Individuals Face a Difficult Choice: Stay the Course or Run

The nation’s small investors, already reeling from steep losses in the 18-month-long stock bear market, face a major new test of their resolve in the wake of Tuesday’s terrorist attacks.

Predictably, financial advisors caution individuals to avoid making rash investment decisions when U.S. trading resumes. Stock markets did not open Tuesday and will remain closed at least through today.

But some mutual funds and brokerage firms said that they received calls Tuesday from worried investors seeking to sell shares.

“The initial reaction by individual investors was they wanted to sell and to sell immediately,” said Jon Brorson, director of equities at Northern Funds, the money-management arm of Northern Trust in Chicago.

Many analysts predicted the U.S. stock market will be hit with a heavy wave of selling when it reopens. Equity markets across Europe and Latin America dived Tuesday as news of the attacks spread worldwide.

But experts say history shows selling into a panic is usually a bad move. Though there are no direct historical parallels to the worst-ever terrorist assault on U.S. soil, experts note that stocks often have moved higher within weeks or months of calamities, even if prices fell initially.

For example, the Dow Jones industrial average was down 9.7% three months after the 1941 Pearl Harbor attack, but it recouped virtually all of that drop within a year.

The Dow was up 25% a year after tumbling nearly 3% the day President Kennedy was assassinated.

“It has always, in retrospect, proven to be a foolish thing to sell in the aftermath of these [types of] events,” argued Mark Keller, chairman of the investment strategy committee at brokerage A.G. Edwards & Sons in St. Louis. “My advice is to sit tight and not panic.”

In the short term, one of the biggest questions is whether the terrorist assault will cause already anxious consumers to further rein in their spending, potentially tipping the economy into recession and possibly unleashing another downward spiral in securities markets.

In the longer term, analysts wondered whether any new blow to share prices, on top of the losses sustained since spring 2000, will turn more investors away from stocks permanently.

“U.S. investors have lacked a sense of vulnerability that previous generations have had,” said Terrance Odean, a finance professor at UC Berkeley. “World War II and the Depression gave previous generations a clear sense of economic insecurity.”

Indeed, the arguments behind the high price-to-earnings valuations that investors afforded many U.S. stocks in recent years included that the world had changed, economic growth would continue without interruption and America’s position in the world was unchallenged.

Yet some experts doubt individuals will dump stocks en masse, in part because many people would realize they probably would be selling at greatly reduced prices. Key U.S. stock indexes already are down 25% to 66% from their spring 2000 peaks.

Extensive panic selling might have occurred had the stock market been open Tuesday, analysts said. But investors will have at least through today to weigh their response.

“The reason you head for the exits is you think there is something to be saved. You want to beat other people out the door,” said A.C. Moore of money management firm Dunvegan Associates in Santa Barbara. “Here, [the event is] a done deal. There’s likely not another shoe to drop.”

Understandably, many small investors Tuesday said they hadn’t even thought about the effect of the disaster on the financial world.

Ralph Dixon, a 39-year-old computer programmer from Miami, said his initial reaction was to move his investments to safe havens. But by early afternoon, he said, he’d already reconsidered.

“I am concerned about a global recession, but from what I’ve been told about history, these things pass in time,” he said. “I believe in America. I believe in our government. I have to believe that this will be a temporary setback. I am going to stay with the things I have invested in for the long haul.”

Los Angeles retiree Frank Glaser said the devastation he felt Tuesday had nothing to do with finance. Before the terrorist attack he had been contemplating selling a telecommunications stock fund he owns. Though he does consider the attack a harbinger of recession, he said he would not be shifting his investments.

“Am I going to do anything? No. There’s nothing I can do,” he said. “I have not been this shaken by anything in my lifetime. I am just sick. That’s not financial.”

Anna Crowe, a Denver retiree, also said she was too shocked to think about finances. “Right now we’re just watching the news,” she said. “We haven’t had a chance to think about investments.”

In West Los Angeles, a dozen consumers were in line at the Washington Mutual bank branch, but none was there because they had become panicky about finances in the wake of the terrorist attacks.

Mark Anker, a Los Angeles waiter, said he simply needed a little cash to get through the week. He said he anticipates that few people will be going out to eat this week, so he expects his business will come to a near-standstill.

*

Times staff writer Josh Friedman contributed to this report.