ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, March 17, 1997 TAG: 9703180094
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF STAFF WRITER
PERHAPS you're retired, but in any case you have limited funds - painfully saved - in your investment portfolio.
You have, or know you probably should have, some of your money in the stock market because that's where the highest growth has taken place in the past.
You need that growth to reach your goals.
But maybe the stock market makes you nervous. Although it has reached new heights recently, there's plenty of talk about the inevitability of a fall. You tremble with every jolt, of which we have seen plenty, for fear that this is the start of a new bear market.
If you need the money you have saved, perhaps for income, should you transfer everything to bonds and cash?
Not necessarily, said the Institute of Certified Financial Planners. You can stay in the stock market, but you should be more careful about how you do it.
It depends on who you are in terms of your financial health and goals and what investments you own, said John Parrott, a certified financial planner with the Roanoke office of Wheat First Butcher Singer.
Parrott asks two questions when a client comes to him with the problem.
First, how are you invested? What types of products do you have in your portfolio? Secondly, what is your current allocation among stocks, bonds and cash securities?
Your portfolio should be in tune with your age and your needs, Parrott said, so you must determine if the allocation is appropriate for you. If not, changes should be made leading to greater stability.
This varies from person to person, Parrott said. "Everyone's fingerprints are a little different."
In most cases, however, he tries to be sure that clients are not overextended in highly volatile stocks.
That doesn't mean they should get out of the stock market, Parrott said, because most people should have both stocks and bonds. The best courses, he said, are to pick companies with a good underlying value or to dollar-cost average. The latter means that you invest periodically on a regular basis regardless of whether the market goes up or down.
The Institute of Certified Financial Planners also had some suggestions for protecting yourself against market volatility.
First, the group said, stocks aren't as volatile as you may believe. Despite some major bumps, overall swings are low.
A study by Ibbotson Associates Inc. of the Standard & Poor's 500 stock index (predominately larger company stocks) shows that the last five years have been less volatile and more rewarding than the previous five years.
Besides, swings aren't what they used to be. What was once a major move of, say, 50 or 100 points in the indices, today represents a much smaller fraction of overall market value.
Secondly, the planners said, bonds are more volatile than some investors may think.
Bonds often are seen as the traditional haven of retirement savings. They provide steady income and, in investors' eyes, were believed to be more stable than stocks.
But as investors are coming to realize, the planners said, bonds are very volatile. By one measure of volatility, called standard deviation, bonds deviated from their average returns 8.9 percent on average from 1991 to 1995. That's down from a 12.5 percent standard deviation in the previous five years, yet it compares with a mere 2.5 percent in the 1960s.
One rule is don't panic, which may not be easy when the market is in free fall. Markets rebound as they did after the sharp drops in October 1987 and during the Persian Gulf War.
The planners advise investors to ignore economic reports. Too many investors react to a single report such as the monthly jobs survey. Such reports may be misleading and conflict with each other.
Constantly tinkering with your portfolio every time a report comes out is unnecessary and may be harmful. Only broader, long-term trends may suggest readjustments to your portfolio.
Another rule is to stay diversified. When the long-running bull market drops significantly, as it will at some point, investors should sit tight and, if possible, take advantage of buying opportunities.
But if you have already spread your funds among different types of investments, including cash, you can weather the rougher times. The planners recommend that retirees, for example, might keep 50 percent in stocks, 30 percent in bonds, 10 percent in cash and 10 percent in real estate. If one part of the portfolio falters, the other parts may pick it up.
Finally, think long term. Keep your eyes on the horizon, not on today's market report. Even a retiree will average living another 20 years. You will most likely see several major market fluctuations during that time.
LENGTH: Medium: 89 lines ILLUSTRATION: GRAPHIC: Color illustration by ROBERT LUNSFORD/THE ROANOKEby CNBTIMES