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Sit Tight or Start Shifting? A Review of Portfolio Basics

May 02, 1999|Tom Petruno

New highs for the Dow Jones industrials last week, new lows for the euro currency, a big jump in U.S. bond yields and a sharp drop in Internet highflier

All of which caused you, in your personal investment portfolio, to do . . . absolutely nothing.

Does that pretty much sum it up? Global markets have been all over the map this year, and moves within some individual markets have been particularly violent, both up and down. But with most U.S. stock indexes now in positive territory for the year, and the typical stock mutual fund also higher, for most investors inaction hasn't been unprofitable.

In fact, for quite a few Americans who've owned blue-chip stocks for the last few years, inaction has been quite profitable: Letting the portfolio ride has been the best strategy of all.

But with each uptick in the Dow (it's already up 17.5% year-to-date, after rising 16.1% for all of 1998), with so many crosscurrents at work in markets, and with buying and selling of individual securities so easy over the Internet today (or in 401[k] retirement accounts), more people may be feeling as if they should be doing something to their portfolios.

If you're itching to take some action, but you aren't quite sure what that would be, the following might help. Consider it a kind of Cliffs Notes for a complete portfolio review.

If you go through a few of these steps, you might find you really don't need to do much to your investment mix after all:

* Do a quick stocks/bonds/cash ratio check. Grab your latest retirement savings account statement and other investment account statements (including any stock option summaries) and do a back-of-the envelope estimate of how your financial assets are divided among stocks, bonds and cash (such as checking or savings account balances).

Are stocks, as a percentage of your total portfolio, in the range you expected them to be--and are you comfortable with that figure? If you feel as if you're taking too much risk, you probably are.

Or perhaps, like many investors, you've opted to build up your cash balances over the last eight months. It's great to have cash, but that's no place for savings you won't need for 10 or 20 years. Think about putting that money to work.

What about bonds? If it's U.S. Treasury securities you're thinking about, yields still aren't terribly appealing (though they are on the rise, as the economy booms). A five-year T-note yields about 5.2%. A money market mutual fund, by contrast, yields about 4.4%.

You can, however, find higher yields on corporate bonds, especially higher-risk junk issues. And tax-free California municipal bonds may be worth a look, depending on your tax bracket. All of these bond categories can be owned via mutual funds.

If cash accounts like money funds are the best place for people who are more interested in capital preservation than capital appreciation, bonds are the next step up--a way to earn higher returns while still giving yourself far more capital protection than what stocks can provide.

* Look at the top 10 stocks owned by your principal mutual funds. You think you know where your money's invested? If you own mutual funds, it's worth checking from time to time to see what the funds are doing with your bucks.

Most fund companies disclose their entire portfolios only quarterly or every six months, but many, on their Web sites, list their top 10 holdings at the end of each month. That can at least give you a sense of what the portfolio manager has been up to.

If you worry that you don't own enough Internet-related stocks, for example, you might be surprised to find that your fund's top 10 list includes quite a few Net giants, such as America Online and networker Cisco Systems.

* Do a five-year performance check on your longtime IRAs. "Buy and hold" can still work as an investment strategy, but don't blindly trust in it. As President Reagan used to say about dealing with the Russians, "Trust--but verify."

If you've owned a particular mutual fund in one of your IRAs for five years or longer, do a review of the fund's performance. How has it fared versus the average fund in its investment category, and versus appropriate market indexes? (Comparative data are generally included in fund literature, or on the fund company's Web site.)

If your fund is lagging well behind its benchmarks over five years, consider making a change to a better fund in the same asset category, or perhaps to another type of investment, if there's something in particular you've been eager to buy. There's no reason to settle for subpar performance in perpetuity--this is money you're going to live on in retirement, after all.

Remember: Selling an investment in a retirement account doesn't generate a taxable capital gain, as long as you follow the proper "rollover" rules.

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