Donald Klumb is not worried about his portfolio despite having weathered the bear-market blues.
He is taking account of his assets after an 18-month decline in the stock market. Yet despite a market downturn, a prolonged economic slump and the indefinite war on terrorism in the wake of the Sept. 11 attacks, Klumb, like most long-term investors, is convinced that the best place for his nest egg is in stocks.
Klumb estimates that he lost about $50,000 in the market downturn, though, like many stalwart long-term investors, he feels confident the market will recover and plans to keep his stock and stock mutual-fund investments intact.
“I was more concerned a year ago when I thought I’d lose a lot more than 20 percent,” Klumb recalls.
With 80 percent of his portfolio in five stock mutual funds, he plans to “let it ride.” Even though he retired nearly eight years ago (at age 56), he’s sitting on gains from the 1990s that more than doubled his portfolio’s value, and he has plenty of cash to ride out the storm.
Financial advisers all over the country are telling their clients, if you don’t need the money now, stay the course. Over the last 75 years, stocks have produced an 11 percent annual average return, which is double the return of bonds and dwarfs the returns you’d get on a 2 percent money-market fund. But to achieve this return, you can’t expect it every year and have to stay in the market.
“You have to look at the long haul, stay consistent with a long-term approach,” advises Paul Farrell, author of “The Winning Portfolio” (Bloomberg, 1999). “By investing in stocks and forgetting about it, you’ll see a return from 10 percent to 12 percent,” he adds.
Despite the punishing markets of the last year and a half, long-term investors who don’t have immediate income needs are staying in stocks. A survey by the Profit Sharing/401(k) Council of America found that only a fraction of assets (0.58 percent) were moved out of stocks on Sept. 17, the first day of trading following the terrorist attacks.
The key in knowing how to invest in a bear market is projecting your immediate income needs. If you are living on a fixed income, plan to retire soon, are unemployed or in an unsteady industry, you need to be thinking about bulking up on cash.
If you are looking at an impending layoff, for example, financial planners recommend you keep at least one year’s worth of expenses in cash. One of the best vehicles for cash is a money-market mutual fund.
You’ve no doubt noticed that money-market fund rates have plummeted to their lowest levels in their 30-year history. The average taxable money-market fund rate is now about 2.7 percent, according to www.imoneynet.com (an excellent source for finding the top-yielding money funds). You can boost your yield by switching to a higher-yielding fund from a low-yielding bank money market account.
While they are not insured by the Federal Deposit Insurance Corp., the top-yielding money-market funds waive their management fee — the amount deducted from your funds to manage the account. The TIAA-CREF Money Market Fund was recently paying a 3.27 percent compounded yield and will waive its management fee until 2006, which automatically boosts return.
Another higher-yielding income vehicle for longer-term income needs is the inflation-adjusted savings bond, or “I-bond.” This unique treasury vehicle pays interest for up to 30 years and offers a base rate based on U.S. Treasury securities, plus a bonus rate based on the cost of living, calculated from the consumer price index.
Although the rates will probably be adjusted downward Thursday, the most recent yield was a healthy 5.92 percent. Your principal is guaranteed (though income is not) and you can buy them at any financial institution. See www.publicdebt.ustreas.gov for more details.
If you are seeking to enhance return and take a little more risk, consider an ultra-short-term bond fund. These mutual funds carry bonds with maturities of less than two years. You could lose up to 2 percent of your principal if interest rates rise, but they are worth it for a portion of your income portfolio.
Funds worth looking at include the Strong Advantage fund and the Vanguard Short-Term Bond Index .
Jim Platania, a certified financial planner based in Mt. Prospect, recommends the Pimco Short-Term Bond fund and the Franklin Income fund if you have a need to boost returns while taking slightly more risk. “I use these funds as a foundation for my retired clients,” he says.
Dennis Dosse is between jobs, having taken a corporate buyout at age 50 and ready to start a new job in Minneapolis. The events of the past year haven’t dissuaded him from investing in technology and telecommunications stocks because he knows the demand will be there for building infrastructure in corporate America. As a former manager for Ameritech, he knows that corporations still need to invest in better phone and data lines and equipment.
“I wouldn’t sell in this market, it would be foolish,” Dosse says. “Consumer confidence will come back.”
There are a number of bargains that have been either oversold or trashed in the bear market. Many stocks in the telecommunications, information technology and software businesses are good candidates to buy and hold in the current climate.
For most investors, stock mutual funds are the best way to find bargainsBut you don’t have to take the huge risks of a “sector” fund that will concentrate your risk in one or two industries. The lower-risk alternative is a “balanced” or “hybrid” fund that invests in at least 60 percent stocks, but tempers the overall volatility by buying about 40 percent in bonds.
One of the best funds in this category has been the Dodge and Cox Balanced Fund, which has a 13.30 percent three-year annual average return, according to Morningstar.com.
If you really feel a need to jump into the ravaged technology/communications sector, a long-term buy and hold is the Seligman Communications and Information Fund. A bear market is an ideal time to reduce overall risk in your portfolio and that means eschewing sector funds and adopting a more diversified approach. The simplest way of finding bargains is through a diversified stock mutual fund that uses the value approach.
These managers don’t shop for stocks “at retail,” they are always picking up stocks that have potential appreciation but are priced below what they call a “fair market value.”
In this bear market, when profits are being battered, mid- and small-cap value stocks that are not as dependent upon earnings growth are favored.
“Value (funds) has been a real winner,” says Platania. “Small-cap value has been the best-performing asset class in the last year.”
Among the best funds in the value category are the Clipper Fund, which turned in a 37.4 percent return last year and is up about 3.17 percent this year; the Fidelity Low-Priced Stock Fund, up 18.8 percent in 2000 and about 12.5 percent year to date; and the Royce Low-Priced Stock Fund, up 24 percent in 2000 and 5.24 percent year to date.
No matter how you view the current market crisis and war on terrorism, there will be a rebound. Bear markets since 1950 have generally lasted an average of 18 months, followed by a robust turnaround.
Most market gains happen in a handful of days, so if you don’t need your money right away, sit tight. You will be rewarded.
