Investors urged to adjust portfolios for bumpy ride

January 18, 1998|By Mary Beth Regan | Mary Beth Regan,SPECIAL TO THE SUN

If you've had money in the stock market since 1994, you've probably made a killing as fat returns have bolstered your investment. But if the 554-point October drop made you queasy, you'd better buckle your seat belt for a bumpy ride in 1998.

Economists, portfolio managers and financial planners warn that the nation's bull market is slowing -- and you'll have to be prudent to do as well.

"People have become unrealistic," warned Timothy Chase, principal at the Towson-based Wealth Management Service LLP. "The market can't continue at this pace. Trees don't grow to the sky."

Consider the evidence: The Dow Jones industrial average closed at 7908.25, up 22.6 percent for the year. The Standard & Poor's 500 index finished at 970.43, up 31 percent. The '97 year marked the third consecutive year of returns averaging above 20 percent -- a first for the modern stock market. Analysts say a four-year run is unlikely. "The data suggest we're not going to have that kind of consecutive growth," said Saxon Birdsong, director of investments at Baltimore Washington Financial Advisers Inc. of Ellicott City.

What's more, the troubled Asian economies are likely to send ripples around the world for months, depressing earnings for U.S. multinationals heavily invested overseas. Mutual funds that have been aggressively investing in the Pacific are likely to tank for the foreseeable future, too. In the U.S., you'll see the impact with lower quarterly earnings by blue-chip companies, which could send stock prices downward. "It's not going to be like it was before Asia," said Steven Norwitz, vice president at T. Rowe Price Associates Inc.

That's not to say the economy is in a tailspin. In 1997, the U.S. economy grew at about 3.7 percent with inflation at about 2 percent. The unemployment rate was among the lowest on record, at 4.6 percent. Economists predict a slight slowdown in economic growth for '98, with inflation creeping up only slightly. The job market is expected to stay strong.

Under these conditions the best bet is that Federal Reserve Chairman Alan Greenspan will lower interest rates slightly, if at all. The upshot: The '98 stock market will produce single-digit returns, and the bond outlook could improve.

So, what's a prudent investor to do?

* Take a good look at your portfolio mix. Many people may find themselves overly invested in stocks. Here's why: With the run-up in the bull market over the last three years, the percentage of your money in stocks has probably increased.

A T. Rowe Price analysis illustrates how your allocation may have changed. Let's say you invested $100,000 in 1994, using a conservative strategy that put 60 percent of your money in stocks, 30 percent in bonds and 10 percent in cash. At the end of '97, because of the strong market performance, you'd have 72 percent of your money invested in stocks. Depending on your objectives, that may be higher than you want -- especially with portfolio managers warning that many stocks are overvalued.

* Reconsider your goals. If you are a 30-year-old investing for retirement, it might be wise to increase stock holdings. If you're nearing retirement, you might consider working with a financial planner to prune stocks -- especially losers, or those with high Asian exposure -- and move more money into bonds or cash.

One bright point: Congress lowered the capital-gains tax rate, from a maximum of 28 percent to 20 percent, so it will be less costly to sell. Your biggest hurdle may be mental. "It's tough to convince people they need to shift allocations, if they've seen an investment making money," admitted Chase.

* Make only minor adjustments to your 401(k) plans. If you're like many Americans, planning for retirement through company-sponsored 401(k) or similar plans, your choices are limited to the offered investment options. Still, the rule of thumb is don't switch money too frequently. Historically, stocks outperform bonds and other interest bearing investments, so they are a good place to be if you're retiring in 2020. Still, if you can't stomach dips in your account or if you're looking to retire in the near term, consider moving some money into more stable balance bond or money funds. Stock funds aren't likely to produce double-digit returns of the last three years.

* Look for the most cost-effective way to grow your money. Birdsong, of Baltimore Washington Financial Advisers, offers this strategy: If you've got less than $125,000, consider an array of mutual funds -- invested in stock, bonds or money. While Birdsong prefers individual stocks, mutual funds allow an investor to get around costly commissions when trying to manage a smaller portfolio.

If you're investing over $125,000, however, you can better control tax consequences -- and returns -- with individual stocks or bonds. Of course, you'll have to be up to speed on your holdings.

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