- The Washington Times - Thursday, January 1, 2004

Impressed by Wall Street’s 2003 run, many investors are looking to raise their stake in the market, but financial planners and portfolio managers say investors should proceed with caution because the stellar returns aren’t likely to last into the new year.

While some analysts have upbeat predictions for 2004, others say the easy gains have been made, and stocks have overshot their targets. Some of the enthusiasm of the past year may carry into the first quarter, but contrarians say equity returns will start to shrink as year-over-year comparisons suffer.

“Entering the market is becoming trickier now,” said David A. Chalupnik, head of equities for U.S. Bancorp Asset Management. “We’ve really been trying to work with our clients to set the right expectations; that is, much more muted gains in the stock market and not such great returns in fixed income.”

It’s a difficult message for investors to accept, especially when the market appears to be surging. The Dow Jones Industrial Average muscled solidly past 10,000 this month, and the Nasdaq Composite Index moved back above 2,000 just before the end of the year.

On the crest of this positive wave, mutual fund investors seem to be upping their antes, as well. Data compiled by the Investment Company Institute shows that $82.4 billion flowed into the nation’s mutual funds in November, raising their combined assets 1.2 percent, to $7.235 trillion.

At the beginning of 2003, Mr. Chalupnik’s firm and others bet on technology stocks and small-cap companies, because they were poised to see the best gains in the recovering economy. But in the new year, there are no strong signals favoring any particular sectors.

Some pundits are talking about old economy stocks, such as steel and autos, but investing veteran Sam Lieber, president of the no-load Alpine Funds, said he’s not sure that’s the way to go, especially because stocks such as Alcoa Inc. are priced fairly high.

Mr. Lieber, whose seven-fund family includes a nontraditional real estate equity fund that rose more than 80 percent this past year, recently began an equity income fund focusing on stable, large-cap dividend payers. More than 200 companies in the Standard & Poor’s 500 index increased their dividends in 2003; these income-producing stocks became even more attractive after the dividend tax cut took effect in May.

“We’re looking for companies that are very solid, with stable positions and dominant market niches,” Mr. Lieber said. “We think since they’re not focused on growth, they may want to give some of their extra cash back to shareholders.”

For smaller fund investors not sure where to put their money, equity income funds may be a safe way to enter the market, Mr. Lieber said. If you prefer a balanced fund, which combines stocks and bonds, you should be very selective, with an eye toward how the manager handles the fixed-income portion of the portfolio.

“Make sure you get a fund with a manager who’s been there a good 10 years,” Mr. Lieber said. “It’s a tough environment to invest in, tougher than the last five years. You want someone who’s seen this type of business cycle before.”

Mr. Chalupnik, whose firm forecasts an 8 percent gain in the S&P; 500 index for the new year, agreed that investors should move out of riskier investments — such as the tech and small-cap stocks that led the rally in 2003 — and into higher quality, more stable areas of the market. U.S. Bancorp is shifting away from tech and toward larger-cap stocks with broader balance sheets.

“This is not the time to leap into aggressive growth funds,” Mr. Chalupnik said.

There are a number of difficult-to-predict factors that could derail the markets in 2004, he said, including the risk of another major terrorist attack on domestic soil and the possibility of a significant increase in interest rates.

Other risks include the weakening dollar and the nation’s rising deficit, which ultimately may lead to inflation and higher interest rates. It’s likely to take awhile for those pressures to build, however, and the Federal Reserve has indicated that it will not raise rates anytime soon. Some observers say the Fed won’t raise rates until after the presidential election in November.

Still, with some analysts eagerly predicting that the Dow will strike 11,000 by midspring, there’s little to dampen the generally cheerful mood on Wall Street.

But Patricia Jennerjohn, a financial planner in Oakland, Calif., urges her clients to “lay off the hype, both the fear-mongering and greed-inspiring kinds,” and stay focused on long-term plans.

The problem is, humans aren’t wired to think long-term, she said.

“That’s why you have to not pay attention to the news, because you’ll get sucked into this short-term thinking,” Ms. Jennerjohn said. “You have to give up the emotional connection to your investments. This really is a long-term game.”


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