In roller-coaster market, review holdings

PERSONAL FINANCE

Dollars & Sense

January 16, 2000|By Eileen Ambrose

THESE ARE the times that try some investors' souls.

Last year ended with the major stock market indexes hitting new highs. Then, early this year, stock prices plunged, dealing the technology-heavy Nasdaq its largest point drop in a single day. The forecast for 2000: more volatility.

It's roller-coaster times like these, financial experts say, that investors wonder how long the bull market can last and begin to re-evaluate their investments.

Among them is Cliff Konstans, 62, who invests in stocks for his retirement and to help the grandkids with college tuition.

"Everything that goes up obviously eventually has to go the other way," said Konstans, who retired in 1997 as an artillery tester for Aberdeen Proving Ground but keeps busy by working with a janitorial company. "A lot of us retired blue-collar workers don't want to get to the point that we lose what we made."

If market volatility continues, Konstans may shift money into bonds. What he would like is a risk-free investment that guarantees an 8 percent to 10 percent annual return.

Financial experts were stumped to come up with such an investment. But they said now is a good time for investors, particularly those concerned about market swings, to review their portfolios and make changes if necessary.

"Market volatility is an inescapable part of investing," said Jack Brod, a principal with the Vanguard Group. "You can moderate it by choosing the appropriate set of assets."

Begin with asset allocation, which is how you divvy money among stocks, bonds and cash. The right allocation for you depends on how long you have to invest, your financial goals and stomach for risk.

Generally, money needed within three years belongs in conservative investments, such as short-term bond funds or money market accounts, experts said.

Stocks are riskier but outperform other investments over the long haul. Stocks are suited for money you won't need for five or more years, which is enough time to recover from a market downturn, experts said.

Still, if market blips leave you tossing and turning, you may want to reduce your stock exposure.

"There is nothing wrong with having 30 percent of your money in stocks if it lets you sleep at night," said Saxon Birdsong, a money manager with Baltimore- Washington Financial Advisors in Ellicott City.

Perhaps you developed an asset allocation a few years ago but haven't revisited it since. If so, the phenomenal growth in the stock market recently may have caused your portfolio to be more heavily weighted in stocks than you are comfortable with.

Review your asset allocation annually. If your target allocation has shifted by five percentage points or more, say, you now have 70 percent of your assets in stocks instead of 65 percent, then it's time to rebalance your portfolio, Vanguard recommends.

You can rebalance by putting new money into those investments where you need to beef up holdings, Brod said. Or, you can redirect dividends from one type of investment into another. For example, dividends from bond funds can be reinvested in stocks, he said.

Another option is to change holdings within tax-favored retirement accounts, such as a 401(k) or Individual Retirement Account, which puts your portfolio back into balance without incurring any capital gains taxes, he said.

If you are reducing your exposure to risky stocks, do so in one step, experts advised. But if you are increasing your risk substantially, such as going from 50 percent in stocks to 60 percent or more, do so gradually over the course of the year, Brod said. This might not enhance performance, but it reduces the risk of making a large stock purchase right before a market drop, he said.

For further protection against market swings, make sure you are diversified within your stock portfolio. That means owning stocks that are small and large cap, growth and value, and domestic and international, experts said.

Birdsong, for instance, recalled one new retiree who had his entire portfolio in technology stocks. That worked well until the Asian economic crisis, which caused countries there to cut back on purchases from U.S. technology companies. The man's portfolio dropped 40 percent in value, Birdsong said. In a panic, the investor moved all his money into bonds only to see his portfolio diminished another 20 percent as interest rates rose, the money manager said.

"He wasn't diversified," Birdsong said. "He acted out of greed by holding onto these [tech stocks] and then acted out of fear. This guy turned wrong at every corner."

While mutual funds provide diversification, they don't guarantee it. Different funds may own the stock in the same companies. Or, fund managers may change their investing style or buy stocks outside the fund's objective to boost performance.

"The problem comes when you're looking at using the fund in an asset allocation plan," said Clay Singleton with Ibbotson Associates, a Chicago asset allocation consulting firm. "You no longer have what you think you had."

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