Guidelines for survival in an unpredictable market


April 25, 1994|By Washington Post Writers Group

NEW YORK -- It can be enlightening not to read all your mail on time. Lately, I've been reviewing month-old reports from stockbrokerage firms and investment advisers. And guess what? Most were fundamentally bullish on stocks in the week before the big price slide. Afterward, most came down on the negative side -- and acted as if they had been there all along.

This week, they're sounding positive again. From which you can conclude that half the investment advisers don't know where market prices are going, while the other half don't know that they don't know. And if they don't, neither do you.

The average investor cannot win by trying to sell before prices slide or by hoping to buy before the market goes back up. You need to develop a suitable investment program -- ideally, one that includes a variety of mutual funds -- and stick with it. If you feel personally endangered when prices drop on stocks or bonds, you haven'tgot your program right. Here's what to consider:

* 1. How much time you have.

Any money you will need for a known purpose within four years should not be invested in mutual funds. This includes college tuition due within four years, money that you'll use to start a business or a fund that you'll use to buy a house. Get it out of investments and into something safe like a bank or a money-market fund.

Why four years? Historically, that's the average time it takes for stock prices to drop from a peak and rise back to their starting price.

Although my rule applies to stocks, I use it for bond mutual funds, too. Their prices can also slide, as recent months have shown. They're no safer than stocks for money you'll need within four years.

BBut if you won't touch your money for more than four years, put it in stock or bond funds and leave it there.

* 2. Your age.

The younger you are, the more your long-term money should be concentrated in stocks. Over five-year periods, stocks almost always outdo bonds -- and the longer you remain invested, the better stocks will be. Young people's retirement accounts, or the college accounts of their young children, could be 100 percent in stocks. Even at 65, it's smart to be 40 percent or 50 percent in stocks. After all, you might live for 30 more years. Growth in your investments will help pay the bills.

If you're employed, a fixed amount of each paycheck should be invested in mutual funds -- through payroll deduction or through automatic withdrawals from your bank account. Continue these investments even when prices are trending down. Buying fund shares at lower prices cuts your long-term cost and produces bigger long-term gains.

* 3. Your personal life.

Every personal-finance magazine, every brokerage firm, every investment adviser, publishes asset-allocation charts. These charts show how to divide your money among stocks, bonds and cash, depending on whether you are an aggressive, mid-risk or conservative investor.

But that's not the whole story. You may be an aggressive investor but in poor health -- in which case, you should keep more cash to help pay your medical bills. Or you may be a conservative investor but young -- hence needing to push yourself into stocks.

XTC The classic pension-fund portfolio, which cautiously balances risk and growth, is 60 percent growth (stocks) and 40 percent fixed income (bonds). If you're retired, count your pension and Social Security as part of your fixed-income assets. That would tip more of your investments toward growth. If you own a lot of real estate (a growth-and-income investment, but not easily sold if you need cash), the rest of your portfolio should be tucked more conservatively into cash and bonds.

* 4. Your frame of mind.

Whether you're invested in stocks or bonds, if the recent price slide put you into a panic, you're taking more risk than you're ready for. Reduce (but don't eliminate) your commitment to mutual funds, then watch what happens to the money you left invested. As you learn that what goes down will rise again, you'll feel better about investing more of your long-term money for growth.

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