Current economic conditions paint a rosy picture: low inflation, high corporate earnings, high employment and steady wages. It's a scenario almost too good to be true. Many analysts believe the DJIA will rise to 10,000 by 2000, and they may be right. But will it get there without another correction or two? That's the $64 trillion question.
Consider market history: In 1988, analysts predicted Japan's Nikkei index would continue its trajectory through 35,000 on its way to 40,000. Late in 1989, the Bank of Japan raised interest rates and the Nikkei lost altitude until mid-1992, when it finished its swan dive at around 15,000. Many of us can recall 1987, when at the end of a red-hot summer, interest rates rose and stocks fell. This is not to put the burden of the stock market's performance on the shoulders of a rationally exuberant Alan Greenspan. Rather, although history may not repeat itself, why not take a few steps to get out of her way:
- Bonds . . . and not James Bond, either. Bonds?! you cry. Not those stodgy, slow-moving, boring, interest-paying things that my father owns? Well, they're not necessarily your father's investment vehicle anymore. Many portfolios have gotten ahead of themselves, becoming unbalanced because of the terrific performance of stocks over the past two years. Depending on your age, risk tolerance and time frame to reach your financial objectives, consider investing a percentage of your portfolio in asset classes other than stock. To make a long story short, sell some stock and rebalance your funds into bonds and cash. What kinds of bonds should you buy? Consider intermediate-term high-grade corporate or government issues if you're a conservative investor or a fund investing in high-yield corporates if you're more aggressive or have the luxury of a longer time frame. How much should you shift? Consult your financial advisor.
- Super stars. What's faster than computer trading, more powerful than an index fund, able to leap over standard performance figures in a single bound? It's Super Fund Manager! It's almost inevitable: A fund has a fantastic year, and investors want to put part of their life savings into a fund with little or no track record, or one recently opened by a star manager who has just started his or her own investment enterprise. While millions of investors can't be wrong, remember what happens to all those lemmings?
Prevent your portfolio from going off the deep end: Resist getting in on the hottest trend until it's had some time to prove itself. In investing, as in most things, nothing good comes easy, and slow and steady investing can help you reach your goal with minimal bumps. If you just have to have that new, hot investment, be it an initial public offering or a particular mutual fund, read the prospectuses before you invest. That could prevent you from seeing stars when your hot new investment takes a beating.
How can you effect these changes without requiring funding from NASA? If you invest in mutual funds, most fund families allow free or low-cost exchanges into different funds. Many brokerages, both full-service and discount, have programs that allow investors to allocate assets across a broad range of investments, including large and small companies, growth and value portfolios, bonds and stocks, foreign and domestic portfolios, and miscellaneous categories, including contrarian, real estate and convertible bonds, to name a few. Before you invest, get prospectuses on the funds you're considering and make sure you understand the management fees involved. Some plans will shift your assets for you on a quarterly, semiannual or annual basis at no extra cost.
Whatever you decide, here's hoping you start the year with a twinkling portfolio. May the force be with you.