Dos And Don'ts
by Charles B. Carlson, CFA
Dow Theory Forecasts
Here's a list of what you should and shouldn't do in 2003:
•Do continue to buy stocks on a regular basis. True, putting money into this market over the last couple of years may seem to have been a mistake. However, every dollar invested today is probably buying stock at cheap prices relative to where the shares will trade five years, 10 years, and 20 years from now.
•Don't chase speculative technology stocks. A lot of the money fueling the rally in the last couple of months has focused on speculative stocks. In short, the pigs have been flying, with the biggest pigs showing the biggest gains. The problem is that nothing has really changed for many of these stocks, other than they are now very, very expensive in terms of valuation (as opposed to be just very expensive a couple of months ago). I would be surprised if the gains in these junky stocks last through January.
•Do maintain a diversified portfolio. A journalist called me recently wanting to do know the best strategies for weathering the following scenarios: 1) massive deflation, 2) a war with Iraq, 3) a surprise jump in inflation accompanied by lousy corporate profits, 4) another terrorist attack. The answer I gave him for all of these possible outcomes was the same - maintain a diversified portfolio. You achieve diversification through owning different asset classes (stocks, bonds, cash), different types of securities within the same asset class (small-cap and large-cap stocks, for example), and time diversification (putting money into the market on a regular basis). If you don't know how much money you should have in stocks versus bonds versus cash, a good "all-weather" allocation is the following - 67% stocks, 25% bonds, 8% cash.
•Don't forget to fill out your proxy statements. While many investors are quick to criticize corporate governance, few investors take the time to actually vote proxies. Voting your companies' proxy statements helps keep executives and board members on their toes. A side benefit to voting proxies is that by returning your proxy statement, your company has an up-to-date mailing address on you. That will help avoid any potential problems down the road in the way of lost dividend checks or escheatment issues.
•Do get your child and grandchild involved in investing this year. With stocks down sharply over the last three years, investors with long time horizons (such as your kids and grandkids) should be jumping all over equities. Dividend reinvestment plans provide a perfect vehicle for introducing a youngster to the stock market.
•Don't miss out on the market's next big move by being on the sidelines. I have no problem if you want to hold some cash in portfolios. However, the temptation for investors right now is to hold all cash. Unfortunately, by playing it safe, you will be sorry when stocks resume their upward march in earnest. If fear is driving you to hold cash, the "all-weather" allocation (see above) is a good benchmark for the amount of cash/bonds in a balanced portfolio.
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