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WALL STREET, CALIFORNIA | STREET STRATEGIES / TOM PETRUNO

Earning Without Burning

If you're worried the stock market is nearing a peak, there are ways to put your money to work while reducing risk.

March 11, 1997|TOM PETRUNO

Pity the investor who happens to receive a windfall of cash today--a big company bonus, for example, or a lump-sum pension distribution. Sure, the money's nice. But what to do with it?

As a long-term investor, you know that the stock market generates the best returns of any financial asset over time.

But after six years of a spectacular bull market in U.S. stocks, you also know your deepest fear: that the market is nearing a major peak, and that if you invest a large sum today you risk being the proverbial last one into the pool--before a harrowing plunge in prices.

Now, there are plenty of academic studies out there that would advise you to simply put that money to work in stocks and forget about it--provided you have at least a 20-year horizon.

A 1995 study by the American Funds group in Los Angeles looked at the growth of a portfolio whose owner had the worst possible timing, year in and year out. This investor put $10,000 into the Standard & Poor's 500-stock index at its high price each year, for 20 straight years, from 1975 to 1994.

The result: The $200,000 total invested over that period was worth $900,900 by March 1995--great growth, even though the investor bought on the worst (highest-cost) day each year.

*

That's all well and good. But what if you don't have a 20-year horizon? The history of bull and bear market cycles since the 1930s suggests that you might have good reason to be concerned about buying at what could be a bull market peak. Consider:

* The average bear market since 1933 has slashed 32% from the value of the S&P 500, according to data from the Society of Asset Allocators and Fund Timers.

In other words, if this is the peak, and a typical bear market is about to begin, you could see nearly a third of whatever you have invested today melt away before stocks would climb again.

* After a bear market begins it can take a long time to get investors back to even. Since 1933, investors who bought the S&P at its bull-market peak in each cycle had to wait 3.5 years, on average, just to see their nest egg rise back to that peak level--before they even began to see a return in terms of stock price appreciation.

We're being generous here in excluding from those average-bear-market figures the decline, and subsequent time-to-break-even, that followed the 1929 market crash, history's worst.

The point is, although stock bear markets often are over quickly, it still can take a significant passage of time for your nest egg to return to what it was at the previous market peak.

Fortunately, if you don't want to take that kind of risk today, there are several strategies you can employ to potentially lower your risk while still putting money to work--as opposed to just stuffing it in a mattress. Here are some ideas for investors with cash burning a hole in their pockets and fear burning a hole in their stomachs:

* Buy value. Everybody's talking about "finding value" in the stock market today. But then, what else do you expect portfolio managers to say--that they're trying to buy the most overpriced stocks they can find?

The real question is, what constitutes true value today? John Laupheimer, manager of the Massachusetts Investors Trust and the subject of an interview that appears on D4 today, sees value in Philip Morris stock [$138.75 on Monday, New York Stock Exchange], which trades for 18 times 1996 earnings per share--arguably cheap for a blue chip.

But given that stock's 62% rise from its 1996 low, other pros looking for value today would rather buy issues that have either been left behind in the bull market, or have been slammed by sellers down to levels that make them bigger bargains for investors with a long-term view.

Marc Kelly, a principal at Spectrum Asset Management in Newport Beach, advises building portfolios with names like AT&T [$36.75, NYSE], McDonald's [$44.875, NYSE] and engineering giant Fluor [$64.50, NYSE]--all of which have been beaten up in recent months because of disappointing earnings projections.

If you want to "buy low and sell high," Kelly says, you must start with what's low. "I want to be buying quality, but also something that is certainly cheaper than it was recently," he says.

Among major industry groups, the stock sectors that have fallen the most over the last 12 months while the broad market has risen include machine tool makers (such as Cincinnati Milacron, [$20.75, NYSE]), broadcasters, gold-mining firms, steel stocks (see story, above), restaurants, truckers and engineering firms, in that order.

More broadly speaking, many smaller stocks have continued to sink since last summer's market pullback, even as the blue-chip Dow industrials have zoomed. "The whole small-stock area is one I would look at" for value, Kelly says.

Naturally, if you're buying what's already down or underappreciated, your hope would be that that investment is already in a bear market--and thus is likely to rebound faster than the high-flying S&P 500 will, should its next bear market be just around the bend.

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