Aim for diversification in investment strategy

Value Judgments

Your Money

September 19, 2004|By JANET KIDD STEWART

CONTINUED TERROR threats, a coming election, long-dormant inflation knocking on the door: It's enough to send even the steadiest investors running for cover.

Trouble is, the old havens aren't what they used to be. Gold has already experienced a huge run-up. Utilities that once were the domain of widows and orphans have deregulated and many still are favoring growth rather than plowing cash into shareholder dividends. And in a rising-rate environment, loading up on bonds can spell disaster.

Little wonder, then, why so many workers are giving up and letting the boss manage their retirement money - even after four steady years of corporate and investment world scandals.

"About 70 percent of new hires are opting out of managing their 401(k) money altogether," said David Wray, executive director of the Profit Sharing/401(k) Council of America. "People are discovering investing isn't so easy, and they're asking for someone else to please do this."

That opt-out rate is for a relative few companies - 22 percent of plan providers - that offer employees the option of having their money professionally managed without input from the individuals.

Anyone can hire a money manager, of course. Whether it's you or someone else running the show, however, it can be expensive to run and hide. Funneling money from stock funds to money market funds to wait out a tense period - say, from now until the election - often comes with fees and tax implications.

Better to weave a permanent safety net into your investment mix, money pros say.

"Any investment has risk. The key is diversification by company and industry," said Payson Swaffield, co-manager of several floating rate funds for Boston-based investment firm Eaton Vance Corp.

The threat of higher interest rates has spurred attention for alternatives to stocks and bonds.

Enter bank loan investments, which adjust quickly to rising interest rates. The risk here is default, but investors have flocked to the instruments in recent months as the economy has improved. Also, the floating rate funds are backed by specific bank assets and stand ahead of other creditors in case of default. And therein lies another risk: Their popularity has driven up prices in the secondary market, suggesting the run may be tiring out.

"The safest thing is not to try to time what interest rates will do," said Swaffield. Rather, he advocates making the loans a standing inflation hedge in your portfolio over time, similar to inflation-protected bonds offered by the Treasury Department. It's important to note, though, that the loan funds are below investment grade.

"This is a niche holding - maybe 5 percent of your portfolio," said Morningstar analyst Russ Kinnel. More broadly, Kinnel suggests combing your safety net for hidden risks that don't match your wishes.

You may have figured out already that you want 60 percent of your assets invested in stocks, but many investors don't diversify from there, he noted.

"Make sure that most of your stocks and bonds are considered low-risk for their asset class," said Kinnel. Morningstar and other data providers, including, offer risk assessment tools online.

So if you toss 40 percent into fixed income, make sure it has a mix of different types of bonds. If stocks represent a big portion, look for dividend payers that will at least pay you something for your money even when stocks are relatively out of favor.

What about the true daredevils who invest in a few individual stocks to make up large positions in their portfolios?

Sharon Oberlander, a Merrill Lynch financial adviser to wealthy clients, recalls a client in his 40s who hired the firm but clung to a few old technology stocks that had lost much of their original value, still hoping for a rebound.

"I got him to sell the ones that he had the least amount of confidence in, then hedge the rest with puts," or derivative investments that give a buyer the right to sell at a certain price, she said.

Modest investors can't afford such insurance, but the lesson is similar: Regardless of whether you're in the deep or shallow end of the risk pool, you need a lifeline.

E-mail Janet Kidd Stewart at

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