Midyear good time to pause, refresh portfolio positions

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At the halfway point in 2007, most investors have substantial portfolio gains to celebrate. Now, how best to hold on to them?

Many financial advisers are warning clients to be prepared for a stormy time in markets in the second half. That reflects the clouds that have moved in during recent weeks: The woes of the U.S. housing and mortgage sectors have deepened. And the corporate buyout wave is threatened as lenders pull back on easy credit.

There also is a general sense on Wall Street that stocks simply are overdue to give back some ground, after a rally that lifted the Standard & Poor's 500 stock index 6.2 percent in the first half and 18.5 percent over the last year.

The problem with any admonition to be careful about stocks is that investors have heard this plenty of times since 2002. Yet every decline has been short-lived. Any pullback this summer might well be more of the same.

But Richard Weiss, who as chief investment officer of City National Bank in Beverly Hills, Calif., oversees $55 billion in client assets, said he can't shake the feeling that the global bull market moved into a dangerous "greed is good" phase in the first half. Many investors abandoned any pretense of prudence in their search for rich returns on their money, he said.

It's an environment, Weiss says, in which the threat of loss outweighs the possibility of more rewards from some investments.

"Our overall take is that paring back some of our riskier investments is a smart idea," he said. He has been trimming in sectors such as emerging markets, real estate investment trusts and high-yield junk bonds.

Think in terms of taking out an insurance policy of sorts, financial advisers say they're telling clients: Particularly for older investors who've racked up handsome gains in recent years, this may be an opportune time to harvest some profits and build up some cash.

Here are some of the strategies that financial advisers are suggesting to clients:

Pull back from stock sectors that are sensitive to higher interest rates.

Long-term bond rates worldwide have risen sharply since winter amid strong global economic growth, worries about inflation pressures and some lenders' concern that they've made credit too easy.

Higher bond yields present more competition for stocks that are attractive in large part for their dividends. Two of those stock sectors--real estate investment trusts and utilities--have tumbled recently.

A Bloomberg index of 130 REIT shares has slumped 18 percent from its record high reached Feb. 7. The Dow Jones utility stock index is off 7.4 percent from its record high reached May 21. Yet many long-term investors still are sitting on large gains in those sectors, and that may fuel more selling if interest rates stay up or rise further, analysts warn. The Bloomberg REIT index is up 100 percent since the end of 2002. The Dow utility index is up 131 percent in the same period. By contrast, the blue-chip S&P 500 index is up 71 percent in that period.

Be objective about foreign stocks.

Foreign markets hold enormous promise over the long run. And this year, healthy economic growth overseas has drawn more Americans to foreign shares, helping to boost them.

But investors who've become enamored of foreign stocks may be forgetting how risky they can be. The last significant pullback in stock markets occurred in May and June of last year. The German market slumped nearly 14 percent in that sell-off. Brazil's main market index tumbled 22 percent.

No one is advising bailing out of foreign issues completely. But in the fifth year of hefty gains for overseas markets, U.S. investors who've been riding this wave should think about cashing in some chips, many experts say.

If you've made no changes to your portfolio, "You have a bigger allocation to risky asset classes than you did two or three years ago," said Liz Ann Sonders, chief investment strategist at Charles Schwab & Co. in New York. That calls for rebalancing, she says.

Favor bigger stocks over smaller issues.

If things get rough in markets, large-company shares ought to hold up better than small-company shares. One reason is that bigger stocks are more liquid and therefore tend to be less volatile. Another is that many big companies pay cash dividends, which can help buttress share prices.

Those advantages haven't mattered much for the last six years, as U.S. smaller stocks have mostly trounced blue chips. But that's another reason why some investment pros are tilting toward big-name stocks now: Their lagging performance makes them more of a bargain.

"That area looks cheap to us," said Keith Wirtz, chief investment officer at Fifth Third Asset Management Inc. in Cincinnati.Randy Bateman, president of Huntington Asset Advisors Inc. in Columbus, Ohio, also favors the biggest U.S.

companies. With continuing globalization of the economy, "the best companies to take advantage of that are the mega-caps," he said.

Tom Petruno is a columnist for the Los Angeles Times, a Tribune Co. newspaper.

Copyright © 2014, Los Angeles Times
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