Wednesday, March 17, 1999
Q & A: How crests can affect investing
BY AMY HIGGINS
The Cincinnati Enquirer
Whether you're glued to CNBC all day or surf Quote.com, chances are you've been watching the Dow Jones Industrial Average on its unprecedented climb toward the 10,000 mark — and wondering how it affects your investments.
We posed some investing questions to the Enquirer Money Panel:
Why has the Dow made such huge gains in a relatively short period?
This prolonged and unprecedented bull market has been self-perpetuating, the panelists said. As values increase, interest in the market grows, and more people pour money into it, driving prices even higher.
“There's been such a broad interest by everybody in the stock market the last several years,” Rosemary Haddad, Merrill Lynch senior financial consultant, said.
Why hasn't my portfolio grown as much as the Dow?
Because good portfolios are balanced and diversified, holding much more than just the 30 stocks that make up the Dow Jones Industrial Average, the panelists said.
Ms. Haddad said different parts of the market move at different times, and the last few years have been the large-cap growth stocks' time to shine. In 1998, 40 percent of the 28.6 percent gain in the Standard & Poor's 500 Index was due to 10 stocks, according to Merrill research. The average stock in the Russell 3000 — an index of the 3,000 largest capitalized stocks — gained only 1.6 percent. Diversified portfolios are designed to balance the large swings in individual stocks.
Why have smaller stocks done poorly compared with the Dow 30?
“Smaller stocks are out of favor because the money is going to the high-tech companies,” said John E. Harris, certified financial planner with the Oxford Financial Group.
More money pouring into the big-name companies has been pulling the money away from companies with smaller capitalizations. “And there's only so many stocks to go around,” he said.
Aren't the international economic problems that caused downturns in 1997 and last fall still around?
Yes, but who's paying attention? Ms. Haddad said some think that the Asian woes aren't going to get any worse and the U.S. economy will hold strong. But many people just watch domestic economic indicators, which point toward continued growth, or even the market itself.
“I think they're focused on this rising U.S. market ... and a continuing good economy,” Ms. Haddad said.
What should I do know? Keep buying or take my profits and run?
Francis J. Niehaus, a certified financial planner and attorney with Niehaus Financial Services in Cincinnati, says it all depends on when you need your money.
“If you need income in the near future, now might be a good time to consider selling particular stocks or mutual funds that might be peaking in value,” Mr. Niehaus said.
Historically, the market has always increased over time, so for long-term investing, it's always the best place to be. People who are more averse to risk or want liquidity probably shouldn't be in stocks to begin with.
“We still believe there is only one proven strategy — the long-term asset-allocation strategy,” said Mr. Harris, who predicts that the Dow will hit 25,000 by 2012, or even sooner.
Don't try to time the market, the panelists said. Many people might have thought the market was overvalued and sold three years ago when the Dow broke 6000. “If you came out thinking it was too high, you missed it,” Ms. Haddad said.
Still, some investors might want to adjust their allocations, such as moving money out of the Dow stocks into companies with smaller capitalizations, Ms. Haddad said. But keep the portfolio balanced, “because you don't know when one class is going to outweigh another,” she said.
What should investors look for in choosing stocks or mutual funds in a rising market?
Of the two most widely held investment philosophies — growth and value investing — Ms. Haddad recommends growth. Those are companies in industries that promise consistent earnings and can withstand a downturn. Growth companies typically offer products or services still in demand in tight economic times.
“It appears that growth stocks are still one of the best places to be,” she said.
Mr. Niehaus recommends dollar-cost averaging during high market times. That means spreading out regular purchases over longer periods, like 10 to 15 months, to take advantage of market dips.
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