks of large U.S. companies, even though she describes herself as a conservative, cautious investor unable to tolerate any more than a 15% annual loss.

Kessel had advised her to diversify, to move 40% of her holdings into bond funds, when he reviewed the couple’s finances in April.

Mills procrastinated, requesting information about a recommended bond fund only in the last few weeks. “My accounts were doing so well,” she explained, adding that the value of the investments in her IRA have risen from $62,000 to more than $70,000 over the last several months.

During Saturday’s discussion, the Santa Monica-based planner reiterated his previous advice, pointing out that concentrating on short-term gains is not a good strategy.

“When the U.S. market is leading the world, you’ll do better, but the downside is if this had been a real crash instead of a pretend crash, and the U.S. market had gone down 20% to 30%, your loss would have been more devastating,” Kessel said of her current portfolio.

Mills was not the only panelist whose investing didn’t always follow stated beliefs and who failed to act on a professional’s advice.

Harry Schwartz, 70, of Diamond Bar, a retired manager for Hughes Electronics, touted stock investing to the group, even telling Orcutt that he was missing out on a tremendous investment opportunity. “If your money market funds are earning only 4% and inflation is running at 2.5%, your real return is really only a little over 1%,” Schwartz told Orcutt.

Schwartz himself is trying to reap a high return on his investments, but in an unusual way. Last year, he was advised to restructure his IRA. It was suggested that he place 40% of the $200,000 in it into mutual funds investing in large, medium and small U.S. companies; 20% into funds investing in international securities; 37% in various bond funds; and to have the remainder in cash.

Schwartz, however, feared that that strategy might mean he would have to start taking his mandatory IRA withdrawals at a time when stocks had hit bottom. So instead, he left almost half that money in stock mutual funds and transferred almost $100,000 from the Vanguard Fixed-Income Securities Fund Long-Term U.S. Treasury Portfolio (five-year annual average return: 9.7%) into factored receivables paying between 11% and 12%. He said he wanted a high-interest-earning vehicle that wouldn’t be affected by stock market fluctuations.

“If the market goes belly-up, I don’t want to go belly-up with it,” Schwartz said. Then why a speculative investment like factored receivables? “It’s a risk I’m willing to take. . . . I didn’t want to have all my eggs in one basket.”

At least one panelist was neither panicking nor tinkering.

Linda Kung plans to make no significant changes to her portfolio until she and her husband buy a home. “I have no idea if the market’s going up or down. We just keep watching our finances, plugging away, and hopefully we’ll come out ahead.”

Kessel is convinced Kung’s strategy is the correct one. “I think the Dow will get to 10,000 before it drops to 5,000,” the planner said.