Strategist Recommends Cutting Stock Holdings

To raise cash or not to raise cash?

Prudential Securities’ chief investment strategist, Greg Smith, said Monday that investors should reduce the percentage of stocks in their portfolios.

Smith recommended investors cut their stock holdings to 70% from 75%, and raised his recommended cash holding to 20% from 15%. He left unchanged his recommendation that investors keep 5% of their assets in bonds and 5% in real estate.

“With the battle between the Fed and the strong economy, investors may have to come to grips with a stock market, as defined by the S&P; 500 and the Dow Jones industrial average, with limited upside,” Smith said in a report to clients. “Profits should continue to be sensational, but questions regarding valuation and sustainability will persist.”

Smith is more bullish on stocks than the average analyst surveyed by Bloomberg, who recommends a 63% stock weighting.

Meanwhile, Lehman Bros. strategist Jeff Applegate, who recommended investors maintain the same portion of stocks in their portfolios even as the Nasdaq composite index slumped by a third, said it’s too late to cut back on stocks.

“Had we assessed that the market was in for such a prolonged breather--it’s flat so far this year [as measured by the S&P; 500]--we shoulda, coulda, and maybe even woulda raised cash,” said Applegate in a note to clients. Now, “with the market already priced for at least a couple Fed tightenings, it strikes us as rather late to lighten up on stocks.”

In April, Applegate raised the cash portion of his model portfolio during the market’s slide, but he did it by cutting bonds to zero from 10%. His suggested asset mix is now 80% stocks and 20% cash.