Don’t Panic If A Drop Comes

To anybody who invests regularly in stock mutual funds for the long term, the thought of a market “correction” shouldn’t be too distressing.

In fact, as long as these investors have the courage of their convictions, an interim pullback in stock prices promises them the hope of rewards, not problems - even if it lasts for a long time.

Systematic investors in stocks, such as participants in employer-sponsored 401(k) retirement plans, typically add set amounts of money to their accounts at regular intervals.

It might be $50 each payday, or $5,000 each quarter. Whatever the amount and frequency, the aim is the same, to increase savings through a disciplined system that smooths out some of the jolts that result from the market’s ups and downs.

With periodic purchases in regular amounts, investors also avail themselves of dollar-cost averaging, assuring that their money will buy more shares at lower prices.

Of course, if stock prices rise when people have just begun this nest egg building process, they get the psychic reward of seeing their money increase. This naturally encourages them to stick with the plan.

But assuming that the market’s long-term course remains upward, systematic investors are not so well served mathematically by immediate market gains. Their money will buy them more shares more cheaply if the market declines, or at least stays relatively flat, for a while.

All this raises some intriguing prospects for today’s younger investors. If the chairman of the Federal Reserve Board, Alan Greenspan, seems to be trying to talk stock prices downward from their recent record levels, patient investors might not be displeased at all.

Greenspan hasn’t said he wants to kill the bull market. Rather, he has made it clear he is concerned that it might go too far too fast, setting everybody up for a destructive letdown. Professional investors, fund managers and anyone who tries to time the stock market need to concern themselves about whether the Fed might follow through on Greenspan’s comments with a move to tighten credit conditions.

But investors who are following periodic purchase programs with a longer term perspective don’t have to fret about such questions. It doesn’t take much of a stretch for people in this position to see Greenspan as acting in their favor.