`Reality check': Getting back to break-even is hard

Your Funds

Dollars & Sense

March 24, 2002|By CHARLES JAFFE

WHEN MARKET watchers and economists talk about a "recovery," many investors start thinking of a "return to break-even."

Most observers think the economic recovery will spread a little sunshine on the market but won't be the big boost many investors are hoping for.

To see why, just look at the numbers. If you invested $1,000 at the start of last year and lost 33 percent (the loss on the Nasdaq Composite for the year), you would need a 50 percent gain this year just to be whole again.

That might have been plausible in a super-hot tech fund a few years ago, but it's far too big a return to be part of any reasonable projection.

"People are looking for something where they can get back what they lost, and that's not going to happen," says James P. Owen, founder of Prudent Investor Network, a Santa Barbara, Calif., financial advisory firm.

"It's going to be a reality check for some people. If they do the right things, they can recover, but it will take time."

Making the most of a modest recovery doesn't require any special strategy. The right things to do during the boom times of the 1990s - such as diversifying, hanging on for the long haul, and more - were also the right moves during the dark days of the past two years.

Similarly, if you weren't financially prepared for the bear market, chances are good you weren't following sound strategy during the bull market, either. The difference was that only the bear cut you to ribbons.

"People tend to believe they can optimize each segment we're in, investing one way for good times, another for bad, and a third for a recovery," explains Kurt Brouwer of Brouwer & Janachowski, a Tiburon, Calif., investment advisory firm. "The thing to do when you have been jolted by the market is to re-evaluate your goals and make sure you are taking the appropriate actions to reach them. That's how you invest in times like these ... so that you can invest at any time."

If you have ridden out both the bull and bear market without adjusting your financial strategy, or if you simply never had a concrete strategy to begin with, here are some things to do now that will help you invest through a recovery or any other condition the market might dish up.

Set your threshold for pain.

What the downturn should have taught you is how much loss you can really stomach, and the point at which you go from being a happy speculator to a nervous and sleepless investor. If you can't stomach the aggressive portfolio you had in the past, aim for more reasonable, less risky returns.

In short, invest so that you are prepared to live through another downturn.

Set an asset allocation plan.

When the bulls were running in the late 1990s, it was easy to let a plan that started as 60 percent in stocks and 40 percent in bonds ride, until the fast-growth stock portion actually accounted for 75 percent or more of assets just as the market peaked.

Whatever mix of stocks and bonds you pursue, stick to it. Rebalance the portfolio - culling your best investments and/or investing in laggards - every 12 to 18 months so that your investments stay on the plan.

Don't overreach.

The current recovery is likely to be mild. Don't expect too much.

Consider that in any decade where the average stock carried a price/earnings ratio of more than 20 - P/E ratios being a key measure of potential growth - the decade immediately following tended to be miserable. The 1920s brought the depressing 30s, and the 1960s led to the doldrums of the 1970s.

We'll see what the 1990s growth pattern holds for the current decade but getting too aggressive in a market like this one gives you a good chance of being whipsawed by the volatility.

Don't mess things up.

Studies have shown that most reasonable stock-and-bond mixes work over time. What doesn't work is constantly playing with the mix. Sure, performance at any given point in time may not be where you want it, but so long as the trend shows that you are moving toward your goals, be patient.

Save more and spend less.

What you make on your investments is only part of the equation. How much you save is a much bigger part, and it's the one thing you can control with certainty.

If you look into the future and your projections don't work out, don't simply raise the risk in your portfolio by pursuing investments with higher potential returns. Put more money to work.

Says Judith A. Shine of Shine Investment Advisory of Englewood, Colo.: "The more you set aside, the more reasonable you can be with your expectations, the more likely you are to be happy with performance.

"People need to realize that it's not just the market that keeps them from reaching financial goals, it's their own saving, spending, and investing behavior."

Chuck Jaffe is mutual funds columnist at The Boston Globe. He can be reached by e-mail at jaffe@globe.com or at The Boston Globe, Box 2378, Boston, Mass. 02107-2378.

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