Don’t Put Off Til Tomorrow What You Can Invest in Today

In the bull market of ‘96, the only thing more nerve-racking than being heavily in stocks is being out of them.

If you’re still out, and kicking yourself for it, or you feel as if you’ve never quite invested enough in the ‘90s, or you have a large lump-sum pension distribution on the way and wonder what to do with it, you’ve come to the right newspaper column.

Enough talk about “10% corrections,” bear markets and other assorted stock mayhem. What if, despite everything that can go wrong for the market, a year from now share prices in general are higher than they are today? How much worse will the uninvested and underinvested feel then?

Herewith, advice from four veteran investment pros who daily face new clients with fear in their eyes and money burning holes in their pockets:

* Sheldon Jacobs, editor, No-Load Fund Investor newsletter, Irvington-on-Hudson, N.Y. Everybody’s got a good reason for being hesitant about plunging into stocks at their current near-record heights. But here’s what Jacobs tells new clients with wads of cash: “We’re going to immediately put 50% of the money into the market, and the other 50% will be invested over the next three to four weeks.”

Dollar cost averaging--investing a large sum of money in small increments over a year or longer--is “a mistake,” Jacobs argues, though he admits his is a controversial stance. “If you’re concerned about how high the market is, you should go in [via] more conservative stock funds,” he says. But for truly long-term investors, the point is to get in before more time gets away from you, he says. “You’re better off establishing your risk level and being there.”

Jacobs’ favorite conservative stock funds include T. Rowe Price Equity Income ([800] 638-5660), Invesco Balanced ([800] 525-8085), Janus Growth & Income ([800] 525-8983) and Baron Growth & Income ([800] 992-2766).

For more aggressive investors who can handle greater volatility for a potentially higher return, Jacobs uses funds such as Stein Roe Capital Opportunity ([800] 338-2550) and PBHG Growth ([800] 342-5734).

Obviously, many investors would want to have money in both conservative and aggressive funds, with the mix depending on your risk tolerance.

What about bonds, especially for older, more risk-averse investors? Jacobs isn’t convinced that bonds, as volatile as they have been in recent years, are the best buffer against a stock market decline. Rather than the traditional 60/40 stock/bond portfolio mix for very conservative investors, Jacobs says 75% stocks/25% cash (money market accounts) may make more sense. “The cash is your risk reducer,” he says.

* Robert Markman, Markman Capital Management, Minneapolis. Markman, like Jacobs, creates stock fund portfolios for clients. And like Jacobs, he advises that people make a decision about what they want to own and just do it.

Risks, Markman notes, are ever present. You can tell yourself there will be a better time to buy, but when that time comes you may still talk yourself out of it. “Six months from now the world is going to be just as wacko,” Markman says. Staying away from stocks now “just puts off the inevitable reckoning for what kind of investor you are.”

But he also concedes that you shouldn’t be buying stocks today without visualizing what a bear market would do to stock values--meaning a decline of 15% to 50% or more, depending on the security--and what your reaction would be. “Structure your portfolio for what you can live with on the downside,” Markman advises.

He steers aggressive investors into funds such as PBHG Growth (obviously, a favorite among investment pros) and Van Wagoner Emerging Growth ([800] 228-2121).

For conservative clients, Markman likes Robertson Stephens Growth & Income ([800] 766-3863), Heartland Small Cap Contrarian ([800] 432-7856) and the Merger Fund ([800] 343-8959), which focuses on takeover targets.

He is less enamored of foreign-stock investing than many pros. U.S. stocks may be more expensive than many foreign shares, but that is because U.S. businesses’ prospects are better than those of many foreign firms, Markman says. “People who know what they’re doing know that you don’t necessarily buy the cheaper product.”

* Morgan White, Woodside Asset Management, Menlo Park, Calif. “We’re as nervous as anyone else” about the stock market, White concedes. But as new Silicon Valley clients come to him bulging with cash from exercised stock options--and wondering what to do with it all--White says staying sidelined isn’t an alternative.

His solution is to build highly diversified portfolios using securities whose returns historically tend not to be correlated with each other. In other words, he wants to own some assets that will zig when others zag.

“If you can invest in uncorrelated areas, you lower your risk” overall, White says.

He also calls this the “palm tree strategy” of investing: “Lay down enough roots so you can sway with the wind” when it blows.

White allocates a client’s stock portfolio by slots. Every portfolio gets 50 slots. Currently, he uses 17 of those slots for individual stocks, ranging from toiletries maker Carter Wallace to agricultural equipment producer Agco; six for natural resources investments, such as shares of Royal Dutch Petroleum and Atlantic Richfield; 15 for foreign securities, principally mutual funds such as T. Rowe Price International ([800] 638-5660); and 12 for real estate investment trusts, a securitized (and high-dividend) way to own commercial real estate.

For investors who want a bond component to their portfolio, White likes to use a mix of individual Treasury securities maturing within five years. But with money market funds yielding 4.7% or better, and five-year Treasury note yields at 6.6%, White isn’t sure that’s enough of a difference to merit choosing bonds over cash for a portfolio buffer.

“I would rather sacrifice yield [by staying in a money fund rather than in bonds] so that I have cash available to buy stocks when they decline,” he says.

* Werner Keller, FundMinder, Sherman Oaks. Forget guessing the timing of the next market downturn, Keller tells clients who use his service to build mutual fund portfolios. The key, he says, is to stay invested in bull moves, but to have an ironclad exit plan that will automatically get you out before severe damage is done in a bear market.

So investors using Keller’s service have a “stop-loss” point for every fund owned: If the fund drops somewhere between 3% and 8% it is sold, and the assets are shifted to cash. When the market (and funds) begin to climb again, FundMinder’s system automatically triggers buy orders after the market has picked up a pre-specified amount of momentum.

Keller’s strategic-growth portfolio of funds currently is 49.2% invested in U.S. stock funds, 27.7% in international funds, 17.3% in special-situation funds and 5.8% in a money market fund. His roster of funds used includes Fidelity Low-Priced Stock ([800] 544-8888), T. Rowe Price Equity Income, Templeton Foreign ([800] 237-0738) and Invesco Gold ([800] 525-8085).

Keller’s more conservative portfolio is 43.9% in U.S. stock funds, 18.7% in international funds, 32.4% in bond funds and 5% in a money market fund.

With preset selling points, investors can be less concerned about investing big sums all at once in this market, Keller notes. “If this is the market top and I’ve just put your mother’s $100,000 into the market, I have to make sure that it doesn’t turn into $63,000,” he says. Over time, “the market will reward you if you just don’t make big mistakes.”