Sunday, 28 July 2002

Analysis Buy-and-Hold Is Passé, So Set Your Market-Exit Strategy Now

By Rachel Beck THE ASSOCIATED PRESS

NEW YORK - It's been a tried-and-true strategy for individual investors: Buy stocks and hold them for the long term; money can be made over time by toughing out the ups and downs of the market.

But it may be time to rethink that investing philosophy as the prolonged bear market diminishes hopes that many stocks will ever bounce back to levels even close to the heights seen in the booming late 1990s.

You now need an end game for playing the market.

"Investors got hurt because they loved to buy but they didn't know when to sell," said Leland Hevner, president and chief executive of the National Association of Online Investors, an investor education group.

Individual investors jumped into the stock market with a vengeance in the late 1990s, especially attracted to the high-flying technology and Internet companies. They poured billions of dollars into these new issues, quickly bidding up the prices to shocking levels.

In their rush to the market, investors used a mix of old and new trading ideals.

On one hand, they were willing to buy into companies that lacked profits and proven reputations. They didn't do extensive research, but made buying decisions on speculative stocks based on what they heard from friends or what was talked about in the media.

Yet investors also employed the buy-and-hold strategy that had long been a cornerstone of investment. As had been the case with more traditional and conservative holdings in years past, many thought they would ride the market out over time and eventually come out ahead.

But stock prices plummeted over the last two years, and those owners of risky investments who fell into the buy-and-hold trap have been left with nearly worthless shares.

"If you bought anywhere near the peak of the market and didn't sell a while ago, you've been destroyed," said Tobias Levkovich, senior institutional equity strategist at Salomon Smith Barney.

It's now time for investors to rethink the principles behind buying stocks and holding them for the long term. It's not that there aren't some stocks worth keeping in a portfolio for years, namely corporations with solid past performances and strong propensities for growth.

Investors, however, can't use that trading philosophy for every share they own. They need to look at each one of their holdings, especially those deemed riskier, and determine at what level they will cash out.

But knowing when to sell isn't so easy, either. It is tough to time the market, and that's why financial planners suggest investors determine when they buy at what price they will sell.

"It is all about risk, and how much risk is the individual willing to take," said Michael Leonetti, who runs an investment management firm in Buffalo Grove, Ill.

The last thing investors should do is wait until prices drop so far that they can recoup only a fraction of their holdings. That's what is happening to many individual investors right now; they have been cashing out of the stock market in droves over the last few weeks because they are scared that prices will continue to plunge.

"They are fleeing now, which is after most of the animals already left the barn," said Levkovich. "It's an emotional reaction, and that's not how you want to play the market."