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In The Stars

What's in store for your 1998 investments.

Last year will be remembered as the year the stock market went into orbit. Barreling past signposts like a spaceship on a mission to a far-off galaxy, stock investors were treated to a moon shot that made the Mars landing look like a trip to the market. Fortunes were made, and investors all but stopped celebrating the passage of yet another round number as the Dow Jones Industrial Average (DJIA) whizzed past 8,000 into the rarefied air above. But October turned some star-struck investors into star-crossed equity lovers. It seems the principles that govern the universe cause stocks to fall back to earth sometimes. Will that be the case in 1998?

Everyone has opinions, and they seem to be all over the map. Financial publications feature articles with titles ranging from "Sell Stocks Now" to "Ten Stocks for the Year 2000 and Beyond" to the more moderate "Keeping Your Cool When Stocks Are Hot." The real question becomes whether you should buy or sell. And Sir Isaac Newton has been proved right once again--what goes up eventually comes back down. Will it bounce up again?

Longtime stock investors will recall the last time the market turned south--and stayed there, from 1973 to 1974. Many of today's investors have experienced routs and volatility, but the trend since the early 1980s has been upward. Sitting with losses for several years can take more than patience, especially if you planned to use your investments to fund your retirement or your kid's college education. You can call the Psychic Friends Network or look to the stars, but the only way to shelter yourself from the possibility of a correction or a sustained market decline is to diversify. Fortunately, there are galaxies of investments to choose from and more ways to shuffle a portfolio than there are stars in the heavens. Here are four ideas to gravitate toward and a couple you may want to send into orbit.

1. Twinkle, twinkle little star. If you're a fan of large-company stocks like those featured in the DJIA and the Standard & Poor's 500 index, the past two years have been great. During this period, the price of large-company growth stocks has zoomed faster than a rocket, with many splitting as they went. Pity the lover of small and medium-sized companies whose portfolios have lagged behind the aforementioned indices while their fans incurred higher risk levels and greater volatility. Don't jump ship just yet, though: Small and medium cap companies began a rally in the second half of 1997, and despite the market's weakness in October, their momentum could help them outperform the overbought larger companies. (See "Personal Finance," November, for more on small cap stocks.)

Many experts suggest checking out small and medium cap stocks, both of which have historically outperformed large-company stocks. This isn't to suggest that you should move everything to these more volatile sectors, but look at the percentage of your portfolio in large-company issues; if it has increased sharply to price appreciation, consider rebalancing some of your profits and hustle to the Russell (2000 index of small stocks, that is).

2. Smooth landing. The last time you heard "land ho," you might have been learning about Columbus--but let your mind drift toward Real Estate Investment Trusts (REITs). REITs are conglomerates that own, manage and develop real estate properties, including shopping centers, office buildings, apartments, self-storage facilities, parking lots and prisons. Most REITs pay dividends, and their relatively good payouts could help them retain value in case of a market correction. In addition to offering high yields, REITs have the potential of increasing in value.

Though past performance does not guarantee future returns, for the past two years REITs have been on a roll, soaring in value since August 1995. Recently, the trend in this hot market has been mergers and acquisitions. Are you getting in at the high if you invest now? Not if you choose carefully. If you plan to select individual issues, decide whether you're more comfortable with an acquisitor or a company that could be acquired. If you don't want to follow individual issues, consider a managed portfolio and let a professional manager decide.

3. Outer limits. An attack of the "Asian Flu" was the sneeze heard in markets around the world as weaknesses in Asian markets infected U.S. and South American shares. Intrepid investors may want to foray into Asia, but brighter economic pictures in many parts of Europe may make a trip to the continent more of a plus for U.S. investors. Consider what America's long economic boom has done for stock investors; if European nations are at the beginning of an expansion, it could pay for investors to buy stock in international companies. Watch out for big increases in the value of the U.S. dollar, though. While that's great if you're planning a year in Provence or a Roman holiday, it could hurt the value of your portfolio.

4. Calling mission control. Phoning home will take on new meaning for countries around the world in the next century. Contemplate the number of people living in China, India, South America and other parts of the world without telephones in their homes. The thought boggles the mind, and perhaps the portfolio. Telecommunications companies have strong potential for customer growth and, with that, potential to dial up some strong future earnings.

Lorayne Fiorillo is a financial advisor at Prudential Securities in Charlotte, North Carolina. For more information, write to her in care of Entrepreneur, 2392 Morse Ave., Irvine, CA 92614. Past performance is no guarantee of future returns.

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This article was originally published in the January 1998 print edition of Entrepreneur with the headline: In The Stars.

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