Time to consider some portfolio changes

Staying Ahead

July 01, 1996|By JANE BRYANT QUINN

NEW YORK -- HAVE you looked at a chart of the Dow Jones industrial average since mid-1995? It traces a parabolic curve, says market analyst Joseph Granville.

These curves rise at an angle that's increasingly violent and steep. They often show up in the price of individual stocks, but you rarely see them in a general market average.

Which may be a relief, considering the aftermath of earlier parabolics. Japan's "bubble market" of 1988-1989 eventually surrendered 63 percent of its value. When the gold price broke in 1980, the bottom turned out to be 47 percent down. Then there was the Dow in 1987 and, um, 1929.

Still, a market's post-parabola blues don't have to last very long. True, the price of gold and Japan's Nikkei average languish well below their peaks.

But after Wall Street's 1987 crash, stocks recovered in 16 months -- a shorter-than-average bear market and no problem for people who stuck to their guns.

There's no denying, however, that that parabola nags. Here are some prudent ways of adjusting your portfolio consistent with sticking to stocks for the long run:

Take your short-term savings out of stocks. You can't run the risk of investing with money you know you'll need within three or four years. Over that period, the market could drop and not recover by the time you'll want the cash.

Rebalance your tax-deferred retirement portfolio. Serious investors choose a specific mix of securities such as 60 percent stocks and 40 percent bonds. That's the classic pension-fund allocation (stocks for growth, bonds for cushioning losses when the stock market drops). The more aggressive you are, the higher proportion you'll keep in stocks.

But, because of changes in market values, investment allocations don't stay put. If you were 60 percent in stocks at the start of 1994, and have made no changes since, stocks now represent 67 percent of your portfolio (measured by Standard & Poor's 500-stock average).

Extra stocks mean extra risk. You should "rebalance" back to your original 60 percent allocation, taking money out of stocks and adding it to bonds.

That reduces your exposure to this parabolic curve. It's easy to rebalance with mutual funds, harder with individual stocks.

With investments outside a tax-deferred retirement plan, you might owe a capital-gains tax if you sold some stocks. If so, rebalance by directing any new investments into the portion of your portfolio that's low (today, that would be bonds).

Look for "value" investments (securities that appear to be underpriced). You cannot consistently identify market tops or bottoms, but you often can tell when a market is relatively cheap. If you buy into such a market, the price may drop further before it recovers. But you'll have locked in your shares at an attractive low price.

Bonds look like a value play today. Taxable-bond mutual funds are down 1.5 percent this year, compared with a gain of 13 percent for general U.S. equity funds. When interest rates rise, bond prices fall -- so if rates rise further, bond-fund prices will sink even more.

But, eventually, prices will recover.

"Even if that takes time, bonds are paying a 7 percent yield on your money which isn't bad," says John Hussman of Hussman Econometrics Advisors in Farmington Hills, Mich.

Another good value, for maybe 5 percent of your money, are diversified emerging-market funds. They focus on Asia and Latin America, and tend not to drop in tandem with American stocks.

International funds, by contrast, emphasize Europe and Japan. Japan should hold up if U.S. stocks drop, but much of Europe would follow the Dow industrials down, says Bill Sterling of BEA Associates in New York. Still, he thinks international stocks would rebound more quickly than the U.S. market.

Diversify into commercial real estate. Even without inflation, real estate values are rising in most parts of the country. Real-estate funds buy real estate investment trusts (REITs), which own and manage hotels, shopping centers, apartments, industrial parks, office buildings and nursing homes.

In the past, REITs behaved like small-company stocks so, they offered no diversification. But 25 big companies have gone public since 1993 and they tend to track real estate prices rather than stocks, says Kenneth Rosen of AMB Rosen Real Estate Securities in Berkeley, Calif. If that trend holds, REITs could offer some shelter from stock market drops.

Pub Date: 7/01/96

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