Money Angles

By Andrew Tobias

One of my friends argues that "timing the market" -- knowing when to get in and out -- is impossible, and thus the only sensible thing for a person to do is to put all his or her long-term money into stocks, or stock funds, at all times.

There's a lot to be said for this. What is worrying me is that it is being said now. When stocks get as high as they currently are -- largely because unseasoned investors who can't think of anyplace else to put their money have come to the table for the first time to play -- there is a fair chance we're headed for trouble.

Which wouldn't much matter if the newcomers would sit patiently for 10 or 20 years. Over long periods, stocks will almost surely outperform safer investments. But I know these people. Some will rush for the door the minute they see the value of their portfolio fall. They sold last week. The rest will hang on, knowing a dip is just a dip, a sigh is just a sigh -- but they will grow increasingly uncomfortable as the dip begins to look like a trough. At that point, they will become a little angry with themselves for ever having got into this mess. Perhaps they will feel a little guilty for having tried to get "something for nothing," and perhaps they will conclude that this stock market stuff is just more stress than it's worth. And they'll decide to get out as soon as stocks pop back up and they can break even. But, it will turn out, stocks won't pop back up. They'll just edge down and down, until at some point these investors will become really disgusted. And scared. Sure, capitalism never collapsed before, they will think, but with all these unregulated "derivatives" you may have read about -- trillions of dollars in bets by financial institutions that could conceivably fly out of control -- and with whatever geopolitical disaster happens to be threatening at the time ... Well, these investors will panic and sell, retrieving maybe $600 for | every $1,000 they invested, but just wanting the certainty of cash.

And that, of course, will be the bottom. The time to buy, not sell.

It may be years before we have another bear market, or one may have already started. If you've been investing $200 a month in no-load mutual funds for years, through thick and thin, don't ever change. In the long run, you'll do great. But if you've never lived through a bear market and have got into stocks because 3% from a bank is a joke, and you've got this young broker (who has also never lived through a bear market) advising you -- beware. Get at least some of your money out onto the sidelines, and for heaven's sake, don't invest on margin.

Things are good. The U.S. is lean and mean and at peace. Free trade is a priority, as are deficit reduction and education. Technology races ahead. We have a smart guy running the Federal Reserve (Greenspan) and another smart guy (Robert Rubin) advising the President -- who's damn smart himself. All of this bodes well. But the stock market in the short term doesn't care about any of that. It cares mainly about interest rates. You can argue that with the economy finally in gear, commodity prices and labor costs will begin to edge up. (Could the Teamsters strike be a straw in the wind?) Then again, you can argue that with enormous global capacity, inflation (and thus interest rates) will stay in check.

My own guess: we are not headed for another round of major inflation. But in the short term, markets are just crowds of people rushing unpredictably in one direction and then another. A year into Kennedy's Administration, the Dow dropped 27% in seven months -- and it wasn't starting from as overvalued a position as today's market. In 1994, after the big tax-hike-on-the-rich kicks in next week and a few more big mergers come unraveled, might the market take a prolonged dive? If it does, just promise me you won't get out at the bottom.