A sideways market is no time to sleep

Value Judgments

Your Money

August 01, 2004|By JANET KIDD STEWART

BETWEEN THE MUTUAL fund trading scandals and the weak outlook for stocks, there might as well have been yellow crime scene tape wrapped around the stock market this summer.

And like onlookers to a traffic accident, ordinary and sophisticated investors alike have slowed way down in their trading activity. There has been low trading volume and tight trading ranges in the major stock indexes.

More mutual funds have been closed to new investments, indicating managers have nowhere to put new cash to work.

In short, investors are learning a valuable lesson in the fine art of doing nothing.

Time for review

That said, thereM-Fs a big difference between watching from the sidelines and burying your head in the sand. Money managers say this is a perfect time for getting beyond the daily stock tips to really thinking about the way a portfolio is structured.

From looking at how well your money is diversified to asking better questions of specific investments, investors can learn great lessons from the current market, said Don Phillips, managing director for Morningstar Inc., the Chicago financial publisher.

This summerM-Fs annual Morningstar investment conference featured several industry leaders forecasting a gloomy future for returns on stocks, in part due to the scandals and the governmentM-Fs reform efforts but also because of a lack of strong economic growth.

What to do?

Focus on whatM-Fs real, Phillips and other investment experts advise.

Sure, looking at a companyM-Fs annual report language or a fund managerM-Fs letter to shareholders are wise things to do. But the knock against requiring greater disclosure by public companies has been that it results, oddly, in far less candor from the corner office.

Fund managers lament that while they are getting more timely disclosures, itM-Fs getting harder M-y not easier M-y to get a true sense of whether managers are walking their talk or are just empty suits.

What you can do is M-tlook how management is compensated and at the incentives, look how they manage cash and how they are using profits. ThatM-Fs the litmus test,M-v said Phillips.

ItM-Fs also a good time to focus on footnotes, said Christopher C. Davis, chief executive for Davis Advisors.

Unstable corporate debt levels, mind-numbing pension obligations and rationales for executive pay can all be unearthed in annual report footnotes, he said.

Another play to make in a sideways market is to look at how well you are diversified among your money handlers. Sure, you can get attractive incentives for keeping all your money with one mutual fund or money management company, but consider the risk that goes along with that.

M-tYou have to diversify. The last thing you want is to have had all your money at Putnam and then scandal breaks. If a company is involved in an investigation, thatM-Fs a huge distraction. Investors are learning the hard way it pays to diversify,M-v said Phillips.

Beware hedge funds

Also, Phillips said, beware the lure of hedge funds, which are drawing huge interest from investors unable to find exciting opportunities in traditional funds and in individual stocks and bonds.

M-tIM-Fm worried a lot of people are going to get hurt,M-v said Phillips. M-tI fear there will be good returns for management but not for investors.M-v

Morningstar is preparing a foray into publishing data on hedge funds later this year. Still, those funds remain largely unregulated.

Finally, remember that just because corporate scandals have been in the headlines constantly, it doesnM-Ft mean the cleansing is complete.

M-tThere are still crooks out there, and even smart investors can get tripped up,M-v Phillips said. M-tThe takeaway from all that is investing is hard work.M-v

Sloth may be one of the deadly sins, but this summer, itM-Fs looking pretty good.

E-mail Janet Kidd Stewart at yourmoneytribune.com.

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