Make up the losses, and don't be greedy

Time: It's on your side if you invest prudently, but often thwarts those who try to time market swings.

Dollars & Sense

October 28, 2001|By William Patalon III | William Patalon III,SUN STAFF

Like most investors, you've had a painful time this year: You over-indulged in technology stocks and even did some buying on margin. Your brokerage statement now summons up memories of childhood nightmares about the monster under the bed, and your net worth is only a quarter of what it was at the height of the bull market.

In fact, that shrunken net worth really rankles: Your goal is to get it all back - and then some - in 12 months.

Unfortunately, after a bear market that's eradicated trillions in shareholder wealth, that's just not going to happen, experts say.

"It's been my experience that, when you come down as hard as this, it's going to take a couple of years to rebuild confidence" enough for investors to push stocks back up to even a fraction of their one-time highs, says James Hardesty, president of Hardesty Capital Management in Baltimore.

Paul G. Shea, an assistant vice president and financial adviser with Morgan Stanley in Baltimore, agrees.

"There's not going to be a `rubber-band effect,'" where stocks snap back to the highs they hit in 1999 and 2000, he says. "It's not going to happen."

Once you concede there are no quick fixes for your portfolio, apply yourself to crafting a strategy that's likely to yield sound results long-term, experts say.

It's like a mantra among the most successful professional investors:

Don't swing for the fences - work hard to hit singles and doubles and you'll be pleased with how your portfolio grows over time.

One of the first keys to getting back to basics after such a difficult stretch is to make sure that your investments are well-diversified. That means that all the asset classes - including bonds, value stocks and growth stocks - are represented in your portfolio. And when it comes to stocks, most of the major economic sectors should be represented, too.

Hardesty says investors looking for good stocks should delve into each major economic sector to find the industry leaders. That means looking at the top-tier firms.

"You have to search out the high-profile companies - the most profitable, preferably - and companies whose products and services are relatively immune to an economic decline: the food companies, the drug companies, the insurance companies," Hardesty says.

"To find the leaders in each industry, find the companies that are the most profitable in each industry."

Definitely avoid the kinds of stocks that savaged your portfolio the last time around, even if it's the next generation of "hot-dot" stocks that fire up investor ardor, says Morgan Stanley's Shea.

Stick with tried-and-true strategies for picking promising growth and value stocks - shares in companies with real profits, and whose price/earnings ratios aren't out of line with the firm's earnings growth rate.

One useful tool is the so-called "PEG" ratio, the relationship between the P/E ratio of the company's stock to the firm's rate of profit growth.

For instance, if a stock has a P/E of 15 and the company's profits are growing at 15 percent a year, its "PEG" (PE/G) ratio is 1.0.

If you are searching for true value-stock bargains, anything with a PEG ratio of around 1.0 warrants a closer look, according to experts on value investing.

One final piece of advice emphasized by investing gurus is to avoid being too cautious about the stock market.

Long-term, stocks provide much better returns than bonds, meaning they are the one real way to protect yourself against the ravages of inflation - even low inflation rates such as those the nation enjoys today.

Experts say "it's not market timing, but time in the market" that rewards investors.

As proof, while the Standard & Poor's 500 index has generated an average annual return of 17.9 percent over the past 15 years, the typical stock market investor has averaged only 7.25 percent a year over the same period, according to market researcher Dalbar Inc.

The reason for that discrepancy: Investors are jumping in and out of stocks in an effort to time the market.

The risks of that strategy are evident.

If you had remained fully invested in the S&P 500 from Sept. 30, 1995, to Sept. 30, 2000, an investment of $10,000 would have grown to nearly $27,000, according to S&P and Bloomberg News.

If you missed the market's 10 best days, your nest egg would have grown to only $18,000.

And the more strong trading days you miss, the worse your returns will be. If you missed the best 30 days, your $10,000 investment would have grown to only $10,760.

Remarkably, if you missed the best 60 days of that five-year run, you would have ended up losing nearly half your investment - that $10,000 would actually have shrunk to $5,869, S&P and Bloomberg researchers found.

Says Morgan Stanley's Shea, "That really focuses you - long-term - on what you need to do."

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