In The Stars

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.

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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.

Black Holes

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.