Clue your broker in on your risk strategy

Value Judgments

Your Money

February 29, 2004|By JANET KIDD STEWARD

THERE ARE people who ride motorcycles without helmets, and others who stock their Volvos with emergency roadside kits. When it comes to managing your money, which are you?

After loading up aggressively on stocks during the tech bubble and then stampeding out at the burst, investors are wading into the risk pool once again. By mid-February, they were pouring a net $8.6 billion a week into stock mutual funds, according to AMG Data Services.

That's the highest four-week average since March 2000. Municipal bond and money market funds showed outflows in the same period. The weekly trends fluctuate, but more aggressive stock selections clearly have the momentum.

Developing a risk strategy that fits your soul and doesn't fluctuate with the mood of the market is no small feat, especially after the volatility of the last four years.

It helps little that one of the industry's latest buzzwords is "tactical asset allocation," the concept of injecting long-range market forecasts into your asset-allocation mix. Market timing in drag? You bet.

If you are one of the few with a risk strategy in mind, that's just a start. Communicating that philosophy to a broker or adviser is no picnic, even if a broker has the best interests of clients at heart.

Investors filed 3,198 claims last year alleging their brokers put them into unsuitable investments, more than triple the number in 2000, according to the National Association of Securities Dealers.

I'm willing to bet at least some of those claims resulted from a failure to communicate.

"Investors have a bad habit of turning over too much control when it comes to risk," said Joseph Borg, director of the Alabama Securities Commission, a state regulatory agency.

Securities firms have to ask customers about their risk tolerance and are supposed to keep an investor's age and time horizon in mind. But no account application form can take the place of sitting up late at night wondering where the market is going to open after you've just witnessed a 5 percent "correction."

With that in mind, here are some tips on crafting an investment risk strategy:

Bone up. It's pretty hard to stick to a strategy if you don't really understand it. This sounds basic, but a Chicago securities mediator told me many claimants in disputes with securities firms started out as investors who were too embarrassed to say they didn't know what sort of risks their stocks carried.

"You should drop all pretense and make sure your definition of conservative is the same as your broker's," said the mediator.

Then take it a step further. One free resource is www.riskgrades.com. The Web site allows retail investors to input their investments and measure the risk level of each holding, as well as get a risk level for the overall portfolio.

Not everyone agrees with the site's methodology, which weights very recent performance heavily, but it's a start.

Gut check. Before he buys a stock, veteran portfolio manager Edward Studzinski of Harris Associates in Chicago asks himself how comfortable he is that the company's managers are taking the right kinds of risks themselves.

"I still go back to, `Can I sleep at night knowing this is the team running the show?'"

Read what you sign. Investors often fail to do this, even highly educated ones.

"I've seen the scenario happen where a broker will get a client to go along with coding an account as more aggressive than the client wants just in case down the road the client wants to take advantage of a quick opportunity," said the Chicago mediator.

Supervisory controls by the firm are then loosened. Bad idea.

When in doubt, rebalance. Short of going to the mountaintop and coming down with a divine asset-allocation strategy, the old standby - yearly or half-yearly retooling the portfolio by selling winners and buying categories that you're light on - should give you comfort, even if you lack conviction.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

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