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Letting Go of the Old Notion of Buy and Hold

November 10, 2000|LIZ PULLIAM WESTON

This year's market turmoil--including Thursday's wild ride--may have you looking for low-risk investments to help you wait out the storm.

It won't be easy.

Investors' safe havens are disappearing, thanks to profound changes in the market and the economy. First it was utility stocks, the once-staid investment upended by deregulation. Then the federal government began using its surplus to buy back Treasuries, reducing the supply. AT&T, the ultimate "widows and orphans" stock, has fallen off a cliff. And analysts have downgraded AT&T's bonds, along with the debt of another former corporate stalwart, Xerox.

"Those are the investments we were confident we could put in our portfolio and hold for years," said Abraham Gulkowitz, chief global strategist for Deutsche Bank Alex. Brown's investment bank.

But no more. Conservative investors who thought they were ensconced in investment-grade bonds and blue-chip stocks might be surprised at what's happened to their portfolios this year. Those who were hoping such investments could buffer riskier plays in technology stocks likely have been disappointed.

Gulkowitz and others argue that, for investors who want to venture beyond Treasury bills and certificates of deposit, there is essentially no such thing as a buy, hold and forget-about-it investment anymore. In short, most investors need to take a much more active role in monitoring and managing risk in their portfolios.

It's a sentiment being echoed in the financial planning community, where decades of preaching about buy-and-hold is giving way to the idea that advisors must stay on top of their clients' investments as never before.

Gulkowitz, who spoke to a group of financial advisors and attorneys in Los Angeles on Wednesday, goes a step further. He questions whether any advisor, analyst or company can confidently navigate a market and an economy that's experiencing such revolutionary change. All of us face more risk, whether we know it or not, he said.

Technology is transforming business at the same time that market volatility is challenging anyone's ability to predict the future. Gulkowitz sees AT&T management's decision to split the telecom behemoth into three companies--essentially reversing years of consolidation efforts--as just another sign that the best minds in business are having trouble coping with the enormous changes facing us all.

Meanwhile, he sees many investment bankers and money managers who have yet to come to grips with all the uncertainty.

"I'm talking from the inside, and there's less wisdom out there than ever before," said Gulkowitz, who was a partner at Bankers Trust for more than 20 years before it merged with Deutsche Bank last year.

Bob Veres, editor of a newsletter and Web site for financial planners, is seeing a similar trend from the other side of the fence.

Veres said the best planners are spending more time evaluating the economy and their clients' portfolios rather than passively leaving the decisions up to the mutual fund managers and other money pros who invest the cash.

In addition, many planners have added Internet and technology stocks as a separate asset class, on top of the more traditional classes such as large-company growth stocks and mid-sized company value stocks.

These planners have almost no historical information to guide them; instead, they are using their own experience, research and intelligence to guide their clients' investment mix, Veres said. They're adding value by maintaining a vigilant, hands-on attitude, he said, and that's in stark contrast to a few years ago, he said.

It would be overstating the case to say that we all must put ourselves on full-time alert. Savers, as opposed to investors, still have plenty of safe, no-brainer options, such as money market accounts and federally insured bank accounts and CDs, all of which are currently offering attractive yields.

And bond investors can always retreat from the corporate fray to the relative safety of insured or general obligation municipal bonds.

There's just one problem--most of us won't be able to retire, and stay retired, with those kinds of yields.

"You won't reach your goals investing in [municipal bonds]," agreed Gulkowitz.

The road ahead may get even rougher for investors. Low mortgage rates and strong consumer spending are helping the economy, but corporate profit growth is slowing, oil prices remain high and consumer confidence is faltering. This could mean a hard, rather than a soft, landing for the economy, Gulkowitz said.

Gulkowitz asserts that all this adds up to one result: We are becoming venture capitalists--in a sense partners in the companies whose stocks we buy, rather than passive investors. The transition is similar to what we've been experiencing in our work lives, as the notion of lifetime employment disappears and is replaced by a more entrepreneurial "we're all working for ourselves," risk-taking attitude.

Being venture capitalists means expecting--and tolerating--more risk, he said. The days of steady double-digit annual growth in stock indexes may be over.

"You have to embrace risk and learn to live with it," Gulkowitz said. "You're going to end up living with greater financial ups and downs."

*

Liz Pulliam Weston is a personal finance writer for The Times and a graduate of the personal financial planning certificate program at UC Irvine. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012. She regrets that she cannot respond personally to queries. For past Money Talk questions and answers, visit The Times' Web site at http://www.latimes.com/moneytalk.

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