"All investors, myself included, need to take a step back to think about where we've been and where we're going so we don't overreact," E*Trade chief executive Christos Cotsakos wrote in an email sent to customers today.
The dramatic shifts in the stock market have made some investors jumpy. The letters were intended to offer customers guidance during what for some is a scary period, the companies said.
Another possible reason, according to analysts, is that E*Trade and Schwab may be trying to bolster customers' confidence--especially inexperienced investors--and prevent those who might be discouraged by the market downturns from closing their online accounts.
"The online brokers don't want customers panicking and selling everything off at a loss," said Yankee Group analyst Michele Pelino. "If everybody says 'Oh my goodness, I'm going to take my money and run,' then the Schwab and E*Trades of the world lose a lot of business."
Both companies are reacting to radical market changes in the last week. On Friday, a huge investor sell-off sent the stock market into a steep nosedive. The Dow Jones industrial average lost 617.78, or nearly 6 percent, to close at 10,305.77, while the Nasdaq composite index fell 355.51, or about 10 percent, to 3,321.27.
On Monday, the markets began to rally. The Nasdaq composite rose 218.37 to 3,539.66, the largest point increase in its history. The Dow climbed almost 3 percent, to 276.74 to close at 10,582.51.
Today, the market shifted down again on news that IBM and Intel were struggling to meet sales figures. The Nasdaq composite index closed down 87.16 at 3,706.41, and the Dow dipped 92.46 to 10,674.96.
The emails addressed basic investing advice, such as telling customers that as investors they would experience up and down markets in their lifetimes and their success on "building wealth" would depend on how well they "manage these cycles."
Cotsakos also cautioned investors to "always consider risk...not to forget to diversify" and "educate yourself."
Schwab's letter, signed by chief executive officer Charles Schwab, hammered home the benefits of long-term investments.
"The market activity we have been experiencing is a great reminder of why the key to sound investing is to focus on the long-term," Charles Schwab wrote customers last Friday. "Although volatility is in the spotlight, long-term investors know investing requires patience and discipline."
Pelino said that the tone and language of the E*Trade and Schwab's letters are an indication that they were probably intended to calm the nerves of inexperienced investors. She added that many investors probably have never witnessed such a dramatic fall in stock prices.
"It's been years since we saw something this ugly," Pelino said. "A lot of newer investors have put a lot of money into the market in hopes of making it big, and experienced investors know that the big declines come. The newer ones may not."
The online brokers have attracted many first-time investors who were trying to get in on the Internet investment craze. According to research firm Jupiter Communications, 9.5 million stock-holding households will trade online this year, up from 6.9 million last year. By 2003, Jupiter predicts that number to more than double to 20.3 million.
"These companies certainly don't want to see their customers getting blown up," said Jupiter Communications analyst Rob Sterling. "It doesn't do them any good to have customers go broke and leave.
"Traditional full-service firms, such as Merrill Lynch and PaineWebber could see this as a good time to bring customers back from the (online trading) model. In a panic, customers might go back to a human broker."