What goes up ... as the bull market regularly reaches new highs, everyone is asking, what happens next?

SUPPOSE you got home after a busy day at the office, flipped on the television, and found out that the Dow Jones Industrial Average had slid 700 points while you were locked in meetings with your boss discussing new vending machines for the employee lunch room. Every Wall Street expert on the tube is saying that such a decline is natural, orderly, and totally expected. "Okay," you say, "I'll accept that explanation." But when trading resumes the next morning, your mind isn't focused on your job. Your computer is on-line, so you can access the prices of your mutual funds. The TV in your office is tuned to CNBC, so you'll know what the Dow is doing every single moment.

It's down another 700 points.

The Wall Street experts on CNBC are again reassuring you that such a correction is normal. They quote historical data, tell you how safe your money is in mutual funds, and explain how economic and interest-rate fundamentals are in your favor. But you notice a slight tension in their voices this time. Each wants to get back to what he was doing and doesn't seem quite as confident as he had been just the day before. You start to wonder whether it was such a smart idea to have sprinkled $120,000 in retirement money --virtually your entire nest egg -- around the mutual-fund universe.

That scene is fiction right now, but it's likely to happen sometime in the future. Corrections of that size are commonplace through the long history of the stock market, although virtually unknown in recent years. In fact, the major averages like the Dow haven't even had a major pullback since the middle of 1990, when the blue-chip index was briefly down 20 per cent. Many of today's stock-market investors have no experience in dealing with such investment setbacks.

How will small investors like you react in such a situation?

That's the question that everyone -- politicians, Wall Streeters, Cadillac dealers, small investors themselves -- would like answered.

The importance of small investors' reaction to a stock-market downturn is not limited to the individuals involved; you could argue that the very security of the United States is at stake. Thirty-seven million American households, representing 43 per cent of all adults, now have some money in mutual funds. The figure was just 24 million around the time of the last quake on Wall Street --the 1987 stock-market crash. The biggest jump came between 1994 and 1996. In 1994, 1,944 equity funds divided up money coming in from 31 million households. By 1996, 37 million households had 2,626 equity funds to choose from.

Those numbers suggest that a frenzy is taking place. The craziness of it all is quite obvious to most pros on Wall Street, and even the Federal Reserve has taken to issuing warnings to investors about "irrational exuberance." And it was two years and thousands of points ago that central bankers began calling what's going on a "bubble."

Small-time investors have become so enamored of the stock market that they have been investing beyond their means. The amount of new cash going into the market already exceeds the total savings rate in the country, and experts believe that many Americans are taking out home-equity loans to get in on the action.

But just as the run-up in stock prices because of small investors' trust in mutual funds has been unpredictable, experts fear that the selling will be equally beyond prediction.

According to recent surveys -- mostly undertaken by outfits with an interest in people's having an optimistic view of the stock market -- investors won't panic. They won't start selling shares in a frantic effort to keep the capital gains they've won in recent years; indeed, they will be composed and bold enough to risk more of their money in equities.

Fifty-four per cent of investors recently surveyed by Peter D. Hart Research on behalf of the National Association of Securities Dealers said they would make no changes in their portfolios if stock prices fell aggressively. And 31 per cent of the nearly 1,500 investors and would-be investors questioned said they would have the guts to buy more stock if the market went into the tank. Only 8 per cent admitted they'd be scared and sell.

That's not too different from what the average investor is telling others who ask. They will be, the investors are insisting, steadfast in their belief that the stock market is the yellow brick road to the retirement Oz, and they won't stray even if frightening things happen along the way.

The trouble is, what investors say they'll do and what they will actually do could be two very different things. It's like the difference between how someone thinks he'll react to a crisis like, say, a shooting or a car crash, and how he actually behaves when confronted with the situation.

Albert Sindlinger first surveyed people about their investments in 1955. His little company, which is not affiliated with any Wall Street outfit that might want a certain slant to the finding, has been interrogating about a thousand people a week for all these years. Yet he never asks small investors what they'll do if the market suddenly depreciates.

"They don't know what they are going to do," says the 89-year-old Sindlinger. "You ask people a stupid question, you get a stupid answer."

Sindlinger does ask people if they plan to buy more stock in the near- and long-term future. And what he found is bothersome. Even though the flow of money into mutual funds hit record levels again in January, fewer people are telling Sindlinger that they plan to expand their investments.

Washington is obviously concerned about the overreliance on the stock market. In recent days, government officials have begun hinting not very subtly that the stock market has a net underneath it that will be used in an emergency. Just days before Federal Reserve Chairman Alan Greenspan's most recent warnings about the pricey stock market, for instance, there was a story in the Washington Post about the "plunge protection team," a/k/a The Working Group on Financial Markets, which will try to keep any decline from becoming a free-fall.

The Team doesn't go quite as far as a suggestion by Robert Heller, a former Fed governor, who back in 1989 said that the central bank should voluntarily become a "buyer of last resort" whenever the stock market craters. "The Fed could support the stock market directly by buying market averages in the futures market, thus stabilizing the market as a whole," Heller said in a speech that was later published in the Wall Street Journal. In short, Heller suggested rigging the stock market.

While the idea might not have garnered much support back in 1989, the repeal of the country's free-market system might now seem an attractive alternative to wiping out a middle class that is counting too heavily on the promises of mutual-fund companies. Just how much of a danger does the stock market currently hold for mutual-fund investors?

By most measures, the stock market is, as Greenspan said, very pricey. The most recent comparison could be the mid 1980s, when real estate was everyone's favorite and few thought the property market could go through the kind of slump that it did. Today's stock market makes the real-estate boom of the Eighties look downright tame. For the first time ever, the total value of stocks exceeds the country's gross domestic product, which is the sum of all goods and services. The dividend yield on stocks is the worst it has ever been. Price-to-earnings ratios are very high, even though corporate earnings have been pumped up artificially by excessive cost cutting. And margin debt -- the money that investors borrow to buy stocks --is more than twice what it was in the early Nineties.

No wonder you're feeling a little queasy.