Cool Heads Needed on Hot-Cold Wall Street
The loudest voices on the subject of the stock market are coming from two distinct camps.
One camp says it’s time to buy, period. They say the 17-month-long bear market has left many stocks at bargain levels that will look absurd when investors peer back years from now.
If you assume the economy will stage some kind of rebound in 2002, the stock market is bound to anticipate it, the bullish camp argues. That means prices are certain to begin rising sooner than later, they say--a view that got a boost with Friday’s sharp market rally.
The other major camp contends that any near-term rally will be a trap. With or without an economic recovery in 2002, the market’s fundamental problem is the same, they say: Most stocks, they argue, are fairly valued at best, and more likely still are overvalued relative to companies’ earnings power.
It’s simply too early to start committing substantial new money to the market because it’s probably going lower before it goes higher, this camp maintains.
Between those two camps are plenty of less vociferous investors whose market outlook is more gray than black or white. They lack conviction about share prices overall moving definitively in either direction, though they allow for fireworks among individual stocks and industry sectors.
But the next few weeks could change some minds: The market’s trend in September, after a summer that saw many stocks mired in narrow trading ranges (and lately, more issues at or near the bottom of their ranges), could be the deciding factor for investors who now are neither aggressively bullish nor aggressively bearish, but who might prefer to be solidly in one camp or the other.
In other words, a hot rally in September could be enough to convince a lot of ambivalent investors that the bulls have the right idea.
If the market sinks instead, more of those same fence-sitting investors could decide that the smart move is to throw in the towel altogether and bet with the bears.
Yet if the last two years on Wall Street have taught anything, it’s that all-or-nothing attitudes toward investing are extremely risky (remember technology). It may feel psychologically more fulfilling to have extreme conviction about a stock or a strategy, but an objective investing approach is more likely to provide a portfolio with the kind of volatility buffer that will ensure that an investor stays in the game long term.
When you’re objective about your money, you’re more likely to be diversified and realistic about risk.
Should you be looking to buy stock now, sell, or just hold steady? Rather than be swayed merely by the market’s move, if any, in the next few months, consider building or rebuilding your strategy based on these steps:
* Calculate your asset mix--the sums you have in various types of assets (stocks, income-generating investments, real estate, etc.), each as a percentage of your total portfolio.
How close is the current mix to what you’d really like to have, given your investment time horizon, risk tolerance and growth needs? Your answer should be the starting point for any changes you make to your portfolio.
* Write down your main financial goals for the next 10 to 20 years. If you’re married this is an exercise you should do with your spouse, so you both agree.
What will it cost you to meet your goals? Based on the assets you have now, and what you think you’ll need, you can get a better sense of whether you can and should be investing more aggressively or less aggressively.
* Make a list of stocks and/or stock mutual funds you would most like to own for the next five years, and why. (Yes, you’re guessing about what’s attractive, but so is everyone else, so don’t let that deter you.)
Set price parameters for the stocks--for example, what’s the most you’d be willing to pay? Also, if you buy a particular stock, how much of a loss could you tolerate if the price begins to slide (i.e., what’s your threshold for pain if the bears are right about the next few months)?
* Make a list of assets you are considering jettisoning. Why might you want to sell? Why haven’t you sold until now? (“Inertia” is an OK answer. So is, “I’m waiting for a price rebound.”)
The best reason to sell an investment is because you want to put the money into a better idea. But a “better idea” doesn’t always mean an asset with a potentially higher return. It could just mean a safer asset.
If you haven’t thought about selling, consider whether year-end tax planning might become a factor in motivating you to get rid of something in the next few months--for example, to realize a loss that can be used to offset taxable gains you have or expect to have.
* If you invest via a tax-deferred savings plan sponsored by your employer (such as a 401[k] program), familiarize yourself with all of the investment options offered in the plan.
If you haven’t studied those options in a while, you may not be aware of potentially attractive funds or other offerings that you either passed over previously or that have been added.
* Take a closer look at how you handle your cash--that is, the sums you keep in highly liquid accounts such as money market funds or bank savings accounts.
Returns on cash assets are paltry these days, courtesy of the Federal Reserve’s seven interest rate cuts this year. But if you can improve your yield to 4% from 2%, you’re still doubling your return, and perhaps with minimal effort.
For the portion of cash that is savings you don’t expect to need any time soon, consider a one-year bank CD, a short-term bond mutual fund or another higher-yielding, relatively low risk alternative.
* Your portfolio aside, what about the rest of your personal finances? Should your primary concern now be reducing debt rather than putting more money into the stock market, even if it rallies?
Do you have enough insurance coverage (life, health, property) to protect yourself and your family? Do you have a will?
* If you own mutual funds, besides scrutinizing their performance this year, resolve to also scrutinize management fees. Are you paying above-average fees for funds whose performance is decidedly below average?
Taken together, these steps could help keep you from reacting with your gut to the market’s next move, whatever that happens to be. It’s your head that should control your reaction.
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Summer of Dull
Despite Friday’s rally on Wall Street, the blue-chip Standard & Poor’s 500 index has edged lower for much of this summer, though it has traded in a relatively narrow range. The index, at 1,184.93 on Friday, is off 6% since June 1 and is down 10.3% since Dec. 31.
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Source: Bloomberg News
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Tom Petruno can be reached at tom.petruno@latimes.com. For recent columns on the Web, go to https://www.latimes.com/petruno.
