Dear Dagen: No Stay-Invested Bromides, Just Some Hard Facts
Tuesday probably knocked the wind out of you.
Take a moment.
Catch your breath.
Don't let this one unnerve you.
The
Dow Jones Industrial Average
fell 359.58, or 3.2%. The
Nasdaq Composite
took a more crushing blow, tumbling 229.46, or 5.6%. The
S&P 500
dropped 55.80, or 3.9%.
The Nasdaq is down again today in morning trading with big losses in Internet stocks.
It's at this moment that some personal finance writers will start reminding you that you're a long-term investor.
Share your investing and mutual fund questions on the
Dear Dagen board
You've heard it before: You shouldn't panic. You shouldn't sell. You should keep your 5-, 10- or 15-year commitment to your investments.
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All those platitudes are fine and true. But following a day like Tuesday, hard numbers on the value of staying invested are probably better for quelling anxiety than a generic sermon on the virtues of long-term investing.
After such an intoxicating 1999, some of you may have forgotten that the 1990s have seen several sizable selloffs. And just look where you'd be if you'd kept your money in the market after each one.
Remember the correction on Oct. 27, 1997 that was rooted in the Asian financial crisis? The S&P 500 fell 6.9% in one day. The
Nasdaq 100
collapsed 7.4%.
Just like Tuesday, many investors were probably itching to sell. You would be much richer if you didn't.
If you bought the S&P 500 index at the close on Oct. 24 -- just three days before that selloff -- you would be sitting on a gain of 48.6% through yesterday.
The Nasdaq 100 has experienced an even more astronomical rise since then, up 235%.
If that's not enough to dissuade you from indiscriminate selling, here's another example.
On Aug. 31, 1998, the market took another nasty beating. The S&P 500 was off 6.8% that day. The Nasdaq 100 fell 9.9%.
But since the close on Aug. 28 of that year, the S&P 500 has climbed 36.2% through yesterday. The Nasdaq 100 is up 180% over the same period.
Even last year, there was heavy selling throughout the course of the summer. From July 16 to Oct. 15, 1999, the S&P 500 fell 12.1% as a result of
Federal Reserve
interest-rate hikes. Still, the index made a comeback during the later part of the year, gaining 17.8% and ending the year up 19.5%.
Once again, interest rates played a key role in this week's market drop. The sharp rise in the market last year, a rise in interest rates and worries about an impending Fed tightening were the basic catalysts, says Arun Kumar, senior equity strategist at
Lehman Brothers
.
"We did expect something to happen in the first half of the year as the Fed raised rates," Kumar says. Although he's not certain yesterday's downturn is the beginning of that or just people cashing in gains, Kumar does expect to see a correction in the S&P 500 of 8% to 12% in the first half of this year with rates rising.
However, "we wouldn't try to market-time around it. We still expect market returns to be attractive enough to be fully invested."
Lehman Brothers still expects the S&P 500 to produce a double-digit return this year.
Elizabeth Mackay, chief investment strategist at
Bear Stearns
, doesn't see anything on the inflation front or in economic growth numbers that would suggest anything close to panic. "Global growth should be stronger than last year," says Mackay.
"The risks in the market would be, at this point, fairly concentrated," Mackay adds. "The overall valuation risk may not be as dramatic as it appears." Instead, the risk is in a fairly concentrated group of stocks -- technology and Internet names that have experienced the most dramatic gains.
Look at the stocks that have shown "signs of a classic kind of froth," Mackay adds. "I think that's where the greater risks would lie."
Given the recent history of this market and the outlook of some market professionals, you should fight the urge to sell.
Unless of course you'll soon need that money, perhaps to pay off those holiday-related credit card bills.
Closed-End Cousins?
Tuesday's
Dear Dagen on the outlook for exchange-traded index funds left a couple of readers befuddled.
"You note that actively managed, exchange-traded funds are not expected to arrive until sometime in the future. But aren't closed-end fund trading on the
New York Stock Exchange
just that?" asks reader
David-Michael Lincke
.
Mike Lekas
also wants to know if these securities are the same as closed-end funds. "Can they trade at a discount or a premium?"
In short, closed-end funds are not the same as exchange-traded funds.
Sure, closed-end funds can have ticker symbols and "trade" on the Big Board and other exchanges. But the share price of a closed-end fund, which issues a fixed number of shares, can trade at a discount or a premium to a fund's net asset value, or NAV. Index shares that trade on the
American Stock Exchange
are designed to do just the opposite. These shares are supposed to track the NAV of the underlying portfolio. Shares of these securities can be redeemed for the actual underlying shares of stock in the portfolio, albeit only in large amounts.
Lastly, investors can short exchange-traded index shares, like the
Nasdaq 100
tracking stock
(QQQ) - Get Invesco QQQ Trust Report
, on a downtick (basically, when the market is falling). That exercise might be very attractive in this market.
Send your questions and comments to
deardagen@thestreet.com, and please include your full name.
Dear Dagen aims to provide general fund information. Under no circumstances does the information in this column represent a recommendation to buy or sell funds or other securities.
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Corrections and Clarifications.
