In the past week, the Dow Jones industrial average plunged as much as 512 points in a day, only to stage a remarkable recovery, rocketing 288 points the next. Hold on. The volatility in the market is not likely to disappear anytime soon, experts say.

"It's like a roller-coaster ride that is no longer thrilling, but sickening," said Charles A. Knott Jr., chief investment officer with Philadelphia-based Logan Capital Management Inc. "The markets can't take this type of constant volatility for any long period of time without it becoming so nerve racking that people just get out."

And the past two weeks have been belly burners.

By Thursday, the Dow Jones industrial average, a market barometer made up of 30 blue-chip stocks, had lost 851 points since Aug. 24, making it unclear whether the longest running bull market ever is dead or whether a bear market has been born.

So, how should investors navigate such a market?

Advice is wide ranging, but most money managers and financial planners say investors should do the following:

Have a diversified portfolio made up not only of domestic and international stocks, but bonds, certificates of deposit and cash as a defensive measure.

Keep expectations reasonable, remembering that stocks generally return 10 percent to 12 percent a year on average over time.

Don't panic and make rash decisions by reshuffling your portfolio, especially your 401(k) plan, when the market gyrates. Market timing, they say, is a loser's game.

"My attitude is just ignore the noise," said Laszlo Birinyi Jr. of Birinyi Associates, an investment research firm in Greenwich, Conn., that monitors stock trading patterns. "There is so much noise out there right now and so many people who have opinions that are not rooted in fact."

L But the noise can't easily be tuned out, especially when the

stock market appears to have come unglued and losses are piling up.

"A lot of people feel like they should do something, but what they end up doing is going to be the wrong thing," said Jonathan D. Pond, a financial adviser and public TV commentator.

That is why Pond and other financial advisers stress that investors should diversify their portfolios. A portfolio with a variety of stocks, bonds and cash can reduce losses when the market takes a hit, they say.

Deborah Voso, a certified financial planner at Voso Associates in Frederick, said investors who are 22 to 55 years old want to be "growth oriented," even after last week's bumpy ride. They should have money in growth stocks, such as blue-chip companies, and mutual funds that invest in small-cap and a small portion in international stocks, she said.

"I don't ever want to hear the word bond when you are in the accumulation stage," she said. "There is no growth in bonds. When you are in the accumulation stage, your goal is growth, not income."

Investors who are only a few years from retiring and will need their money to live, however, are advised to shift about 40 percent of their portfolio into something that is secure and can be quickly tapped -- such as short-term bonds, certificates of deposit or money market funds, the experts said.

The remainder of the portfolio should be weighted toward mutual funds and stocks that offer both growth and income. A small percentage of the portfolio should be in international and small company mutual funds, which are more aggressive investments.

Pond's rule of thumb is to have 60 percent in equities and 40 percent in bonds.

"A 40-year-old and a 55-year-old need growth more than income, and a 65-year-old needs both growth and income," he said.

Some people who have listened to Pond argue that bonds aren't necessary, he said.

"In the past few years I have literally been hooted and howled at by groups when I mentioned the four letter word -- bond," he said.

Bonds, however, aren't necessarily purchased to enhance returns, but to reduce risk, Pond said.

"Those who have so much money in stocks, if your pension fund manager had all of your money in stocks they would violate the prudent-man rule. They would end up in jail," he said. "The courts would look at that and say, 'What are you doing?' "

But stocks have been the big draw for millions of investors, and it is not easy watching portfolios that have returned 30 percent and 40 percent three years in a row, suddenly fall. Who wouldn't question their strategy in such a volatile market?

"What might be happening right now is people are saying, 'Oh my God, I was too aggressive,' " said Thomas Grzymala, president of Alexandria Financial Associates Ltd. "Then don't put more money into stocks and perhaps re-allocate to a more conservative mix."

But Grzymala warns investors not to touch their 401(k) retirement plans or individual retirement accounts no matter how tempting. If they are young, they can ride out the rough spots in the market, he said.

Pond said that he has advised investors to forget about their retirement plans and keep investing money as the market rises and falls. But many don't listen, he said.

"They are not going to make as much money as a buy-and-hold person," he said. "I can say that almost categorically. They don't need to make as much money as the buy-and-hold person because they are not going to live very long worrying about their investments."

One of the problems with the current 16-year-long bull market is that investors' expectations have soared, and they have come to believe that big returns are the norm, experts said.

"People who are new to the market in the last four to five years don't know what realistic is," Voso said.

Pond said an investor recently told him he is expecting 17 percent returns on his retirement portfolio.

"I never use more than 7.5 percent, and I'm an optimistic guy," Pond said.

With the stock market taking a pounding this year, an annual return of 7.5 percent might be an excellent showing, considering the current turmoil.

The economies of Russia, Japan and other Asian countries are in shambles, commodity prices around the world have plunged, and there are fears that U.S. corporations will be hurt as these global events continue to unfold. Many analysts see these problems causing more volatility in the stock market.

"I think the risks are the highest I have seen in my career, which spans from 1966 on," said investment strategist Knott, who manages about $500 million. "Whether the risks are realized, I don't know, but the risks are there."

Knott is worried that the U.S. economy is on shaky ground because of deflationary pressures. He fears that with prices of oil, grain and metals at their lowest levels in decades, corporate profits will be cut, corporate debt won't be serviced, workers will be laid off and consumers will stop spending.

"It becomes a self-fulfilling death spiral," he said. "If deflation hits the country, you are going to have a very nasty stock market."

Knott has about 15 percent of his clients' money in cash, but in the next couple of weeks he plans to move an additional 10 percent into liquid instruments.

"People should not have 100 percent of their money in the stock market," he said. "You have got to take some money off the table if you are fully invested."

Birinyi, who claims to be the biggest bull on Wall Street, expects to see more volatility in the stock market.

The 512-point drop Monday was driven largely by mutual fund companies that had to sell stocks to meet redemptions from investors, he said.

Trades were running at about 200 to 300 a minute for much of the day, but then exploded in huge sell-off of 1,000 trades a minute in the last 15 minutes.

Indeed, the volatility rattled some investors, and their confidence could be shaken even more when they review their monthly brokerage and mutual fund statements over the weekend.

"I called my broker and I had sticker shock," Birinyi said. "Oh my goodness. Even I was a little surprised at what happened."

Pub Date: 9/06/98