Lummer's Logic: Understanding the Stock Market Drop of Late September 1999

By Scott Lummer
Chief Investment Officer, mPower

The stock market has been on a downward trend over the last few days, and many of you may have concerns about where the market is going. A few of you may even consider making changes to your investment strategy because of the drop. If the decline over the past few days troubles you, let's address those concerns head-on.

First let's talk about what happened. There are three reasons for the decline.

1. Anxiety that the Federal Reserve Board will raise interest rates during their meeting early next month.
2. The doubt expressed by some analysts about whether the rapid earnings growth for most US companies can be sustained.
3. The statement by the president of Microsoft that the high-tech sector might be currently overvalued.

You may notice a common thread in these three factors - a lack of definitiveness. There is no hard economic evidence to support the stock market decline.

Yes, You Should Be Concerned...

Now let's examine whether you should be concerned that your investment's value has fallen. Of course you should. I'm concerned. Personally, I would rather be 6% richer right now. But we need to put things in perspective. Even with this decline, the stock market has gone up by 5% from the beginning of the year, and 30% over the past 12 months. Stocks are risky investments - they go up more often than not, but sometimes they do go down. If you are investing in stocks, you have to be prepared to accept occasional short-term losses.

But Remember Your Goals

Also, you should remember your goals. If you were planning on spending all of your money next month, then there would be reason to consider pulling your investments out of the stock market. In fact, at mPower we never recommend equity investments for investors with very short-term time horizons. But you are saving for your retirement. The market will endure temporary fluctuations between now and then. Over the long-term however, chances are very good that your equity funds will increase in value.

And Stay The Course

So what should you do? Nothing! It's natural to want to take action when things are going against you. If I'm driving down the road and I see a car coming at me from the opposite direction, I move out of the way. However, when it comes to investing, immediate and strong reaction is not the best policy. In August of last year, when I last wrote an e-mail like this, many investors reacted to a declining market by transferring out of stocks (a total of $9 billion of equity funds were redeemed by 401(k) plan participants). Those investors missed the 30% return I referred to earlier.

So do whatever you usually do to ease frustration. Work out at the gym. Play some soothing music. Pound a pillow if it helps. Just don't take out your worries on your portfolio.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.

Lummer's Logic: Understanding the Stock Market Drop of Late September 1999

By Scott Lummer
Chief Investment Officer, mPower

The stock market has been on a downward trend over the last few days, and many of you may have concerns about where the market is going. A few of you may even consider making changes to your investment strategy because of the drop. If the decline over the past few days troubles you, let's address those concerns head-on.

First let's talk about what happened. There are three reasons for the decline.

1. Anxiety that the Federal Reserve Board will raise interest rates during their meeting early next month.
2. The doubt expressed by some analysts about whether the rapid earnings growth for most US companies can be sustained.
3. The statement by the president of Microsoft that the high-tech sector might be currently overvalued.

You may notice a common thread in these three factors - a lack of definitiveness. There is no hard economic evidence to support the stock market decline.

Yes, You Should Be Concerned...

Now let's examine whether you should be concerned that your investment's value has fallen. Of course you should. I'm concerned. Personally, I would rather be 6% richer right now. But we need to put things in perspective. Even with this decline, the stock market has gone up by 5% from the beginning of the year, and 30% over the past 12 months. Stocks are risky investments - they go up more often than not, but sometimes they do go down. If you are investing in stocks, you have to be prepared to accept occasional short-term losses.

But Remember Your Goals

Also, you should remember your goals. If you were planning on spending all of your money next month, then there would be reason to consider pulling your investments out of the stock market. In fact, at mPower we never recommend equity investments for investors with very short-term time horizons. But you are saving for your retirement. The market will endure temporary fluctuations between now and then. Over the long-term however, chances are very good that your equity funds will increase in value.

And Stay The Course

So what should you do? Nothing! It's natural to want to take action when things are going against you. If I'm driving down the road and I see a car coming at me from the opposite direction, I move out of the way. However, when it comes to investing, immediate and strong reaction is not the best policy. In August of last year, when I last wrote an e-mail like this, many investors reacted to a declining market by transferring out of stocks (a total of $9 billion of equity funds were redeemed by 401(k) plan participants). Those investors missed the 30% return I referred to earlier.

So do whatever you usually do to ease frustration. Work out at the gym. Play some soothing music. Pound a pillow if it helps. Just don't take out your worries on your portfolio.

Scott L. Lummer, Ph.D., CFA, mPower's Chief Investment Officer, is a recognized expert in the investment field. He has conducted extensive research on asset allocation, international investing, risk management, mutual fund analysis, ethics and valuation, and is a co-author of The Pension Investment Handbook. He wants to know what's on your mind, so feel free to send him your questions about the stock market! He'll answer as many as he can in his weekly column.

The information provided here is intended to help you understand the general issue and does not constitute any tax, investment or legal advice. Consult your financial, tax or legal advisor regarding your own unique situation and your company's benefits representative for rules specific to your plan.