- The Washington Times - Tuesday, December 17, 2002

Mutual fund shareholders currently enamored of money-market accounts and bonds, the bear market's safer havens, may be interested in what some Wall Street firms are saying: Increase your stock holdings.
The Standard & Poor's Investment Policy Committee earlier this month advised that investors raise the equity portion of their portfolios to 65 percent from 60 percent and reduce their cash holdings to 20 percent from 25 percent.
The S&P; committee maintained its recommendation that investors have 15 percent of their portfolios invested in bonds, which have performed quite well throughout the bear market but now face interest-rate pressures after 12 rate cuts in the past two years.
"We believe the S&P; 500 and Nasdaq may advance in the range of 8 percent from current levels by midyear 2003 and approximately 15 percent by year-end," said Sam Stovall, S&P;'s chief investment strategist.
On average, Wall Street's largest investment firms recommend a stock allocation of nearly 70 percent, a bond allocation of nearly 23 percent and cash allocation of about 7 percent.
Before investors start making any changes, financial planners say, they should examine their goals and consider how much risk they can take to determine how much to invest in stocks and bonds and how much to keep in cash.
"They should invest in a way that makes them feel comfortable," said Patricia Jennerjohn, financial planner and head of Focused Finances in Oakland, Calif. "It has a lot to do with their risk tolerance."
Investors should keep in mind that not all of Wall Street is so gung-ho on stocks. Merrill Lynch & Co. strategist Richard Bernstein has lowered his recommended stock allocation to 45 percent from an already low 50 percent.
The bullish move from S&P; and the upbeat sentiment among many Wall Street analysts reflects the growing belief that earnings and the economy are improving and will be even stronger next year. In August, S&P; increased its equity allocation recommendation to 60 percent from 55 percent.
"We think that the economy and corporate profits will improve and that stocks came down to levels that were not justified by the fundamentals. [Investors] overshot the fundamentals," said Arnold Kaufman, editor of S&P;'s weekly newsletter, Outlook.
Mr. Kaufman also said, "Given the continued high productivity and the likelihood that companies will be able to raise profits even in the face of continued competitive pressures on prices, we believe the market can move up at a decent percentage rate from the current depressed level."
Investors also should remember that appropriate asset allocation varies by individual. For investors who are five or more years away from needing to draw on their investments whether for retirement, paying college bills or buying a house Ms. Jennerjohn recommends having 65 percent to 70 percent invested in stocks and the rest in bonds and cash.
As investors near the time when they need to cash in some investments, Ms. Jennerjohn said, they should simply adjust their equity allocations downward.
But she cautions against getting entirely out of stocks, no matter how old an investor is or even if the investor is in retirement. Growth in the stock market historically has been the best way to protect against the ravages of inflation, Ms. Jennerjohn noted.
"You don't want inflation to rust out your portfolio," she said. "You always need to have a growth engine in your portfolio. Over the long run, inflation is your enemy, not [market] volatility."
Ms. Jennerjohn also said that she agrees with S&P;'s overall message that it's time to invest more in stocks.
"Bonds have had quite a run. If you want to buy low and sell high, now is the time to increase your exposure to equities," she said. "You need to look at what seems cheap right now, and equities seem cheap."

ASSOCIATED PRESS

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