Quotes of the Day

Job de Jonge thought he had the guts for this game. A 53-year-old psychiatrist from Amstelveen, the Netherlands, he started investing in stocks in the waning days of the bull market in 2000. "I even started placing puts and calls for a while," he says, referring to sophisticated — and risky — financial tools favored by active traders. Even as the market tumbled from there, de Jonge kept his nerve and stayed in stocks. But the latest round of sell-offs, which brought Dutch shares back down to 1997 prices, has him fed up. "I'm going back to bonds and non-equity funds," he says, "where I don't have to log onto the Internet six times a day to see my returns."

De Jonge isn't the only one looking for the exit. London's FTSE 100 touched a five-year low last week, and so far in 2002 the blue-chip European companies that make up the Dow Jones Stoxx 50 index have declined 24%. That bonfire of capital has been fueled only in part by the revelations of corporate sleaze on the other side of the Atlantic. "Even if Europe hasn't had a scandal like Enron or WorldCom," says Sorbonne economist Christian de Boissieu, "the situation confronting our telecom operators, who are all deep in debt, means that we're facing similar problems." To the well-known troubles of France Telecom and Deutsche Telekom, add the pains at tech giant Alcatel. Or the fiasco at media and utilities conglomerate Vivendi, which soon after booting Jean-Marie Messier was seen scrambling for emergency funding to service j19 billion in borrowings.

Could this spell the end of what the Germans call the Aktienkultur, or equity culture? Just a few short years ago, traditionally risk-averse European savers were piling into stocks at a breathtaking pace, transforming not just household finances but the balance of economic power. (Or so it seemed.) But now even in the U.S., where half of all households were in stocks or stock funds, that faith in equities is being challenged. And European investors may actually be more disillusioned, and could prove even slower to return to shares.

It's about timing. "The retail investor in Europe is a young investor," says Michael Hartnett, a Merrill Lynch strategist in London. "He came into the market toward the end of the bubble and has experienced considerable downside." What's more, the newest investors often ended up in some of the worst stocks. Many were first drawn into the markets by the high-profile share offerings of former state-owned companies — like France Telecom and Deutsche Telekom. Both are down about 90% from their highs.

It is unlikely, though, that the trend toward shareholding has truly been reversed. Although the number of German direct shareholders has been falling since 2000, you can still meet plenty of people like Tanja Bartsch, 31, of Munich, who just this spring started putting €150 a month into mutual funds. In France, meanwhile, a survey by TNS Sofres shows that share ownership hit a record in May of 7.1 million, or 16% of adults. The harsh reality is that most Europeans need to keep investing. The slowing economy has done nothing to help governments put their retirement systems in order, while tumbling markets have made private companies that much more anxious to get out of the pension business themselves. Staying in the market isn't likely to be much fun for a while, but sticking to these three fundamental principles should make the ups and downs easier: You're right. stocks are risky So why do so many Americans own stock? Experience has taught them that equities have almost always been the best place to keep their money over the long run. Academic theory — oft repeated by stockbrokers — held that stocks returned an average of more than 7 percentage points a year over risk-free government bills, and nearly always outdid bonds in any 20-year period. Yet this conventional wisdom may not be a reliable guide to the future, for Americans or anyone else. In a landmark new study, The Triumph of the Optimists, a trio of London Business School researchers crunched stock market data for 16 nations over the past 100 years. They found that after stretching the record back a bit further, U.S. shares actually returned only 6 points over bills on average. Worldwide, stock investors earned 5 points.

But a lot has changed over the past century. For a start, modern financial tools, such as mutual funds, have made it much easier for investors to diversify, giving them more confidence in stocks. That realization helped boost past returns, but it was probably a one-off gain. The study's authors forecast a future global stock premium of 3 or 4 percentage points a year over risk-free money. That still isn't bad, especially over the long haul, but it can't justify the risk of an all-stock portfolio. The LBS scholars suggest putting about 40% of your risky assets in bonds.

You should still buy (some) stocks now Are we near the end of this long, grinding bear market, or can stocks still fall further? Answer: Forget the question, because market timing is almost always fruitless. Most of us are better off putting money into the market on a steady basis. Such "cost averaging" helps to dampen volatility, because you end up buying shares at a variety of prices, high and low. But the more important advantage is psychological. It's just human nature to buy into exciting stock-market rallies near the very end, and to sell in frustration at the bottom. A program of regular investing can help keep you detached from the hysteria — and you might as well get into the habit now. Smart Diversification still works It seems as if there's been nowhere to hide. In the U.S. and all the major European markets, stocks from blue chips to small caps are down. But it still goes without saying that the easiest way to avoid losing 80% or 90% on a single stock is to keep out of stock picking altogether. For most investors, mutual funds are safer and can still provide strong returns when the market comes back. You can also use funds to diversify farther afield, such as into South Korean shares, which are up this year.

For most of your stock portfolio, tracker funds, which simply invest in every stock in an index such as the FTSE 100 or the S&P 500, are your best bet. Trackers don't always win; but their low expenses — the best cost just 0.5% or less of assets per year — give them a huge long-term edge over active stock pickers who charge 1.5% or more. Combine those fees with the hidden expenses, such as the trading costs incurred by some hyperactive managers, and the real drag on a managed fund can get close to 3%. That, if you believe the LBS group's numbers, could wipe out your long-term gain from stocks over cash or bonds. And if one thing's for sure, this is no time to start throwing money away.

• PAT REGNIER
• Corporate Europe has problems of its own