INVESTMENT OUTLOOK : ASSESSING THE MAJOR MARKETS : MAKING MONEY WORK : Views on Investing From Those Who Give Advice and Those Who Take the Risks : The Experts

The market plunge on Friday Oct. 13, the debacle in junk bonds this year after a decade of unbridled growth, and the proliferation of equity, fixed-income and other mutual funds may have investors confused about prospects for the next decade. But three experts The Times brought together for a round table on the outlook for investments in the 1990s are not panicking. They generally proved to be stalwarts of some time-proven truisms of investing, such as the long-term strength of the stock market.

For one hour, the round-table panel discussed a variety of investment topics and categories, including stocks, bonds, real estate and money market funds. The participants were Stephanie Enright, a financial planner; Norman E. Mains, an economist, and Richard Roll, a finance professor. Here are highlights from an edited transcript of their conversation:

QUESTION: This may be the investor’s favorite question: What are some possible hot stocks for the 1990s?

MAINS: First, we know that people are living longer. We know that people are devoting an increasing amount of the wealth they accumulate during their lives to problems in health they have in their later years. Clearly an industry of the ‘90s is going to be the whole health and medical technology field.

Second, I think as the world globalizes in a commercial sense, and as trade continues to rise around the world, those companies that have positioned themselves to take advantage internationally are very attractive. So a company that is well placed, like Boeing, is likely to do very well through the 1990s.

Q. But is it really possible for the small investor to anticipate trends like these and beat the market?

ROLL: I think you could do better than average. Somebody has to do better than average, somebody has to do worse. You’d think that the ones who invest more time and effort in trying to figure out what those trends are doing would do better.

ENRIGHT: I think it’s somewhat egotistical of small investors to think that in 15 minutes a day, they are going to out-achieve the concerted efforts of the stock analysts. I always say to my clients, take whatever percentage of your portfolio you can devote a large amount of time to, and that’s what you should use for your individual stock picking. You don’t do your own heart surgery. Why should you feel you should have to outperform all the analysts?

Q. Does Wall Street’s volatility in October say anything about prospects for investing in stocks in the 1990s? Some investors are spooked. Is this any time to be getting into the market?

MAINS: There is very definitely a perception that markets are much more volatile today and much more treacherous. The data, however, don’t really support it.

In fact, for the small investor who is looking to invest over a multiyear horizon, it probably is as good a time as any to be investing in stocks.

ROLL: The main thing you have to remember about the stock market is it is a long-term investment vehicle. If you are very worried about what’s going to happen in the next few months it’s not a good place to be, but it’s by far the very best place to be in the long run.

Q. What is the outlook for bonds now? And what does this say about where interest rates may be going in the next few years?

ROLL: The market as a whole believes that short-term interest rates are going to decline. You can buy a 10-year Treasury bond for a yield of 8%, and you can buy a one-month T-bill at the same yield.

What’s going to happen is that when you go to reinvest that one-month T-bill, you’re going to be getting a lower rate. If you look over the whole 10 years, your reinvestment from the short-term bond is going to earn less.

ENRIGHT: Well that’s true, but the investor doesn’t perceive that. A lot more people are concerned that if they lock their money up at a certain rate, and interest rates rise in two or three years, they will miss the opportunity to have that higher rate of return. All you can do is take certain maturities and stagger them. You’re never going to get the best and you’re never going to get the worst.

MAINS: My own view is that as we move into the 1990s, we’re going to see inflation lower than we did in the ‘80s. And therefore interest rates will trend irregularly downward in the first half of the decade. That makes long-term Treasury bonds more attractive.

Q. Has the risk of junk bonds been overstated? Should small investors be rethinking their enthusiasm of the last decade, like the rest of the market has?

ENRIGHT: I’m very, very nervous about the junk bonds and the high-yield funds. Small investors don’t understand them. I think (investors are) extremely exposed. If investor confidence starts to shake, it’s going to snowball on people and they’re going to dump them.

ROLL: I don’t like junk bonds as an investment because basically there are two risks involved. One is if we have a little recession, a lot of these bonds are going to default. But there’s another risk that I think is even more important, which is that if the companies do well, then they call the bonds. You’ve got to realize that when a bond is called before maturity, then you’ve got to reinvest that money, and your opportunities are going to be lower than the yield on that junk bond. Nothing good can happen to you if you buy a junk bond, unless nothing happens--but that’s unlikely.

Q. Does anything you see out there now--including the perceived dangers of the stock market--change the common wisdom that the average investor puts too much money in money market funds?

ROLL: No, it’s not that different. I think that people generally aren’t wise to put so much in a money market fund, especially since they really are looking at fairly long-term horizons. But they don’t like that short-term price fluctuation in stocks--even though they should be willing to bear that and be compensated for it by higher returns.

MAINS: I think they’ve done a good job marketing some of these money market funds as cash management vehicles to the public. So they have taken on attributes that used to be fulfilled by your checking account. That’s clever marketing. I would agree that over the long run there may be a disproportionate share of money in fairly liquid funds.

ENRIGHT: These gentlemen are looking at it with a more sophisticated view. I think the average investor is not nearly so sophisticated. Most people should not think of the money market fund as an investment. I think of it as a liquidity fund.

So the average investor is both too conservative and too speculative. They are too conservative because they are fearful and they don’t want to take a hit. And then they sit down with a group of friends and someone has bought a new car or gone to Tahiti and they say: “Gee, Mary, it doesn’t look like we’ll be able to do that. We’d better go out and find a 20-30% yield investment.” And then someone calls them on the phone and markets to them one of the multitudes of investment scams.

Q. How about real estate in the 1990s? Given overbuilding in Texas and elsewhere, should investors be wary?

ENRIGHT: I think there’s never a bad time to be in real estate. I think it’s something that should be in everyone’s portfolio in some format, because now there are so many new ways to be in it. You can be in it in mortgages, you can be in it in equities, you can be in it in mutual funds, you can be in it in real estate investment trusts, you can be in it in limited partnerships.

ROLL: Real estate has some very good qualities. It hedges inflation very well, much better than stocks. I think the problem has been people have been undiversified in real estate. They have one house, and it is highly leveraged and very subject to the vagaries of that region and the economy. What should be done, instead, is move toward a more diversified position through other kinds of real estate vehicles, from real estate investment trusts, to mortgage investments to the organized and diversified real estate funds that are becoming available now.