Steady Hand on Investment Tiller
Head for the hills!" ... "Hold that line!" ... "Duck and cover!" ... "HEEEELP!"
A broker hears many different cries from investors, but these days many voice the same need: security.
Since the regional economy of East Asia began changing in July from "miracle" to meltdown, feelings of security have become as scarce as vows of poverty in world stock markets.
In New York, the Dow Jones Industrial Average has slumped 13 percent since mid-August, with swings of more than 100 points in more than a dozen trading sessions.
And as the downs get sharper than the ups, investors might find a new comfort zone closer to the conservative side.
Volatility is nothing new on Wall Street. For much of this year, the New York Stock Exchange has endured some of the decade's worst backing and filling.
But until August, the trendline pointed up. Now, worsening volatility worldwide and a few near-free falls have thrown the seven-year bull market abruptly back to earth.
"The market will be very choppy for a while, but for how long is the question," says Margaret Clover Broenniman, a principal at Fulton, Breakfield, Broenniman in Bethesda, Md. Despite the correction, stock prices remain high.
The tumult doesn't necessarily mean the bull market has turned tail, investment advisers say. In fact, brief rebounds indicate that many investors seize on declines as a chance to buy, not panic.
Also, the United States economy persists in its near-perfection. Growth is steady, inflation and unemployment are at quarter-century lows, and there is no hint the Federal Reserve will raise interest rates anytime soon.
Indeed, the current correction prompted some leading strategists to raise the share of equities in their model portfolios. Both Goldman, Sachs and Smith Barney moved on Oct. 28, the day after the 554-point Dow plunge. Goldman went from 60 to 65 percent stocks; Smith Barney from 50 to 55 percent.
But investors who don't feel so boldly bullish can shift to firmer terrain with a range of choices, from sure-footed equity mutual funds to honest-ox certificates of deposit.
Before shredding your portfolios and starting anew, though, remember the basics: Diversify; buy and hold; and don't expect premium profits without taking some risks.
Moreover, unless the current turbulence is unbearable, any tinkering should be around the margins of your portfolio. Sell stocks that have strongly appreciated, especially if rising stock prices have given your portfolio a greater percentage of equities than desired.
Advisers recommend several shelters from the storm:
* Low-volatility stock funds. The share prices of these mutual funds tend not to wander far from their average total return. Remember, though, the steadiest stock funds tend also to be dull performers.
For example, in the past three years UAM SAMI Preferred Stock Income Fund has posed just one-ninth the volatility of Fidelity's famous Magellan Fund. But over the past five years UAM SAMI has returned just 5.2 a year, versus 18.48 percent for Magellan. Such figures can be found in the Morningstar guide in most libraries.
* Real Estate Investment Trusts (REITs). These diversified securities own and manage office buildings, shopping malls, apartments, and other property. They offer higher dividend yields than stocks. And they generally tend to dip less than the Dow. But beware: Their slumps track the whims of the real estate market, which can be as fickle and cruel as the stock market.
* Bonds. With the US budget deficit evaporating and inflation docile, many experts say bonds offer the best risk/return package.
Bond mutual funds offer convenience. But some experts suggest investors can avoid management fees and cut market risk with a "laddered" bond portfolio: Buy one-, three-, and five-year bonds and hold them to maturity. When one comes due, replace it with another five-year note.
"You shouldn't have your horizon much more than five years," suggests Ms. Broenniman, noting the costs of being locked in with a low interest rate when rates rise.
* Bank certificates of deposit and money-market funds. Some economists believe overproduction has pushed supply far above demand in many industries. If corporate profits slump, cash may become king after all.
Shelters From The Storm
* Low-volatility stock funds. Mutual funds that keep an eye on safety, often sacrificing some up-side gains.
* Real Estate Investment Trusts (REITs). Relatively low correlation with stock market.
* Bonds. Some say the time is right for bond mutual funds or a "laddered" bond portfolio.
* Bank certificates of deposit and money-market funds. Nothing is safer than cash or short-term CDs.