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Stock market volatility fans fears about equities

| Friday, Oct. 10, 2014, 11:35 p.m.

The ride for stocks in October has been rough.

Stouthearted investors like Mike Berman don't mind.

“All I've been thinking is I'm glad I've got some cash,” said Berman, 56, of Cranberry. “I see what's happening this week as a very good buying opportunity.”

Berman has about 70 percent of his investments in equities, and despite the wild market swings recently, he's planning to keep it that way.

Stocks spiked and dipped all week. The Dow Jones industrial average plummeted 273 points Tuesday, roared back on Wednesday with a 275-point gain, and then plummeted again Thursday and Friday, ending the week down 2.74 percent at 16,544.10 on concerns about the global economy. It was the same story for the S&P 500 Index, which fell 3.1 percent over the five days, its worst weekly drop in more than two years.

The volatility, and the fact that stocks remain near all-time highs, raise questions about whether now is the right time to pull out of equities.

Many wealth managers say stocks still beat the alternatives.

“I believe that, because with interest rates near zero, compared with bonds, stocks are cheap,” said Bob Hapanowicz, president of Downtown-based H&A Wealth.

Bonds offer a safe place to park cash, but historically low interest rates have given bond investors little in return, and it looks like it will stay that way for some time. On Wednesday, the Federal Reserve said that it would keep its target federal funds rate near zero with a “highly accommodative stance of monetary policy,” despite better-than-expected job growth and drops in the unemployment rate.

Still, stocks are not for the faint of heart, especially in October, a historically volatile month that has seen some of the worst crashes, including Black Monday, Oct. 19, 1987, and the crash that set off the Great Recession in 2008-09.

The first question investors need to ask is when they'll need the money.

“Certainly, if you need the money over the very short term, over a matter of months, equities aren't a reliable investment,” said Brian Koble, director of research at Downtown wealth manager Hefren-Tillotson.

Think of investing for years, even a decade or more. The question of whether to buy also depends on how much money to invest, said Chris Wiles, founder of Rockhaven Capital Management in Mount Lebanon.

Wiles isn't so sure that stocks are a great buy right now. It's true that the returns are better than bonds, but he thinks that many stocks are overpriced. He points to a simple calculation, favored by Warren Buffet, that takes the overall value of stocks, or “market capitalization,” and divides it by gross domestic product. The higher the ratio, the more overvalued stocks are, and the ratio today is the highest it has been since the tech stock boom of the late 1990s and early 2000s.

That doesn't mean someone should pull their 401(k) investments out of stocks, Wiles said. The person saving a couple hundred dollars a month should “stay on auto pilot,” he said. But he urges patience for anyone looking to invest a lot of cash at once.

“If I have a lump sum to invest, I probably don't want to put too much into equities right now,” Wiles said. “These guys I know, they like to keep a lot of cash, and they want to wait for panic and those irresistible bargains. If you're trying to invest a lump sum, have some patience.”

Berman, the investor in Cranberry, said he intends to keep a level head. He will keep buying blue-chip stocks, companies that his grandfather bought, like General Electric.

GE's stock ended the week down 4.45 percent. Berman wasn't worried.

“History shows these things happen,” he said. “It's not the end of the world.”

Chris Fleisher is a staff writer for Trib Total Media. He can be reached at 412-320-7854 or cfleisher@tribweb.com.

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