01 June 2006
By Susan Harrigan
With stocks sliding, investors are advised to look at long-term goals before making any portfolio changes
For the time being, at least, looking at one's investments may not be much fun.
After soaring for weeks, stocks are down with a thud, with the Dow Jones industrial average 4 percent off its near-record high earlier this month, and the technology-loaded Nasdaq composite index 1.2 percent lower than where it started the year. Commodities such as oil and gold have given up some of their huge gains this year, and the dollar, which has an impact on all kinds of investments, has been sliding, although it rose yesterday.
So, what should you do if you get the courage to peek at your nest egg, and notice that it has shrunk? For starters, nothing, according to Lewis Altfest, president of L.J. Altfest & Co., a financial planning and investment management firm based in Manhattan.
"The first thing to do is do nothing on that day [that you look], because often, the emotional reaction is to move in the direction that the market is moving in, and that's not a good idea," Altfest said. "On the other hand, it's a good time to look at your portfolio, and see whether or not what you have makes a whole lot of sense."
Ideally, Altfest and other financial planners say, you will have chosen your investments as part of a long-term plan geared to your goals and risk tolerance. Your portfolio should contain a variety of assets such as some cash, stocks, bonds and maybe a sprinkling of commodities, and it should be diversified within each asset category. For example, the stock portion should contain U.S. and international equities.
Still, "don't look at your long-term plan as a rationalization for doing nothing," Altfest said. Within their portfolios, people should consider swapping some investments that may have had a good run but may be about to lose steam, advisers said.
Raymond Mignone, a certified financial planner in Little Neck, recently advised some clients to rebalance the stock portion of their portfolios by lowering their exposure to international and small U.S. equities and increasing their investments in large U.S. growth stocks. That sector "hasn't participated" in the recent stock rally, but "it offers a lot better valuation" in terms of price relative to the potential for gain, Mignone said.Charles Hughes, a certified financial planner in Bay Shore, said he believes small-cap stocks are losing their luster because they have been hit harder than large companies by rising interest rates. He, too, considers large stocks a good place to be and particularly recommends large stocks that pay dividends, which are taxed as capital gains instead of ordinary income because of recent changes in the tax code.
Hughes also suggests that investors look at the maturities of bonds that they own and consider moving to longer-term bonds, particularly 10-year U.S. Treasuries. "If the Fed decides to discontinue raising interest rates, either because they believe inflation is under control or the economy has slowed down sufficiently for their purposes, that will probably ... [cause] a peak in interest rates," he said.
"You want to, therefore, lock in a higher yield, and be poised for the next cycle in interest rates, which is the decline." A wild ride The Dow Jones Industrial Average has taken investors on quite the roller-coaster ride this year. Data represents anjusted closing prices since Jan. 3, the first day of 2006 trading.