As Stocks Struggle, Basic Strategies Endure
At a difficult moment for the stock market, financial advisors are trying to keep their clients focused on the long term and on the basics of portfolio management -- in particular, diversification.
“I have had two clients calling because they are discontented and concerned about stocks,” said Margie Mullen, a Los Angeles-based financial planner. “The only answer I can tell them is, ‘Let’s go over your goals, your risk tolerance and how your account is set up. If you are well diversified and your portfolio accurately represents your tolerance for risk, there’s not much more that you can do.’ ”
Despite the possibility that stock prices could be on the cusp of a much deeper decline, most financial advisors don’t try to time major market moves for their clients. They say they know their chances of getting it right every time are slim to none.
It’s far smarter, advisors say, for investors to stay in the market in good times and bad -- and to maintain a portfolio that includes assets that are likely to hold up if U.S. stocks fall.
“If people have an appropriately structured portfolio, there is absolutely nothing that they should do in response to a short-term market downturn,” said Tim Kochis, a San Francisco-based financial planner.
Some investors are relearning that, just as they should never be completely out of the stock market, giving up completely on long-term government bonds could be a mistake.
Treasury bond yields have tumbled in recent weeks on worries that the economy is slowing. As yields on new bonds fall, the value of older fixed-rate bonds rises. In a diversified portfolio, the net gain in the value of Treasury bonds since mid-June has helped offset the losses on U.S. stocks.
Although the Federal Reserve appears likely to raise its key short-term rate this week from 1.25% to 1.5%, the credit-tightening campaign may be short-lived if the economy softens, said Jeffrey E. Gundlach, manager of the TCW Galileo Total Return Bond Fund in Los Angeles.
The weak July employment report issued Friday “has to make the Fed rethink its game plan,” Gundlach said. “If it’s not going to be on a tightening-every-meeting regime, which was priced into the bond market, then bonds are much safer than many people believed.”
But other money managers warn that, just as investors shouldn’t have been rushing into the stock market as it soared early this year, they should be wary of loading up on Treasury bonds now, with yields at their lowest levels since spring.
The yield on a five-year T-note was 3.38% on Friday, down from 4.10% on June 14.
“This probably is a good trigger to make a gradual reduction” in longer-term bonds in a portfolio, in favor of shorter-term maturities, said Tad Rivelle, a principal at Metropolitan West Asset Management in Los Angeles.
Gradual moves are exactly the kind many financial advisors favor. It’s known as rebalancing a portfolio -- that is, chipping away at assets that have soared in price and using the proceeds to slowly add assets that have slumped in price.
That strategy is counterintuitive to most investors, who often want to buy more of whatever is rising, but it’s the soul of smart portfolio management, said Scott Leonard, president of Leonard Wealth Management Inc. in Newport Beach.
The problem for many people is that they aren’t diversified enough to begin with, advisors say.
Investors often expect everything they own to rise at once. But “if all your stocks are doing well at the same time, you probably don’t have a well-diversified portfolio,” Leonard said.
Foreign stocks, in general, were a lousy investment in the 1990s compared with U.S. stocks. But that has reversed in this decade.
Over the last three years, the average foreign stock mutual fund has risen 4% a year, according to Morningstar Inc. The average U.S. stock fund is down 1.3% a year in the same period.
This year, many foreign markets again are faring much better than major U.S. stock indexes. Indeed, the U.S. Nasdaq composite index, down 11.3% year to date, is among the worst-performing of market indexes worldwide.
If the dollar continues to weaken on concerns about the U.S. economy, that can be a boon for Americans who own foreign stocks because it automatically makes foreign stocks worth more when translated from their stronger currencies into dollars.
Good diversification within the U.S. market also is important, advisors say.
Although the Dow Jones industrial average is down 6.1% year to date, a Bloomberg News index of real estate investment trust shares is up 3.8%. The Dow index of utility stocks is up 6.6%.
Other assets that are showing positive total returns (price change plus interest or dividend income) this year include high-yield corporate bonds, municipal bonds and many energy stocks.
The central point of diversification, advisors say, is that although it may mean lower overall returns in good times -- when the riskiest stocks are soaring -- it also sharply limits a portfolio’s losses in bad times.
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Times staff writer Josh Friedman contributed to this report.
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Foreign versus U.S. stocks
Many foreign stock markets are faring much better this year than the U.S. market. Here’s how some key markets have performed, using returns as calculated in dollars (in other words, what U.S. investors would realize after adjusting for currency fluctuations).
Country/index and year-to-date gain or loss
Czech Republic/Prague-50 +19.4% Mexico/IPC +10.5 Australia/All ordinaries +1.5 Britain/FTSE-100 -0.1 Japan/Nikkei-225 -0.3 Hong Kong/Hang Seng -1.2 Canada/S&P-TSX; -1.7 Italy/MIB-30 -2.2 U.S./S&P; 500 -4.3 U.S./Dow industrials -6.1 Brazil/Bovespa -7.1 South Korea/composite -7.1 Germany/DAX -8.4 U.S./Nasdaq composite -11.3
Sources: Bloomberg News, Times research
