Staying Afloat in a Choppy Market

Stock and bond funds posted strong gains in 1997, but Asia's troubles raise concerns heading into '98.

John Sullivan, an insurance-claims agent in Kansas City, Mo., could probably speak for scores of individual investors when he admits to feeling both skittish and stoic about 1998.

"I'm a little nervous, and I have been for awhile," Mr. Sullivan says.

Stocks seem high-priced and the market skidded up and down for much of 1997, he says. But he's not about to bail out of mutual funds.

"Most of my holdings have been in domestic stocks, and I've been underweighted on the international side. This seems like a good time to buy overseas stocks," he says, given recent drops in Asian markets (see global investing, Page B6).

For people like Sullivan, 1998 is already looking slightly daunting.

Many investment gurus are warning of a market downturn - what they euphemistically call a "correction."

Some experts remain cautiously bullish. But even if a debacle is avoided, they anticipate a year of turbulence, slower corporate earnings, and lower total returns.

Experts point to three steps you can take to smooth the ride:

1. Look out for thin ice: Be more cautious than usual when picking new investments.

2. Cover bases: Make sure your current investments follow an asset-allocation plan - a mix of stocks, bonds, and cash - that's right for you. If needed, realign your portfolio to match the plan.

3. Do a bear-market drill: How would you feel about your strategy if stocks fell 15 or 20 percent? Be sure you can sleep at night, but also remember that short-term dips won't necessarily thwart your long-term goals. But not sticking to your plan will.

1998 will probably not be a repeat of l997, with its solid 20-percent returns, analysts say.

But there are still prospects for gains, albeit with sights a little lower.

"Look, you've got to be cautious, but follow the winners," says Larry Wachtel, a vice president of Prudential Securities. "What we're saying is, that some [industry] groups will probably have trouble, such as technology and the oil-services sector." But he says other groups, such as "banks, home building, utilities, and real estate investment trusts" look like potential success stories (see story, right).

"The bad news is that it will be harder to outperform the market this year. But the good news is that this will be a stock-picker's market," says David Sterman, associate director of research at Individual Investor magazine.

Whimper or bang?

While 1997 ended below its peak performance, investors generally did well.

The average US diversified equity fund had a total return of about 20 percent. Still, most actively managed stock funds again lagged behind index funds, as they have done since 1993.

Now, the impact of international currency adjustments on large companies could shift the balance away from the indexes and toward stock pickers, who often focus on small companies.

Value beats growth

Value funds - that is, funds that look for hidden wealth in a company, usually measured by lower price-earnings ratios - beat growth funds, those that buy stocks with fast-growing earnings.

Looking abroad, European and Latin American funds did best; Asian/Japanese funds were battered by currency devaluations and bank troubles later in the year. Gold and precious metals funds were dead last, as inflation remained tame and some economists even caught whiffs of deflation.

Bonds became a stunning success later in the year as investors flocked to them as a haven from the storm.

Eric Kobren, who publishes the FundsNet Insight newsletter, is boosting recommended weightings in the Baron Small Cap Fund (800-992-2766) for growth-oriented investors; for more-conservative investors, he is increasing his exposure to the Vanguard Fixed Income Long Term US Treasury Fund (800-662-7447) and the Delafield Fund (800-221-3079).