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By Martha M. Hamilton
Washington Post Staff Writer
Sunday, October 4, 1998; Page H1

Mutual fund investors knew the party would end someday.

Around Washington, as around the rest of the nation, investors last week were rubbing their eyes, checking their options, trying to peer into an uncertain future and asking themselves what to do with their money.

The seemingly unrelenting rise of the mutual funds lasted almost four years, attracting hordes of investors and raising mutual fund assets to more than $5 trillion. But the momentum came to a confidence-rattling halt during the summer as diversified U.S. stock funds lost an average of 15 percent, according to Lipper Analytical Services Inc.

Not only did stock funds lose value, they also declined more than the Dow Jones industrial average or the Standard & Poor's 500-stock index.

The initial reaction of many investors was to head for the door. Equity funds registered their first monthly outflows in eight years in August, with a net exodus of $11.2 billion, according to the Investment Company Institute.

But the money apparently poured back in September as investors sought to take advantage of the dip in the market, stocking up, so to speak, at bargain rates. Stock funds had net inflows of an estimated $15.4 billion, according to Trimtabs.com, which tracks fund flows.

Even so, it's a time of sobering reality for investors in mutual funds, after years of watching their holdings grow, and their anxiety could rise in the next couple of weeks as they begin receiving their third-quarter statements.

Last week, however, while many longtime investors in mutual funds were pondering whether to hold or fold, or congratulating themselves on having sold, others were willing buyers.

"It's a buying opportunity," said one investor at T. Rowe Price Associates Inc.'s downtown office, who said that he was buying into funds that invest in large-cap stocks that pay dividends. The investor, who wouldn't give his name, said he recently sold bonds. "I'm using them to go bottom-fishing," he said.

Desiree Charpentier, a law student at George Washington University, was also shopping. Only 26, Charpentier was looking at mutual fund information at the K Street offices of Fidelity Investments, with an eye toward saving "for retirement and for whenever I have a baby."

Persuaded by what she had read about the benefits of beginning to invest at an early age, Charpentier said she would give up the "extra pair of jeans and the cappuccino" to put money into investments. She also was relatively sanguine about the economy. "I know a crash won't happen," she said, but she added that one of the benchmarks that she plans to use to pick her investment is "one that returns the most during a recession."

"I'm trying to learn from all of this and become a more sophisticated investor," said Treasury Department employee Bruce Cromack, who stopped by T. Rowe Price to check on his holdings.

An investor in both mutual funds and individual stocks, Cromack said he liquidated holdings in funds invested in Asia before the extent of the financial crisis was clear, but not as soon as he wishes he had. In retrospect, he said, "I would have gotten out of Asia before the return of Hong Kong to China."

Kent Lunsford, a self-described "Beltway bandit" whose small firm does technology-oriented studies for the Defense Department and other clients, was getting back into stock mutual funds last week. Back in August, three days before the market fell more than 500 points, Lunsford said he had been walking by the same office "when a little voice said, 'Come in. Why don't you move everything out?' "

He heeded his instincts and transferred his money out of equity income and growth funds into Prime Reserve, a money-market fund that the investment firm says is for "income-oriented investors primarily seeking preservation of capital and liquidity." On Thursday, though, he was cautiously moving 60 percent of his assets back into the market.

"I'm coming out of parking and going to get back on the highway," he said.

Lunsford said that he feels confident about the long-term direction of the markets. "My personal feeling is that there's so much going in, with the bulk of the population trying to salt something away, that it's almost impossible for the market to go down."

Peter R. Wieczorowski, who works in the nonprofit sector, said that he also benefited from good timing. About a week before the current decline began, "I called my broker and had him convert my positions in mutual funds and stocks to money markets." His broker of five years tried to talk him out of selling but called three days later to congratulate him on his foresight. The broker also wanted to recommend some investments.

"I declined to hear him out," Wieczorowski said.

Although he is happy to have gotten out of the market when he did (and credits his graduate studies in Asian politics and economics for helping to inform his instincts), Wieczorowski said he worries about the pain and misery resulting from the growing global economic crisis. "I feel this is a really, really hard time we're going into, although I'd give my eye teeth to be wrong."

Wieczorowski is in his late thirties and has plenty of time to reinvest, but for now he's sitting on the sidelines. He has thought about investing in U.S. Treasury bonds, as so many other people have, but needs to find out first whether he can buy Treasuries for his individual retirement account without using a brokerage account.

As for mutual funds or stocks, he doesn't plan to jump back in "for at least six months, as I believe that we have only seen the initial panic in the markets, not the long-term economic effects of gross overvaluation of securities and global overproduction of goods."

Timing was an issue that came up frequently when Washington area investors talked about their mutual funds. One lawyer in private practice who declined to give his name said that he had put part of the cash he had in a money-market fund into an index fund after the market's decline began, but now he wished he had waited longer.

"I'm sort of betting now that it will go down some more," he said. "I have some liquidity that I'm not investing because I think it will go down further." This investor predicted that one consequence of the recent market troubles might be to drive more investors into index funds with lower expenses and away from costlier managed funds.

"I think more and more people see the fees they are paying might tend not to beat the market averages, or not consistently," he said.

"My strategy is just to hang in there and just to wait," said Melvin Bell, an auditor at the Federal Deposit Insurance Corp. who retired last week. Bell is invested in science and technology and growth and income funds for himself, and he has invested money on behalf of his daughters, aged 11 and 15, in a small-cap growth fund.

"My view is that you definitely have to be in it for the long term," said lawyer Larry Gesner, who had stopped by Fidelity's office. Gesner said he wasn't shifting assets from any of his funds, which account for about 50 percent of his savings and investments. His funds include large-cap funds, some small international funds and "one small Latin American fund, unfortunately."

Financial adviser Anne Stone of McLean said most of her clients are taking a similar approach. "If you're not going to need your funds to pay for a tuition bill or to live on, I'm seeing a lot of my clients who are willing to wait it out," she said.

Rebecca White, a systems administrator for a law firm, smiled ruefully when asked about her mutual fund investments. "I'm very disappointed. They all have gone down so much. The big decision is whether to cut your losses," she said. White's holdings include two funds that invest in Southeast Asia, but "I've been in them so long, I'm still in the black."

Investors may not be willing to throw the mutual funds that they have held for a long time overboard in the current turbulence, but clearly some of the fun has gone out of the market.

"I'm feeling sorry for myself every day. It goes up, and it goes down," said lawyer Robert A. Remes, who had stopped by Fidelity. Remes said he was invested in "a whole variety of aggressive and not so aggressive, large-cap and not-so-large-cap" funds.

He drops by to take a look at the markets and how his funds are performing periodically, but not as often as he did when there was more pleasure than pain. "I checked it every day when the market was going up," he said.