It’s a scary time to make these moves. On alternative days, most stocks seem to be either wildly overpriced or tanking. There’s a surreal quality to all the activity: oil companies aren’t profiting from high gas prices; venerable investor Warren Buffett felt he had to apologize to his shareholders, and the only people who seem to be scoring are those lemmings who keep buying what everybody else already did, fundamentals be damned. Someday, wiser heads may prevail, but not just yet.
So, where should you commit new money? The answer is easy: wherever it isn’t. The old allocate-your-assets-and-rebalance-regularly theory of investing may be out of favor; it isn’t out of merit. “The only 100 percent guaranteed measure of long-term disaster is to bet the entire farm on one style, or strategy or sector,” says Harold Evensky, a Coral Gables, Fla., investment advisor. Someday, the highest flying no-profit techs will come back to earth (witness MicroStrategy’s heart-stopping 70 percent slide in the first two days of last week), and as the Biblical prophecy goes, the last shall be first. Dull but profitable blue chips will cash in; the Asian tiger will roar again; the smallest, most overlooked firms will shine. So turn off CNBC for a few minutes and check out your own portfolio instead. Sell where you’re overweighted, buy where you’re underweighted and consider these key market segments before you ante up.
Tech stocks, a.k.a. “The New Economy”: It will take more than last week’s halfhearted and quickly reversed sell-off before there are any serious bargains in tech stocks. “The revolution has been fully discovered and fully priced,” says John Rekenthaler, research director of Morningstar.
That doesn’t mean tech is played out, or that investors can afford to ignore it altogether. But be a little cautious, because the technology leaders already have a fair amount of investor frenzy built into their share prices. Keep your tech load to 25 percent or less of your stock portfolio, and be careful where you focus, says Internet Fund manager Peter Doyle. He’s buying established tech companies that already have profits and irreplaceable assets (like radio frequencies), such as Winstar Communications and Advanced Radio Telecom Corp. And watch your prices. It is possible to pay too much for a great company.
Ye Olde Economy: Something is amiss when the combined market caps of 10 Dow companies–General Motors, Bank of America, Disney, Eastman Kodak, J.P. Morgan, McDonald’s, Honeywell, Merck, United Technologies and Alcoa–are worth just one Internet company, Cisco Systems. But that is what the market’s great love affair with tech stocks has done to the old standards, and that’s after last week’s Dow rebound, according to data from Yahoo! Don’t count out old standbys, especially those that own worthwhile names, who are pouring money into new technology, are profitable and are favorably priced. “The market said, ‘Hey, maybe we want a little bit of earnings, too’,” says Andrew Cupps, manager of the tech-heavy Strong Enterprise Fund. He spent last week picking up some hospital and financial services stocks, including Tenet Healthcare and Charles Schwab.
Small Company Stocks: It’s good to have some money in small-company stocks. One place to commit now is the place where nobody’s buying: small-cap value funds. These funds focus on small companies that are underpriced relative to their earnings and assets, and they are the cheapest segment of the mutual-fund market now. “I feel like I’m preaching and nobody’s in church,” says William Nasgovitz, who is hanging tight with underpriced small firms in his Heartland Value Fund.
Foreign Stocks: Foreign stocks may get a boost from government reforms, which will bring 401(k)-like retirement plans to Europe and Japan before the year is out. As workers in those countries start investing in their own markets, their rising tide might lift other boats. “Right now it looks to me like the year 2000 will be the fastest economic growth of the world economy since 1988,” says Henry Herrmann of fund company Waddell & Reed.
With megamergers, consolidation and investment in technology, Europe looks like America in the late 1980s. And some of the best tech stocks–Nokia, Ericsson, Vodaphone, to name a few–are foreign.
Keep some of your funds overseas, but unless you want to make international investing your full-time hobby, think about just parking between 10 and 20 percent of your stock money in a broad-based foreign stock fund and letting someone else do the work.
Cash: There are worse things in life than taking a wait-and-see position, and many experts expect continued volatility until the Fed has raised rates one or two more times and squeezed some fluff out of the highest flyers. “Greenspan will win,” says Charles Pradilla, chief investment strategist at SG Cowen Securities. “It is a very bad bet to go against him; he controls all of the money and can change all of the rules.”
If Alan Greenspan isn’t going to take “grow” for an answer, it wouldn’t hurt to position some of your cash where it will capture every last rate increase along the way and still be waiting for you when you need it: money fund yields are pushing 6 percent, and will move up as the Fed continues to nudge. That may not be IPO-exciting, but your money will be safe and ready for action the next time this crazy seesaw market presents a round of buying opportunities.
