1998 may require more caution for success in the stock market

The Ticker

December 31, 1997|By JULIUS WESTHEIMER BTC

SUCCESSFUL stock market investing will be very different -- and more difficult -- next year.

With the Dow Jones industrial average standing this morning at 7,915.97, up 4,081.85 points, or 106 percent, in three years (on Jan. 1, 1995, the Dow stood at 3,834.12), here are 1998 New Year resolutions for your money:

In this aging bull market -- the surge began Aug. 12, 1982, at Dow Jones 776.90 -- I suggest extra caution.

Although the economy is strong, inflation dormant and interest rates low, many "positives" are reflected in today's lofty stock prices.

Lofty? Besides doubling in three years, the 30 Dow Jones stocks now stand at a hefty 19.7 times earnings, says this week's Barron's, compared with a normal 15 P/E ratio.

The "yield gap" -- the difference between high-grade corporate bond yields (6.66 percent) and Dow Jones stock yields (1.79 percent) -- stands at 4.87 percentage points, a spread considered risky for equities. Until earnings catch up, stocks in 1998 could move sideways.

Resolve to be more selective. Despite the recent "Asian setback," some sectors appear overpriced, such as airlines, brokerages, drugs, high-tech, pharmaceuticals.

Investors might now consider buying public utilities, real estate investment trusts (REITs) and corporate or tax-free bonds.

More 1998 resolutions: Consider a $2,000 individual retirement account contribution for a spouse whose earnings are under $2,000. Joint filers now can contribute up to a total of $4,000 in one year.

Beginning Jan. 2, 1998, give thought to buying the new "Roth IRA," in my opinion the best IRA. Briefly, you make contributions with after-tax dollars, but earnings are tax-exempt. Contributions may be made after age 70 1/2 , and contributions to a Roth IRA (as opposed to earnings) can be withdrawn at any time for any purpose without tax or penalty.

Don't rely on a rising market to "cover up" investment mistakes.

Resolve not to buy a stock before applying the "risk vs. reward" strategy.

If risks outweigh possible profits, hang onto your cash. Alternative: Buy half your commitment now, half later.

For the 20th year, Happy New Year to our loyal Ticker readers!

Pub Date: 12/31/97

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.