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Special Report on Investments and Personal Finance : Return to Simplicity : First Quarter Special Report on Investments and Personal Finance


A simple approach to making money served investors just fine in the first quarter. And the lessons learned from that turnabout may be good for a lifetime.

After two years in which exotic investments and strategies boomed, then busted--from Third World stocks to high-risk bond bets to derivative securities--Americans have gone back to the basics this year.

Blue chip U.S. stocks roared back to popularity in the first quarter, surging to record highs while most foreign stock markets were tumbling. Banks and S&Ls drew about $60 billion in cash into federally insured small savings certificates in the quarter, the biggest inflow of this decade.

And when they shopped for bond investments, many people opted not for open-ended mutual funds, but for individual U.S. Treasury issues or insured municipal bonds--securities with principal repayment guaranteed.

"That's where the money flowed in the quarter: It was definitely toward the simple," said Neal Litvack, executive vice president at mutual fund giant Fidelity Investments in Boston.

Cynics might call investors' Forrest Gump-like attitude nothing more than a knee-jerk reaction to rising bank CD yields, the bond market's 1994 crash and the harrowing collapse of some formerly hot Third World stock markets, led by Mexico.

After all, it's human nature to chase what's in vogue and ignore what's not. Securities are the only universally desired product that consumers often avoid when prices decline--even though that's illogical and usually wrong.

But something else may be motivating small investors who are thinking in back-to-basics terms--a realization that their portfolios have become too complicated in recent years, perhaps too diversified. And maybe, overall, too risky.

Consider the hypothetical case of two investors who each had $20,000 cash on Dec. 31, 1984, about 10 years and three months ago. Both chose to invest all their money in stock and bond mutual funds.

Investor No. 1 wanted a well-diversified portfolio, so he picked funds from eight investment categories and divided the money among them: growth stocks, small stocks, bonds, utility stocks, natural resources stocks, gold stocks and two types of foreign-stock funds.

Investor No. 2 also wanted diversification, but without a lot of complexity. So she divided the money evenly among four fund categories: growth stocks, small stocks, international stocks and bonds.

After 10 years, who came out ahead--not accounting for taxes?

If each investor's funds performed in line with category averages, investor No. 1 had $61,586 at the end of the period, but investor No. 2 ended up with $68,850--a bigger return, and arguably for less work and less risk.


Admittedly, the time frame and fund categories used in the example are arbitrary. Depending on the funds selected, an investor's real-world experience could have been vastly different--either much better or much worse than the category averages.

But if you're trying to look 10 or 20 years ahead, to retirement or your child entering college, all you can rely upon in building an investment portfolio is logic and hope. And often, what is logical is pretty simple.

How to tell if your portfolio contains logical choices for you? It's not whether you made or lost money last quarter. The questions to ask are whether you can easily explain why each element is there and how its proportion--relative to the portfolio overall--fits your long-term goals.

Investing too cleverly for one's own good is a common trap, financial consultants say. Gib Kerr, a Culver City-based financial planner, says his first task with most new clients is to sort out what they own and offer a plan for simplifying the portfolio.

"People usually have investments scattered all over the place," Kerr says. New clients may own six different bond mutual funds, he says--and may long have forgotten why they bought (or rather, were sold ) any of them.

The first step in portfolio simplification is to decide on what's called strategic asset allocation: how to split your investment portfolio, including all retirement accounts, among stocks, bonds and "cash" accounts (such as CDs or money funds).

Every investor will have a different comfort level in strategic allocation, of course. But the basic advice put forth by the legendary Benjamin Graham in his 1949 book "The Intelligent Investor" is as valid today as ever, experts say.

That advice begins with stocks, which--however volatile--are the only proven ticket to long-term asset growth other than well-chosen real estate. Wrote Graham: "As a fundamental guiding rule the investor should never have less than 25% or more than 75% of his funds in common stocks."

Young investors and those willing to accept short-term risk for better long-term return should skew to the upper end of Graham's range; older investors and the more risk-wary ones would skew toward the lower end. All should then take the same basic vow of patience.

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