Advice to investors
When stocks have more plot twists than opera, just tune them out
by Ellen Simon
Associated Press

NEW YORK – The stock market is looking increasingly like an opera: Triumphant returns in one scene followed later by a chanting chorus as a player is dragged down to hell.

At the end of Act III Wednesday, as trading closed, the Dow Jones industrial average marched off with a nearly 2 percent gain, as did the broader market indexes. JPMorgan Chase & Co. and UnitedHealth Group were the conquering heroes, exiting on the shoulders of investors, each up more than 5 percent. Yahoo Inc., by contrast, was left bleeding on the stage as the curtain closed, down 22 percent to a two‑year low.

It was a marked contrast to the previous week’s action, which left the major indexes bruised and uncertain as distant war drums pounded.

And, in the last two months, the indexes have had more ups and downs than the lovers in “Aida,” crowned with laurels one moment, buried alive in a crypt later. In one scene, there is nothing onstage larger than a soprano; the next moment the marching elephants arrive. (Think of Motorola Inc.’s 7 percent jump in trading Thursday.)

Just as watching opera all day every day may be a path to madness, so with watching the market. Wise investors buy the stocks they believe have a bright future, sell the stocks they think could betray them in the long run, then remove themselves from the their computer, turn off CNBC, and turn to quieter activities, such as gardening or mall walking.

Consider some of the week’s research notes from David Rosenberg, Merrill Lynch’s North American economist. On Tuesday Rosenberg put out a note titled “Revisiting Recession Risks,” where he put the odds of a recession at 40 percent. The message: Desolation could be lurking!

Wednesday, in a note titled “Rotten to the Core,” about troubles with the computation of the Consumer Price Index, he said the odds of an Aug. 8 rate hike by the Federal Reserve were 80 percent. Terrible!

But later that day, in a note titled “Bernanke Delivers a Great Testimony,” he lowered the odds of Fed rate hike in August to 65 percent. Relief!

His colleague, Richard Bernstein, Merrill’s chief investment strategist, put out a note during the week that was much more useful to investors who do not work on a trading floor or have millions of dollars under management. His note was titled, “A simple risk reduction tool: Time.”

“Longer time horizons make losses less likely,” Bernstein wrote. “When markets go down, observers often talk about how important it is for investors to have a longer‑term time horizon; when markets go up the subject rarely gets a mention. We have consistently encouraged investors to focus on the long term and to ignore the ‘noise’ associated with short‑term market movements.”

He doesn’t say this, but think of the operas where a character commits suicide because she thinks her lover is dead, but it turns out he’s really alive and searching for her. Likewise, investors too frequently pull their money out of the market at its bleakest moments, only to see it rebound later.

The probability of losing money in an investment generally decreases as the investment time horizon lengthens, Bernstein wrote. Looking at rolling returns for the period between January 1985 and June 2006, the probability of losing money is 46 percent when investing in the Standard & Poor’s 500 for one day, but a mere 14 percent for those investing for three years, he wrote.

Diversification will protect you from changing attitudes toward asset classes over time, Bernstein wrote. “There has never been an instance where the best performing asset class during one decade was the leader during the subsequent decade,” he wrote. Just as the lead character of one opera never reappears in another, you shouldn’t double down on the latest wonder‑sector.

Diva stocks and sectors, may come and go, but those who avoid single stars and invest broadly and patiently, across sectors, have a greater chance of solid returns. And safety. After all, it’s hard to think of an opera where the entire chorus gets killed.