ONE financial adviser likens today's stock market to a game. ``You've been playing [it] for years, and then one day you find out someone has changed all the rules. You're a little disappointed, because you had a strategy, but now the [ones who have changed the rules] just smile and say, `Trust us, we'll tell you when you win and lose.'''
The market is still oscillating since it took its huge plunge Oct. 19. Many financial advisers suggest investors wait until volatility cools down, and the ``rules of play'' become more obvious, before making their next move. Most say it's impossible to predict which way the market will go in the weeks ahead.
``Our clients are now recognizing it is a considerably more dangerous creature than they thought,'' says Gregory Confair, president of Sigma Financial Inc., in Allentown, Pa.
Indeed, the bear's quick return, after a little more than five years of hibernation, has caught many people off guard. ``After `Black Monday,' we were surprised at the number of people who were totally invested in stocks,'' says William Goldberg, national director of personal financial services at Peat Marwick Main & Co. in Houston.
``A lot of people thought stop-loss orders would protect them,'' Mr. Confair says. But on Oct. 19, many of those orders were not filled, except at a price much lower than when they had been put in, he says.
For the next several months or so, investors have generally been advised to avoid lopsided holdings of a single type of asset that could dive in a crash. It's been recommended that they put a fixed mix of assets into long-term investments, or into less risky US Treasury bonds, and short-term investments, like money-market funds and bank certificates of deposit.
Investors are heading back to these safer, less glamorous vehicles now, Mr. Goldberg says, especially since long-term Treasury notes are paying almost 9 percent, CD and loan rates have declined, and we seem to be entering a bull market in bonds.
But ``if your objectives were well thought out before Black Monday, you should take some comfort in that,'' says Donald Rugg, president of Charlesworth & Rugg Inc., a money management services firm in Woodland Hills, Calif. ``Don't just go out and automatically restructure your portfolio,'' he says.
All investors' portfolios should contain a base of stable principle before they begin to be filled with more volatile assets, says Alexandra Armstrong, president of Alexandra Armstrong Advisors in Washington, D.C.
Her ``conservative'' ratio is 15 percent in cash and about 20 percent in something with a fixed return, which includes CDs, Treasury bills, and municipal bonds. Then, she says, 25 percent of what is left should go into common stocks, 30 percent into real estate, and 5 percent into gold. She says the rest is up to individuals' tolerance for risk.
That 15 percent cash portion should equal at least three months' worth of expenses, says Karen Spero, president of Spero Financial Services Inc., in Cleveland. ``You really don't know what is going to happen.'' In fact, she says, stocks may now be a bargain compared with two months ago, but not compared with two years ago.
Ms. Spero says that this is not the time to get into growth stocks that pay absolutely no dividends. Right now, the average investor should be in securities, either mutual funds or stocks, that pay dividends and have some good earnings potential.
Next year's tax change, which will eliminate the difference between long- and short-term capital gains, ``could reduce the amount of risk people are willing to take for returns,'' says Edward McCarthy, a financial planner in Cranston, R.I. This could precipitate a shift in strategy, he says, toward total return, a balance of growth and income.
While some financial planners don't expect the tax change to make much of a difference, ``it should remove tax motivation from economic decisions,'' Ms. Armstrong says.
At this point, most advisers suggest staying in stocks, even as one gets closer to retirement. ``When you retire and don't have any more income that's keeping up with cost-of-living increases, that's when you have to have your money invested in equities that have an opportunity for growth,'' Spero says.
``If your stock is losing, change the kind of stock, but don't leave the market,'' Armstrong agrees.
Most investment planners see current low interest rates as positive for the stock market, an incentive to invest in bonds.
``International bond funds are a great investment and a good way to get some income,'' says Larry Carroll, a planner in Charlotte, N.C.
The type of stocks most analysts are recommending are the predictable ones. ``Low-risk-tolerance investors should be in high-quality utility stocks, insurance company stocks, or utility mutual funds,'' Spero suggests. Others suggest blue-chip and defensive stocks, such as short-term zero coupon Treasury securities and small, high-yield utility stocks.
Investors who like stocks should avoid debt-laden companies, and be very cautious about non-income-producing stocks, particularly gold stocks, analysts say. They are very volatile, which, Spero says, ``the average investor does not have stomach for.''
But Mr. McCarthy suggests that if someone has spread their assets around enough to offset any market changes, a small amount of gold is a good way to broaden a portfolio.
Achieving this kind of diversity and mix is also expensive, and if you buy individual stocks or bonds, you may even need several hundred thousand dollars. If you don't have that kind of capital, you can achieve similar diversity through mutual funds.
Funds that have investment flexibility, where the fund manager can shift assets among stocks, bonds, precious metals, and cash, are the best prospect, McCarthy says. He says you should look for this flexibility in a fund's prospectus.
Another way to achieve diversity, and retain some liquidity, is through real estate investment trusts, McCarthy says. REITs are accessible with relatively small amounts of money; allow you to own real property, which could be a hedge against inflation; and have good dividends now, he explains.
If you're in any kind of fund, ``this is the perfect year to start the habit of dollar-cost averaging,'' says Armstrong. People need to have a systematic approach to investments no matter what the market does, she says. They can start by putting a fixed amount of money each month into a fund.
With dollar-cost averaging, an investor buys cheap shares when the market is down, and while they're buying more-expensive shares later, the once-cheap shares bought are growing in value.
For those who believe the country may be heading into a recession, advisers say that one should stay away from real estate and new stocks, and keep money as close to the government as possible. But don't lock it up for more than a year, they say.
``The market crash opened a lot of people's eyes,'' Spero says. ``This is a wonderful time to learn how to plan.''