FAITH OF INVESTORS WORKED THIS TIME, BUT THE NEXT?

Byline: Ben Sullivan Daily News Staff Writer

On Monday, when thousands of professional investors were wringing their hands over just how far the U.S. stock market would drop, 64-year-old Beverly Barrette was baby-sitting her grandchildren in Simi Valley.

Far from worrying about the market's volatility, the retired hotel banquet coordinator and private investor said she felt a mild glee.

``I heard the news on the radio,'' Barrette said. ``It's a good time to buy, I thought. All it means is my monthly investment now buys me more.''

The same conclusion was being drawn at workplaces and homes across the country, as legions of private investors saw the market volatility as either insignificant to their portfolios or a chance for bargain hunting.

According to mutual fund giant Fidelity Investments, private investors on the whole began adding money to Fidelity stock funds after Monday's 554-point drop, not withdrawing it. No. 2 Vanguard Group reported the same. The market responded by gaining 337 points the next day.

Such apparent calm in the face of the biggest correction in a decade led many in the industry to credit the level-headed small investor with staving off a more serious market free-fall.

But it has also raised concern in some corners that individual investors have developed an unprecedented, even blind faith in the stock market that not even a 500-plus point drop can shake.

While partially justified by the market's robust, 16-year expansion, some market watchers say such an attitude will lead to rude awakenings if - make that when - an extended correction takes hold. As quick as investors are to entrust their money to stocks now, they may be just as quick to flee the market in an extended downturn.

``What I'm concerned with is that if we do have a serious correction, people may lose the faith,'' said Maury Elvekrog, a financial adviser and licensed psychologist who heads Michigan-based Seger-Elvekrog Investments.

Elvekrog recently delivered a paper to the American Psychological Association on investor mentality. He believes that today's small investor has largely dismissed the possibility of a crash and puts nearly as much faith in the market to safeguard his money as previously allotted to banks, bonds and savings and loans.

``The present attitude is that of expecting stocks to grow and that everything will turn out fine,'' Elvekrog said. That attitude is ``typical (historically) but amplified'' by recent market growth, he said.

Elvekrog and others acknowledge there is cause for a bullish outlook.

``Most people perceive the economy as basically quite strong, which it is, and that wasn't the case in 1987'' during the last major downturn, said professor William Jennings, chairman of the CSUN finance department.

Inflation is low and Federal Reserve Chairman Alan Greenspan indicated last week there are no plans to increase the prime lending rate soon. Unemployment remains below 5 percent, with new jobless claims falling in October. New-home sales have climbed in recent months throughout the country. And as icing on the cake, the federal deficit inexplicably dropped this year by more than $100 billion.

Adding to investor confidence is the stock market's historic performance. Since 1942, the Dow Jones industrial average has increased 7.9 percent annually, far outpacing money market accounts, inflation and government-insured bonds.

But, analysts say, the greatest source of current small investor confidence in the market is its recent past performance. Though last week's correction shaved 10 percent off the Dow's 1997 growth, most investors are still far ahead of the game. Even with the correction, the Dow has grown 25.8 percent this year.

But because the recent growth has coincided with the entry of many new investors to the market, a potentially dangerous set of circumstances is falling into place, Elvekrog believes.

New investors enjoying 20 percent-plus return on their investments are likely to overestimate their own investing skills, he said. When more normal growth rates return and investors see their profits drop, many may panic as their methods fail. That, in turn, could lead to massive sell-offs.

``Their egos have been built up, and they have a high opinion of their abilities, but it's really the bull market, not their stock selection'' at work, Elvekrog said. ``That makes for an overconfident attitude . . . that may make it ultimately tougher than ever'' when market growth slows.

Because it rebounded so fast, last week's correction did little to awaken small investors to the market's perils, said Art Bonnel, portfolio manager for the U.S. Global Bonnel Growth Fund in San Antonio, Texas.

``This correction, if we don't go much lower, is going to get people thinking it's pretty easy - just buy on the dips,'' Bonnel said. ``I'd almost like to see the market go below the recent lows just to show people that bear markets do happen.''

David Wyss, a Standard & Poor economist, agrees.

``There are people preaching that we are in a new economy and a new world,'' Wyss told the Chicago Tribune last week. ``That always seems to reach a crescendo just before the next recession. I do believe this is a new economy, but it still hasn't changed that much. The same dangers are out there.''

The market's hectic week

How the Dow Jones index closed during the past six market days of ups and downs:

Oct. 24: 7,715.41

Friday, Oct. 31: 7,442.08

SOURCE: News reports

CAPTION(S):

Chart

CHART: (color) The market's hectic week (see text)

Knight-Ridder Tribune Graphics Network