Dear readers, this is part one of four-part retrospection featuring excerpts from some key concepts out of the 1,200-plus Moneywise articles (and more than 1.4 million words) that I have written for The Royal Gazette. Parts two, three and my last and final article will be featured over the next three Saturdays.

This one was on the topic of market turmoil during the “dot-com” crash in 2000. At the time, I stated that investors would be better off if they sat tight, having already experienced first-hand three capital market collapses. There were two more to follow.

Published on April 18, 2000, the article was headlined: “Sit tight on the roller coaster and wait it out”.

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People terrified by last Friday's stock market collapse may be tempted to sell out now.

After the incredible stock market roller coaster ride of Black Friday, April 14, 2000, financial planners are advising their clients to wait until the market stabilises; to work with their adviser to assess their portfolio; then consider their options.

It becomes a good time to remind clients again about their planning strategies and long-range investment goals.

And many financial planners see the market turmoil of the past few weeks as a vindication of the principle of asset allocation (spreading your money among a variety of sectors and asset classes).

If you are properly diversified, not playing with borrowed money or cash that you will need in five years, then volatility in the market is not as worrisome, because statistically planners know that over longer periods of time, the market has come back and brought a decent return to investors. Further, properly diversified portfolios experience less volatility overall.

What caused this dramatic stock market drop?

There is any number of reasons, some of them not even quantifiable, but the major economic triggers of uncertainty were many of the following:

Increases in consumer spending and excessive credit-card debt

The Consumer Price Index released on Friday was higher than expected and reignited fears of inflation and further interest rate hikes by the Federal Reserve Board.

Excessive margin debt

By the end of March 2000, margin debt had reached an all-time high of $278 billion, more than double the $125 billion in January, 1999.

Margin buying has been a factor in driving stock prices to artificial and unsustainable high valuations. As the stock bought on margin falls in value, brokerage firms issued margin calls, forcing investors to either put more money into declining stock or have their positions sold out.

Economists said margin calls appeared to have contributed to the near collapse of the Nasdaq Stock Exchange last week. Waves of margin calls can trigger secondary charges that accelerate falling prices.

Individual investors and money managers both were margined in this irrational market.

Because of the influence of all the tech stocks, it was not as surprising to see the Nasdaq decline so far, but it is yet to be explained as to why the Dow Jones Industrial Average fell even further. One theory is that in meeting margin calls, traders and individual investors alike had to sell all their holdings which included Old Economy stocks, too.

Yesterday’s hot issues are today’s cold turkey

The lack of fundamental values in the overpriced tech/internet stocks finally came home to roost.

When so many of these high-flyer companies had little or no earnings, some for as long as five years, analysts start looking at the company's cash funds flow.

In other words, how long can these companies keep going without a new infusion of cash? If the market is uncertain, venture capitalists will not step in again to help out.

That leaves companies the option of issuing a secondary offering of new stock. But with the current stock values falling rapidly, it is doubtful that another offering will sell at any price.

Market makers and orderly markets

In the past, market makers (or specialists on the New York Stock Exchange) assumed a role of conducting an orderly market.

Very, very simply explained, these are actual investment companies who are charged with finding buyers for sellers, and sellers for buyers in the course of a trading day. For this they are paid on the spread between the ask and the bid price.

In the crash of 1987, market makers played a huge role by stepping in and buying stocks when there were no buyers because everyone wanted to sell.

However, as access to stock markets for all investors has increased and with it, increased competition for the investor dollar, the amount of the spread paid to market makers has dropped dramatically.

They are not always so willing to keep the buy/sell process orderly by committing all of their capital for so little profit.

Thus, as many stock prices swung significantly downward, some as much as 60 to 90 points, many traders stayed on the sidelines waiting to see if the value had bottomed out before they would consider purchasing.

Greed and the lemming syndrome

Because individuals and many money managers got totally caught up in the entitlement of ever-increasing returns, 12 to 20 per cent annual returns were considered minuscule.

Why, even boasting of a 1,000 per cent return in a year was considered downright dull.

Expectations of continued profits accelerated beyond comprehension.

Investment advisers and money managers alike bought, sometimes against their own judgment, and certainly under pressure from their clients.

A portfolio that did not achieve at least a 50 per cent annual return in a few months or a year saw heavy redemptions as clients took their money for (temporary) higher returns elsewhere.

We all saw this “lemming syndrome” first hand as even elderly and retired clients whose preservation of principal was paramount, were requesting that we "get into those tech stocks and see some real returns''.

Irrational exuberance and reality

As the bubble burst, there is no question that many people have (on paper) lost a great deal.

The tide of exuberance has turned; managers and individual investors alike will focus on quality stocks of all sectors, for a while.

The small, prudent investor may turn out to be the wisest of them all.

They were the ones who did not panic in the previous two corrections (1987 and 1998). They patiently waited until the storm subsided and went back into the stock market in full force.

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That was early 2000.

The more things change, the more they remain the same!

• Martha Harris Myron is a native Bermuda islander, a presenter, author, international finance columnist, YouTube creator The Bermuda Islander Financial Literacy Perspectives network. Subscribe to the Bermuda-Bermy Island Finance Blog http://marthamyron.com/. Contact: martha.myron@gmail.com