Wednesday's market spike should be a lesson to stock investors that they should not withdraw from the market, even for a single day, East Bay financial professionals said.
Members of the Times Investing Panel were cautiously optimistic after the market closed, with a majority saying it looks as if the market has bottomed but none of them yet ready to dismiss the chance that stocks could drop further. They remained convinced, though, that equities on the whole are bargain investments at recent levels, especially in comparison with bonds.
The overriding lesson they identified from Wednesday's session is an old one: that investors should be ready to ride waves of volatility and stick with their asset-allocation plans rather than trade stocks out of fear or an attempt to forecast market trajectory.
"Days like today are the reason market timing is not a successful strategy for the average investor," said Eric Flett, a portfolio manager at Bay Isle Financial Corp. in Oakland. "The stock market reacts quickly and when you least expect it."
Frank Catalano, a registered principal with American Investors. Co. in Walnut Creek, agreed. "Miss a day, and you miss out on a 5 percent to 7 percent gain," he said. "A lot of people were scared and wanted to bail out, and after today they're afraid to miss a day in the market."
Michael O'Neill, president of Lafayette's Sage Investment Management, said many individual investors were flummoxed by the rally, not only because they have been offloading stocks but because they have been increasingly shorting stocks.
"The market does its best to cross up as many people as possible, and obviously quite successfully," he said. "You'll [soon] have people who were selling very aggressively for the last eight weeks wondering if they made a big mistake."
Of course, whether the market is on the path to recovery remains to be seen. The experts could not agree on whether the rally was rational, reflecting strong underlying fundamentals like earnings and low share prices, or whether it was irrational, based more on investor emotion. While all agreed that there are still bargain stocks out there, it is not clear whether stocks as a group remain somewhat overvalued.
"I'm not taking a lot of meaning in today's second-largest Dow point gain ever," said Jeffrey Elfont, an investment counselor with Alamo Capital Investments in Walnut Creek. "We had reached extremely oversold positions, and it just lends itself to a snapback rally. -- The question is when will the true investors of America come back to the table and reallocate their 401(k)s.
"We have some major tests of corporate balance sheets between now and Aug. 14, when CEOs will have to sign their accounting statements." Judith Bedell, president of Bedell Investment Counseling, also sounded a note of caution. "The bottom can get tested over and over," she said. "It's a P/E (price/earnings) story, but no one knows what the 'E' is. People are saying, 'Is that a real E? Can I believe that E?'"
Rather than watch the market, Bedell and other experts said, investors should stick to their target asset allocation, staying in stocks as well as the other instruments, like bonds, they are using to diversify their portfolio. At the same time, now might be a good time to rebalance their savings, selling off bonds and buying into the still-downtrodden stock market to return to their target allocations.
"People that put their portfolios together in 1997 and haven't touched them since then are right back where they started," said Thomas Payne, a financial planner with MetLife Financial Services.
Ryan Tate is a general assignment business reporter. He can be reached at rtate@cctimes.com.
Caption: Photo 1, Catalano mug; Photo 2, Bedell mug.
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