BY JEAN M. DESJARDINS,
SALOMON SMITH BARNEY
The first six months of the new millennium have left investors feeling as if they're on a roller coaster. The phenomenal gains of the past several years of ups and downs have given way to phenomenal losses for investors whose portfolios were heavily weighted in high-tech "e"stocks. Coupled with the Federal Reserve's repeated increase of interest rates in an attempt to thwart inflation, it is not surprising that investors are concerned about preserving their wealth. What can investors do during these turbulent times?
Investors can protect their capital by selling weaker securities in their portfolios, replacing them with high-quality stocks which offer consistent growth and solid fundamental-defensive stocks including selected electric and telephone utilities, food and drug companies. Or, consider the following strategies to help smooth the bumpy ride.
Use dollar cost averaging. Invest a fixed amount on a regular basis without regard to market fluctuations. More shares would be bought when the price goes down, and fewer shares when the price goes up. As a result, the average price per share may be lower over time.
Adopt a more defensive strategic asset allocation for your portfolio. Although the extended bull market may have helped equity holdings grow, it also may have caused a portfolio's asset mix to diverge from its original goals. Asset allocation is simply the process of diversifying funds among various asset classes, including stocks, bonds, and cash equivalent investments (the asset mix). Adopting a more defensive asset allocation strategy generally means decreasing the proportion of assets invested in, say, stocks, and reallocating those funds to a more risk-averse investment class, such as cash or shorter-term bonds.
Make fixed-income part of your strategy. Investors looking to reallocate a portion of their assets into a relatively stable sector of the bond market might consider high credit quality bonds offered by large-capitalization companies. Choosing high-grade corporate bonds could enhance portfolio stability and liquidity, and provide a substantial yield over comparable maturity Treasury notes.
But don't overlook intermediate-term tax-exempt municipal bonds. The positive slope of the municipal bond yield curve currently offers the best relative value in intermediate-term municipal issues (10- to 18-year).
Consider convertible securities. Although convertible securities prices rise and fall as other securities do, they tend to be more stable than most equities. Like a bond, convertible securities provide a competitive yield. But unlike most bonds, convertible securities can be converted into the common stock of the underlying company at a predetermined ratio. When markets are declining, the convertible security's yield provides some degree of protection. When markets are rising, investors may exchange their convertible securities for the greater growth potential of the issuer's common stock.
The best strategy for investing in volatile markets should be based on individual financial needs, investment goals and attitudes toward risk. No investment strategy, however, can truly guarantee a profit or protection against loss. It is important to maintain a long-term perspective and avoid investing emotionally. And, don't forget that this volatile market may also offer investment opportunities. Dollar cost averaging does not guarantee a profit nor protect against loss.
Ms. Desjardins is a financial consultant at Salomon Smith Barney, 767 Fifth Avenue, New York City, 212-230-3531.