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INVESTMENT OUTLOOK : PERSONAL FINANCE : PLAYING IT SAFE : Some Conservative Investments for Those Still Jittery From the Crash

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<i> Times Staff Writer </i>

The stock market may have regained some of its equilibrium in the seven weeks since the big crash, but the events of late October have left permanent scars on the psyches of many individual investors.

“Once you’ve felt what it’s like to be in a falling elevator, you never have quite the same confidence in elevators again,” said Stuart Kessler, a tax attorney with the New York law firm of Goldstein, Golub, Kessler & Co.

For most investors, however, giving up on investing altogether is no more feasible than hiking up and down stairs to get between floors. Instead, many feel a compulsion, given the murky economic outlook, to shift into conservative investments to protect their assets.

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Investment advisers say the shell-shocked who want to play it safe still have a range of choices, from certificates of deposit (CDs) and money market mutual funds to defensive stock and bond mutual funds. The slightly more adventuresome might want to set aside a share of their assets into higher-quality foreign securities, precious metals or even real estate investments.

The experts say that now, more than ever, is a good time to diversify your investments to hedge against abrupt economic shifts that would upend some segments of the economy. While the economy has been giving mixed signals since the market’s collapse, market plunges have presaged recessions eight of the 13 times they have occurred since World War II.

“Until Oct. 19, the job of balancing risk versus reward seemed like some sort of intellectual exercise for a lot of people,” said Larry Biehl, a director and co-founder of the Bailard, Biehl & Kaiser money management firm in San Mateo, Calif. “Now that they’ve seen what can happen, it’s easier for them to understand why you do that.”

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For investors who don’t have much faith in their ability to anticipate turns in the economy, Biehl recommends dividing assets into a mix of 20% cash and cash-equivalents (money market funds, CDs and short-term Treasuries); 20% long-term domestic bonds, weighted toward 20-year Treasury bonds; 20% U.S. stock mutual funds; 20% in international securities funds, and 20% in real estate, in the form of limited partnerships and real estate investment trusts.

All the same, people who are still heavily invested in the stock market should not be panicked into selling off shares of solid companies if they can afford to hold them for several more years, most professionals say. Over a period of years, an investment in the stock of companies with sound fundamentals is still likely to be among the best of investments.

Since the market’s collapse, investment professionals have kept a close watch on Washington and other world capitals as they calculate their next move.

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Richard F. Goshert, vice president of Financial Network Investment Corp. in Torrance, has been recommending that conservative investors in top tax brackets hold 30% of their assets in cash for the next few weeks. “If it turns out the government is serious about cutting the deficit, and if retail sales look good, we’ll start putting that money back to work,” he said.

Cash-Equivalent Investments

Investment professionals say that until it’s clear whether a recession is ahead, it may be wise to keep a substantial share of your assets--20% to 35%--in cash-equivalent investments. If you have sold off some stocks in the recent panic, you may want to keep the proceeds of those sales in such liquid investments for a while.

Money market funds, which burgeoned to a collective value of over $300 billion after the crash, are now offering rates up to 7.3%, while money market bank accounts average about 5.3% in the Los Angeles area. One-year CDs are offering returns that average about 7.2% in Southern California; one-year Treasury bills, the safest of the lot, have recently been yielding around 6.8%.

Investors may want to divide their cash into several CDs so they mature at different times of the year, said tax attorney Kessler. This “laddering” gives the investor access to a portion of the funds at various times of the year.

Kessler is a fan of an old standby that has new appeal in these turbulent times--U.S. Savings Bonds, which currently yield 7.17% at their five-year maturity. The Series EE bonds are particularly appealing for people nearing retirement because federal taxes on the bonds are deferred, and they are exempt from state and local taxes.

On maturity they also can be rolled over into another Treasury bond, the Series HH. These bonds pay interest on a portion of the Savings Bond principal at a time, thus allowing some further deferral of federal taxes, Kessler said.

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Mutual Funds

The features that make mutual funds desirable in bull markets also make them attractive in bear markets. They offer convenience, professional management and reduce your risk by diversifying your holdings among a number of stocks.

Many experts recommend “no-load” funds--those that charge no sales fees. Investors can check the track records of the various funds by requesting such data from the funds. Annual ratings also appear in various business publications.

Since Black Monday, many investors have withdrawn their money from the higher-risk, “growth” stock mutual funds, which invest in smaller companies expected to grow rapidly, to funds that invest in the lower-risk, blue chip companies.

Also attracting new investment have been the “income” funds that specialize in utility stocks and those of other companies that provide investors a flow of cash through dividends. For those who can bear some risk, experts are recommending “blended” funds, which seek to combine the two kinds of stocks.

Some investors suffered a permanent loss of faith in stocks during the October crash, but haven’t decided how best to withdraw from the market. Their best course may be to wait for one of the mini-rallies that may occur over the next few months and bail out then, investment advisers say.

Investors who are in stocks for the long haul but can use a tax loss this year might consider a temporary withdrawal from the market.

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Stephanie Enright, financial planner at Enright Associates in Los Angeles, said such investors might move the stock-sale proceeds into a money market or Ginnie Mae mutual fund for at least 30 days--that is, long enough for the sale to be recognized as a tax loss under Internal Revenue Service rules.

Then they can move their money to a conservative stock mutual fund, such as one that invests in blue chips, utilities or a balanced growth and income fund.

Some may want to consider mutual funds that specialize in the kinds of basic stocks that are likely to do relatively well in a recession, such as those of food, beverage and pharmaceutical companies. “If you stick to things that are basic to human survival, and diversify, what happened Oct. 19 shouldn’t upset you,” said Diane Blakeslee, president of Blakeslee & Blakeslee Inc. in San Luis Obispo.

In a volatile market, many advisers recommend a strategy called dollar-cost averaging, which calls for investors to put a fixed sum in the market at regular intervals. Such a strategy lowers your average cost per share, because you automatically buy more shares when prices are lower and acquire fewer shares when they are high.

Foreign Securities

In the post-crash retrenchment, many investors have rushed into the bonds of other industrialized nations. Some, including a number of Australian bonds, now offer yields of 13% even on relatively short five- and seven-year maturities, said Robert M. Heier, of the Heier & Co. investment-management firm in McLean, Va.

“For once, I think the crowd is right,” he said, adding that these investments get a boost when they are converted from foreign currency into a weakening U.S. dollar. Heier likes two funds, the MFIV International Bond Fund, offered by Massachusetts Financial Services Co., and Putnam Global Income Fund.

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Heier said 25% of his firm’s portfolio is now invested in foreign bond funds, with the remaining 75% in Ginnie Maes, mortgage-backed government securities. “This isn’t a time to be thinking about making a lot of money,” he said.

Those who favor international securities funds note that other nations’ economies may not react badly if the United States does begin sliding toward a recession. If a recession does begin, German and Japanese bonds may prove a haven, because of the closer regulation of those countries’ economies, Biehl said.

Real Estate, Precious Metals and Defensive Investments

Real estate may not be for those who have been unhinged by Black Monday, but some investment professionals are recommending real estate limited partnerships or real estate investment trusts as a means of diversification for those willing to take on some risk.

Tax-law changes and overbuilding of commercial properties in many markets has tended to depress many such investments, and the experts say investors should expect to hold on to these shares for several years. “Real estate’s been so down and out that up is the only way it can go,” said financial manager Biehl.

Precious metals investments are also not for the faint of heart. But some advisers recommend putting a small slice of your assets into precious metals mutual funds as a hedge against inflation, since their value is likely to soar under those circumstances.

Since the downturn, some brokerages have also been busily turning out new investment products that they contend offer a good defensive strategy. Merrill Lynch and Dean Witter Financial Services, for example, are offering unit investment trusts that combine gold and Treasury securities.

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Shearson Lehman Bros. has put together a unit investment trust that includes stocks of 60 small- and medium-size utilities that may be ripe for a takeover. Shearson’s idea is that the trust will offer a yield of 7.4%, and more if any of the utilities are taken over.

But these products have already been criticized as overreactions to a jittery market. The gold and Treasury bill trusts, for example, will prove to have only a modest 4% to 5% yield if there is neither rapid inflation nor a deep recession, Biehl said.

Andrew Tobias, the writer of books on personal investing, said that for most people the best strategy for playing the stock market may be the most conservative. Many who are near retirement ought to stay out of stocks entirely, he said.

Those who are younger should figure out how much money they can afford to lose and begin a regular program of investing in no-load mutual funds. Over the long term, stocks are among the top-performing investments, Tobias noted.

Yet for many people, he added, “the amount of money they can do without is zero.”

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