Shrewd Managers Retreat To Quality As Volatility Increases Politics Likely To Heighten Skittishness As Election Year Skirmishing Continues

If the legendary Wall Street financier J.P. Morgan were alive today, the recent volatility on the stock market probably wouldn’t faze him.

In his heyday, in the late 1800s and early 1900s, Morgan had an easy answer when asked what the market would do. He said it “will fluctuate.”

How brilliant. It has fluctuated every day and every hour since, confirming Morgan’s skill as a shrewd forecaster of investment trends.

When the market fluctuated recklessly in recent days, falling 170 points in one session and rising 110 in the next, many professional money managers began changing their strategies. Some had done so earlier, gearing their portfolios of stocks and bonds for a retreat that seemed sure to come.

The Dean Witter brokerage firm changed its recommended allocation among three key investment areas from 60 percent stocks, 35 percent bonds and 5 percent cash to a 55-30-15 split. Smith Barney, another big Wall Street player, made a similar adjustment a few days later.

Rethinking is the order of the day for a market that has exceeded practically everyone’s expectations in its remarkable climb to repeated record levels.

Steven Eber, a money manager in Coral Gables, began taking action a couple of months ago.

“I have raised more cash by selling partial positions in several of our core holdings which have experienced terrific moves and thus have discounted much, if not all, of the growth I had envisioned for them over the next year,” Eber said.

There was nothing wrong with the fundamental appeal of the companies whose shares he sold, he said.

“All are candidates for repurchase at the appropriate lower prices that would offer a better relationship between risk and reward,” he said.

Those are the words of a professional manager of other people’s money and are not necessarily a guide for non-professional individuals considering what to do about stocks or mutual funds in the current environment. Moving in and out of the market with every twist and turn in the economy or the normal fluctuation of prices can be a recipe for disappointment.

“Given the fact that the market goes up in many more years than it declines - seven out of 10 - the greatest risk to investors is not being in when it is slumping but being out when it soars,” said H. Bradlee Perry of the David L. Babson advisory firm in Boston.

In-and-out traders who try to anticipate frequent up or down moves are called market timers. Perry is skeptical of their tactics.

He suggested that a sensible strategy for coping with an erratic market is to own and hold high-quality stocks - shares of proven successful companies.

“This will provide not only peace of mind, but also good investment performance in the long run,” he said.

Guessing the stock market’s course on a short-term basis is becoming ever harder, as its behavior in recent days has demonstrated. Some of the wild fluctuation was created by program trading, wherein computer-generated buy and sell orders for huge blocks of shares distort the normal ebb and flow.

Programs from big institutional investors roiled the action so severely last Tuesday that the Dow Jones industrial average of 30 leading stocks was down 95 points in the early afternoon but was up a couple of points by the time the market closed at 4 p.m.

J.P. Morgan never saw fluctuation like that.

“The market is likely to become more volatile as politics takes center stage,” said David Testa of the T. Rowe Price mutual fund group. “The philosophical differences between the two parties will be played out this year and will create more uncertainty and anxiety.”

Like Perry of the Babson firm, veterans of the Wall Street wars have a plan for dealing with all this confusion.

Their strategy of buying and holding quality stocks has paid off since the first shares were traded under a buttonwood tree in New York 200 years ago.