Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: THURSDAY, April 7, 1994 TAG: 9404070021
SECTION: BUSINESS PAGE: B-8 EDITION: METRO
SOURCE: Associated Press
DATELINE: NEW YORK LENGTH: Medium
Many are former savers who eschewed 3 percent annual interest rates on certificates of deposit and instead bought mutual funds that until recently were earning double-digit returns. Others are soon-to-be retirees who depend on hefty lump-sum payouts from pension funds invested heavily in stocks and bonds.
While financial strategists have long warned that the market is no place for short-term investors, the hazards didn't become fully clear until recently, when stocks dropped sharply.
"The real trick is not having to have your money," said William Griggs of Griggs & Santow Inc., a financial strategy firm. "It's a good lesson to learn, that these things do fluctuate according to asset value. Hopefully it wasn't an expensive lesson."
Unlike bank deposits and money-market funds, mutual funds can cost you some of your principal. Indeed, mutual funds invested in stocks sank an average of 3.21 percent in the January-March period, according to Lipper Analytical Services Inc.
The decline reflected a nearly 10 percent plunge in the Dow Jones average from its Jan. 31 all-time high. The market staged a dramatic rebound Tuesday, but analysts said the slide may not be over.
Many investors may not have the luxury of waiting out the decline.
"Most stock- and bond-market money is long-term investment funds, where people tend to ride out these corrections. But if some people were sticking short-term cash savings into bonds and the stock market, then they are in trouble," said David McLaughlin, a financial adviser with Chase Investment Counsel Corp. in Charlottesville. "On the average, they'd have 10 percent less money to spend."
For example, prospective homeowners intending to close on a new house this month may find themselves unable to make the down payment if they're relying on cash from a mutual fund.
In some rare instances, buyers may no longer qualify for a mortgage if the drop in their stock portfolio pushes them below the minimum net worth required by the lender.
Retirees may have particular reason to worry.
While some retirees reinvest their dividends, others cash in their mutual funds to meet their living expenses. For them, the drop in the market "may not be life and death," Griggs said, "but it will have been a bit of a problem."
Employees or retirees who belong to defined-benefit pension plans invested in stocks can probably relax, according to Mike Clowes, editor of Pensions & Investments magazine.
In such plans, the employer promises the retiree a regular income, usually based on length of employment and salary. If a market decline drags down the principal value of the pension fund, it's up to the employer to add more money to the fund.
The principal amount of these funds, which generally are heavily invested in stocks, will show a decline for participants who are now retiring.
"This is where employees are most likely to feel some pain from the market declines," Clowes said. "But even there it should be minimal."
by CNB