GWEN IFILL: The wild ride continued on Wall Street today with the Dow Jones closing at its lowest level in over three years. The market's plunge is eroding the retirement accounts and stock portfolios of millions of Americans. When will it end? How far away is the bottom? To help us answer those questions and others, we're joined by Terry Savage, a personal finance columnist for the Chicago Sun Times and author of the book, The Savage Truth on Money; and David Kotok, president of Cumberland Advisors, a money management firm in New Jersey.
Mr. Kotok, how shaken are investors? How shaken should they be?
DAVID KOTOK: Well, investors are certainly shaken, and they are reacting to a lot of fear. It's a cumulative fear because we are now in the third year of a bear market. We've burst the bubble, and investors are scared.
GWEN IFILL: Terry Savage, how shaken is everyone?
TERRRY SAVAGE: Shaken enough so that up until now, I think, in spite of the market decline people have been a bit frozen. I think we might note that the market has failed to bounce on numerous occasions even with good news. We might see the final act of panic, desperation selling, which ironically would probably be good news for the markets but not great news for those people who sell out of panic.
GWEN IFILL: The business cable networks today have been alive with speculations about what people should do. "Should they hold, should they sell, should they buy, what should they do?" Should people be staying in place or should they be fleeing for their lives and their futures?
TERRY SAVAGE: Well, that all depends on who you are. If you are a young person in your 20s, 30s, even 40s, having to put money in your 401(k) every month, you should take a look at the long-term picture or history of the market. According to Ibitsin, which tracks all the numbers, there has never been a 20-year period going back to 1921 where you would have lost money in a diversified portfolio of large company stocks-- and that includes reinvesting dividends. So you don't want to bet against those odds.
That's the future of America-- a long uptrend-- but there are some people that should not have been so heavily invested in stocks in the first place, and all the savage truths about rebalancing and having diversification went on deaf ears. People thought it was so easy to get rich. And those people who are in retirement, certainly are closer to retirement, need to reassess. You cannot watch your money dribble away, and yet it is very painful to sell out at a time like this. But this could last a long time.
GWEN IFILL: David Kotok, are there other things people should be taking into account in addition to their proximity to retirement and their age?
DAVID KOTOK: Well, I think there are a lot of things. Terry said it well. She used the word diversification, which is key. And many investors got into trouble because they concentrated their investments in the tech sector and they got caught up in the bubble, and that's why they've really been hurt. Diversification and risk is a very, very sound principle. It doesn't mean you can't lose. But it means you can't lose it all at once. And that's... there's a very big difference. We always recommend that investors invest in a variety of things, and that includes stocks, but it also includes bonds and alternatives. And if people broadly diversify their investments among those alternatives, they will be better off.
GWEN IFILL: If you are a small investor at this point and the statements are coming in the mail and you can't even bear to open them, what should you be doing? Should you just hold at this point or should you be reviewing your entire portfolio and trying to figure how to restructure?
DAVID KOTOK: I believe investors should be reviewing their portfolios all the time, in good times and in bad times. And now we're in bad times, and they're being forced to do so. I agree again with Terry that to panic and sell at a time like this would be a tragic mistake. There is a lot of evidence that the economics of the country have turned since last fall and should continue to do so. And there's a lot of evidence that the economics will include growth next year.
The Federal Reserve is clearly very stimulative. The fiscal situation is now stimulative. We are running a deficit. We have sectors of the economy, particularly defense and security, which are growth areas which we didn't have... wish we didn't have them because of the events that brought them there. So, the situation isn't totally bleak.
GWEN IFILL: So, Terry Savage, what has to happen for the skid to stop?
TERRY SAVAGE: Well, you know, bear markets -- people keep saying, "where is the bottom?" As if there is a rock bottom. Bear markets, in my experience-- and I was a trader on the floor of the Options Exchange in '73, '74, so I've seen how painful this can be firsthand-- bear markets don't hit bottom. They sort of hit quicksand and you're slogging through it.
GWEN IFILL: Are we in the quicksand yet?
TERRY SAVAGE: I think we are there, because people keep expecting it to bounce back, and it keeps getting sucked down. But even if you take the worst case scenario-- you asked what investors should do; let's assume that the market now, for the first time in a long time, drags the economy down: Layoffs at WorldCom, layoffs at their suppliers, fear on the part of consumers that don't spend as much. If that slows the economy down-- and it could for two or three or four years-- you should be asking yourself, is this affecting my life right now, my 401(k) plan?
If it is the money I'm taking out and living on for retirement, that's one story, but if you're investing for the long run future, then you should view this as an opportunity. But there could be a worst case scenario. It could last longer than you think, and you have to look at your own portfolio and determine not your emotional state but your financial state.
GWEN IFILL: But you're saying years, not months?
TERRY SAVAGE: You know, I'll tell you, from 1972, the Dow was over 1000. It was there on the trading floor. It fell below 600 in '74. It was still below 800 in 1982, a period of eight years, when no one wanted stocks, no one wanted mutual funds, and you couldn't talk to people about investing. So while I'm not predicting that will happen again, it is not out of the question.
GWEN IFILL: David Kotok, we still see more people selling than buying, which is probably oversimplifying what has been going on in this crazy market today. But what has to happen for this kind of volatility to even out, for investor confidence to be restored?
DAVID KOTOK: Well, there's got to be a level in which stocks appear so cheap that the buyers who have been on strike-- and I think it's fair to say that the buyers have been on strike for a while-- start to picket the bargains and they overwhelm the panicked sellers. In a classic sense, we would have a classic selling climax. The market would go down sharply on high volume, it would appear as if the world is coming to an end, and then it would reverse and start an uptrend. A lot of people are looking for that. I don't know that we are going to get that pat scenario, but I think that there is a point in which stocks appear very, very cheap, and people start to position them again.
And I believe we are going to see that within the next few weeks or few months, certainly by the fall. The next thing that is needed is restoration of confidence because of the scandals that we've seen. And I believe we are going to start to see that again, too, in the fall when, for the first time, we'll see some positive earnings comparisons and we'll be able to believe them or at least believe them more than we have in the past. So I think we're going through a process, which is curative and it's running its course. It's ugly while we're in it, but it is soon coming to an end.
GWEN IFILL: Terry Savage, you just talked about the scandals and lack of investor confidence because what is happening with the big companies. You just heard the analysts tell Jim in the last segment that this state of flux is something the economy and the markets have to deal with. Do you imagine that is going to put us in a situation where now volatility becomes the rule for the foreseeable future?
TERRY SAVAGE: Well, I think we've... we had volatility. We didn't complain about it on the upside when it would go up a lot and then back off and then go up some more. So we will live with volatility. In fact, the worst thing would be boredom where it just went down and stayed down. I look at what WorldCom today, and so many people said to me, "Terry, where did all that money go?" And I think of it sort of as a financial neutron bomb, where the business is left standing, the phone lines will still connect, but the money just vaporized.
We have seen trillions of dollars of wealth vaporize just as it magically appeared in people's accounts. They weren't working for the money that happened in the stock market. People accepted that it could appear. Now they have to understand that it can disappear, and the art of investing is not necessarily to time the markets, but not to panic. And there are funds that are going up still.
GWEN IFILL: Does the emotion that fueled the run-ups and is now fueling a lot of the great sell- offs, does that emotion affect the economy, or does the economy drive the markets?
TERRY SAVAGE: Typically the markets are reacting to the economy. I mean, we've heard all the news, home sales or interest rates or so forth, but now we've reached the point where the markets may start to affect the economy. It's what both of us hope won't happen. It could possibly slow the economy, and that would drag out this bear market. But even if it does, you know, there are funds, they don't have to be growth funds. They're equity income funds, balance funds, people overlook those in the 401(k) accounts. They were too stodgy. If you are contributing and you must continue to contribute, because you believe if your future, if you don't, I mean, you're going to stop investing now for your future and you're in your 20s or 30s or 40's, then you will have no future. You're creating the future. So invest conservatively.
GWEN IFILL: David Kotok, final word, is stodgy good now?
DAVID KOTOK: Well, stodgy is good. Don't forget bonds. They have a role, too.
GWEN IFILL: Okay. Well, thank you both very much for helping us.
TERRY SAVAGE: My pleasure.