Investors Seek to Stay Calm Amid Turmoil : Knowing When to Reach Stock Brokers and How to Diversify Can Help

Black Monday was a nightmare for many investors--and not just because the Dow Jones industrial average nose-dived by 508 points. Many investors couldn’t reach their brokers or mutual funds by phone to execute orders, while some orders that got in were mishandled or delayed. Others saw their margin accounts liquidated without their consent. Still others unwittingly lost their life savings in risky options trading.

Since Oct. 19, however, brokerages, mutual fund firms and investors have taken steps to lessen the chaos should there be a repeat of the frenzied conditions--which some fear could happen as soon as today, following Friday’s 140.58-point collapse.

Many firms have added phone lines and computer terminals, and have trained more staff to handle customer orders. The National Assn. of Securities Dealers, which oversees the over-the-counter markets, has taken steps to improve the handling of OTC stock trades. Firms have raised margin requirements on risky options trading, meaning that investors must put more money down before trading, thus reducing their risk.

“A whole bunch of steps have been taken to lessen or prevent another disaster from occuring again,” said Hugo W. Quackenbush, senior vice president for marketing at Charles Schwab & Co., the giant discount brokerage firm that was criticized for phone tie-ups and other snafus related to the market crash. Among other steps taken to better handle a possible crush this time, Schwab will open its branch offices on the West Coast at 5 a.m. today, one hour earlier than normal, Quackenbush said.

Some investors, too, have done their part, learning some valuable lessons on how to deal with brokers and mutual funds during chaotic times, and how to better diversify their investments to reduce risk.

Here are some of those lessons:

Dealing With Brokers

If you are in a margin account, consider putting down extra cash or securities this morning if you don’t want your holdings sold without your consent in a margin call. Many investors believe that brokers must give them five days notice before liquidating their securities if they fail to meet a margin call (a demand by a broker for more cash or securities to replenish the declining value of collateral backing up a loan to buy stock). In fact, brokers have the discretion to liquidate customer accounts without giving any notice to clients. On the days surrounding Black Monday, holdings in some customer accounts were sold out at fire sale prices.

Richard H. Fontaine, a portfolio manager at the T. Rowe Price mutual fund firm who buys stocks for his personal account on margin, said he plans to deposit more cash with his broker first thing this morning. “I don’t really want to see my broker cleaning me out on a down spike,” Fontaine said.

An alternative to putting down more cash or securities: enter stop-loss orders on some of your stocks, which requires them to be sold once they fall to a certain level. Thus, you will limit your losses and provide cash for replenishing your margin account.

If you can’t get through to your broker by phone, consider going to the branch in person. If your broker is unavailable by phone or in person, you often can have your order taken by another broker.

To avoid inaccurate trades, have your broker repeat your order back to you.

Try to avoid selling into panics. Instead, wait for rallies before selling. Those who sell into panics often get the worst prices, only to see stocks rally to more reasonable levels.

Dealing With Funds

Understand that if you sell or switch from a stock fund, you will get its net asset value at the next close of trading. So if the market plummets, you will have to absorb the entire decline that day even though you sold earlier in the day. (On the other hand, you could benefit from a gain late in the day.)

Investors who sold their fund shares on the morning of Black Monday actually were worse off than those who couldn’t get through because their holdings were priced at the close of Black Monday.

One strategy: Wait until near the close (1 p.m. PST) before deciding to buy or sell a fund. That, however, may be risky if phones are busy and you can’t get through.

To increase your chances of getting through by phone, call around 10:30 a.m. PST, when the lines are least busy, said Brian Mattes, spokesman for Vanguard Group. Phone lines at mutual funds usually are busiest around the opening of trading and during lunch hour, he said. “The first thing in the morning is absolutely the worst time,” he said. An alternative: Send a telegram.

If you are in a mutual fund group with a money-market fund, open a money-market fund with that group immediately if you have not already done so. Most allow you to transfer money from your stock funds into the money-market funds by phone, provided you have applied for telephone switching in advance. (Make sure you’ve done so.) Most money-market funds provide checking privileges, so you can withdraw money quickly.

If you are in a fund that will honor only written redemption requests by mail, have such a request ready to be sent at a moment’s notice. Write the letter now, requesting that the funds be transferred to you, leaving a blank for the number of shares involved, and have your signature guaranteed by a bank or brokerage firm, since that is commonly required. The letter can be sent by overnight mail to the fund or its transfer agent, as designated in the prospectus.

If your fund group won’t allow direct telephone redemptions, ask if it will allow wire redemptions. That will allow you to register your bank account with the fund, so that when you want to redeem the shares, you can call and have your money wired into your bank account.

Keep good notes of your conversations with phone representatives. Take down the name of the rep and other details of the order, such as time and date.

This will help protect you if there is an error.

Diversifying

Black Monday underscored the importance of diversifying your investments and reducing your risks. The safest investments, in which your principal is virtually free of risk of loss, include money-market funds, now yielding an average of 7.03% nationally; bank certificates of deposit, now averaging 7.23% nationally for six-month CDs; Series EE U.S. savings bonds, now paying 7.17% for the first six months, and Treasury bills, now paying 6.35% for the six-month variety.

All of these beat the return on the Dow Jones industrial average or the Standard & Poor’s 500-stock index last year (although in the long run, stocks tend to earn more than savings accounts and money-market instruments).

There also are several types of mutual funds that will help you diversify and are somewhat less volatile than stock-only funds. They include:

Asset allocation funds. These are mutual funds that invest in domestic and foreign stocks and bonds, precious metals, real estate stocks, government bonds or other vehicles.

Total return funds, balanced funds and growth and income funds. They diversify your money into stocks and bonds, emphasizing dividend income as well as capital gains.