The roller-coaster gyrations of the stock market, and its recent downward slide, can drive even the most level-headed investors to distraction.
Watching stock values decline while a seemingly endless stream of advertisements shout "Make 100 percent, not 10 percent!" suggests to those not holding the hottest high-tech stocks that they are obviously the world's worst investors.
Adding to the inferiority complex, the latest financial magazines show happy young couples earning triple-digit returns and making plans for early retirement on the beaches of Aruba.
Give us a break! We can't all wind up in the Caribbean, but financial experts say average investors can take certain steps to get the best returns possible. Even modestly fine-tuning a portfolio can make a big difference over time.
Lynn Thornwall, an interior designer in Glen Rock, N.J., is among those shifting gears, hoping to rev up her returns. She held off making changes in her investment portfolio last year. But "many stocks are much cheaper now than in the past year," she says.
So she is pulling out of underperforming large-cap mutual funds and putting the money in individual value-oriented stocks, such as Proctor & Gamble, Gillette, and Coca-Cola. She is adding to her REIT (real estate) mutual fund, because real estate values have been beaten down the past year. Meantime, she is sitting tight on her foreign, high-technology and small-cap funds, because they have been posting solid returns.
Here's what experts recommend to those now considering a portfolio shift:
Step 1: Whatever you do, make certain you don't lose the assets you already have. In short, in trying to boost returns, don't blow the bank by moving into extremely risky investments. The reason: With Federal Reserve chairman Alan Greenspan now saying that the Fed will do whatever it takes to slow the US economy (which likely means a new series of interest-rate hikes), the "downside risk for the market is greater than upside gains," says Sheldon Jacobs, editor of the No-Load Fund Investor, a newsletter published in Irvington-on-Hudson, N.Y.
"You don't have to play," he says about this market.
Mr. Jacobs has once again increased his cash holdings, as he had also done late last year. But prudence can be wise, folks like Jacobs stress. Remember, if you lose 100 percent of your portfolio on a bad investment, you'll have to earn back at least 125 percent to 150 percent to replenish your coffers and offset taxes (and inflation) on your new gain.
Step 2: "Make certain your portfolio is properly allocated," says David Bendix, who heads up Bendix Financial Group in Uniondale, N.Y. Having the proper allocation is widely considered the most crucial factor in ensuring hefty financial gains, he says.
In the past two years, for example, stocks surged at the expense of bonds and cash (money-market accounts). Now, with a number of stock categories in the doldrums, including popular index funds and large-cap growth stocks, many stockholders are likely to take a hit. So, you may need to add to your bond and cash positions, Mr. Bendix says.
Step 3: If you feel brave, go with the flow. Right now, that's technology (in terms of domestic stocks) and international (especially Asia and Europe), says Russel Kinnel, equity editor with information firm Morningstar Inc. (He personally favors a more cautious approach, such as looking for solid value and small-cap funds.)
In the technology area, the best returns are among the "new-tech companies," that is, firms linked to the Internet, rather than old-tech firms, such as computer- or chipmakers, says Stephen Dalton, senior vice president for First Capital Group, Philadelphia.
Internet funds provide an easy access to the world of high tech. The Internet Fund for example, can be opened for $1,000 (888-386-3999). The Munder Net Net Fund requires only $250 (800-468-6337). To maximize returns, consider sheltering them from taxes by tucking them inside an IRA.
Science and bio-technology funds have also done well lately.
And make certain you have at least one fund that carries lots of overseas stocks, experts agree. An international fund usually holds stocks from both Asia and Europe. Or, you could put some money into a Japan, or Pacific Basin fund.
An emerging-market fund can also be a solid performer. These funds can be volatile. As a result, you may want to buy them from only one fund family with access to a money-market account. With this set-up, you can retreat to safety if the market plunges.
Step 4: Look at overlooked categories. Currently, one type of investment often overlooked is the convertible-bond category, says Mike Huffman, a financial specialist with Fraser Management Associates, Burlington, Vt. Many mutual-fund companies offer convertible-bond funds. The Fidelity Convertible Securities Fund (800-544-8888), is up 16 percent for the year, ahead of major stock indexes. Convertibles combine elements of stocks and bonds. Mr. Huffman also likes other contrarian investments, including cheap bank stocks and utilities, both traditional (e.g., Northern States Power) and nontraditional (Enron, which is in gas, oil, and computer services.)
Step 5: Look beyond equities to bonds. Sam Paddison, managing director of First Capital Group, notes that just about all the folks he knows under age 30 have no bond products. For them, equities alone are the way to invest. But that could be a mistake in a downturn, or a slow-growing economy, he says.
Mr. Paddison argues that for investors in high tax brackets (30 percent or high-er), municipal bonds "are hard to resist." He also likes corporate bonds graded A or better with maturities of around 10 years. Junk bonds are also attractive, but he believes they currently entail too much risk for average investors.
Step 6: Think about buying a piece of Uncle Sam. Consider new Treasury I Bonds. The bonds pay a guaranteed yield (or premium) above the rate of inflation.
(c) Copyright 2000. The Christian Science Publishing Society