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1994-95: REVIEW AND OUTLOOK : ’94/'95: INVESTING : If Year’s Results Shock You, It’s Time to Review Investment Goals

If you feel that your savings and investments were savaged in 1994, it may be time to consider whether your investment strategies suit your goals.

Many people changed tack during the past three years, as interest rates plunged and investors increasingly stretched for yield. However, last year’s losses in both the stock and bond markets have underscored the risks that investors take in the financial markets. Professionals maintain that anyone who found 1994’s results shocking should carefully review his or her portfolio. Chances are good that your investments and your goals fell out of sync somewhere along the line.

“If this has been a very uncomfortable year for you, you should try to reduce your risks,” says Roger W. Vogel, senior vice president of the New York financial advisory firm Wood, Struthers & Winthrop. “It is time to do some portfolio evaluation.”

Such an evaluation is essentially a three-step process, experts say.

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Your first step is to consider your goals and segregate your assets into short-, medium- and long-term chunks. What you’re doing here is recognizing that you have more than one financial aspiration and that each has a different estimated time of arrival.

For instance, your first goal may be financial security--knowing you’ve got cash to handle a job loss or emergency. If that emergency happens tomorrow, you can’t wait for the financial markets to pull out of a tailspin before taking your money out. That means any investments you make with your emergency fund must be available at a moment’s notice and can’t fluctuate substantially in value.

Your investment options for this part of your portfolio are consequently limited to cash, bank accounts, money market mutual funds and short-term Treasuries. However, if you have revolving credit lines--credit cards with substantial limits, personal lines of credit or home equity loans--you may consider paying down any balance on these loans instead of adding to your cash reserves. The reason is simply that the interest you pay on these loans is more than likely greater than what you’d earn in a bank account. At the same time, the available credit you’re freeing up by paying down the loans could be used to handle emergencies.

If you are like most people, your other financial goals will fall into a small number of categories: saving for an expensive item such as a home or car, paying college or education costs, providing for retirement.

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The events that are likely to occur within three to seven years are medium-term goals. Those that can wait for at least seven years are long-term. You can and should take more risks with medium- and long-term money than you’d take with money needed for short-term expenses.

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The second step is evaluating your ability to tolerate risks. This is as simple as knowing whether moment-to-moment swings in investment values are enough to keep you reaching for the Rolaids or awake at night. Those who answer yes will take different risks from those who answer no.

The final step is the hardest. You have to examine each investment in your portfolio and determine what type of risk it represents. This goes several steps beyond saying that your portfolio is composed of stocks, bonds, real estate and cash. It requires actually finding and reading investment documents--and closely evaluating any investments that don’t come with documents.

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For instance, if you own rental properties, you need to consider how long you could go without rental income before your finances would be sapped and how likely it is that such an event would happen. If the results of this analysis make you uncomfortable, consider switching to an investment that poses risks you can better handle. For example, because you’ve already invested in real estate, you may have accepted the possibility of declines in value and the inability to sell the investment at a moment’s notice. What you can’t live with is the idea that you may have to pump substantially more into the investment in bad times. If that’s the case, you might consider trading your rental property for shares in a real estate investment trust. Although you’ll still have principal risk, it is limited to the amount of your initial investment.

Stock, bond and mutual fund investments should come with documents that include explanations of where your investment dollars have gone as well as financial details on the entity you’ve invested in or lent money to.

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Mutual funds disclose their actual holdings in annual reports available to shareholders. You should read what those investments are even if you’re fairly unsophisticated, says Joan Payden, president of Payden & Rygel, a Los Angeles-based money management firm. You don’t need to be sophisticated to know whether the companies listed are household names, foreign firms or concentrated in a single industry, she notes.

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Mutual funds are something like trucks, Payden says. In structure, they’re all fairly similar. It’s what you put inside that makes them good or bad. If you only look at them from the outside, you know nothing. You have to open the hatch and look inside before you can evaluate whether or not you’re comfortable hopping into the cab.

The same holds true for bonds and bond funds. If you’re investing in bond funds, take a look at the list. See if the fund company is concentrated in one area, buying foreign bonds or otherwise taking unusual risks. It doesn’t require an MBA to figure it out, she says.

If you are investing in individual bonds, read the offering circular and pay particular attention to where the proceeds are going and how bond holders will be paid back, she suggests.

What if the answer is “arbitrage” and you don’t know what that means? Don’t invest. There are only a few great truths in finance, and one of them is that the best investments are the simplest and easiest to understand.

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“Most people are just looking at yield, and that’s the wrong place to look,” Payden says.


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