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Do a nest egg checkup
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June 19, 2001: 8:49 a.m. ET
Six months into the year, it's a good time to review your portfolio
By Staff Writer Martine Costello
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NEW YORK (CNNfn) - Six months ago, long-term investors got the shock of a lifetime when U.S. stocks finally toppled off their pedestal after years of double-digit gains.
It was as if Armageddon had descended on Wall Street. The Nasdaq composite index plummeted 39.3 percent in 2000 and suffered its worst losses in its 30-year history, while the Dow Jones industrial average sank 6.2 percent, its first down year in a decade.
Investors who had forgotten that the market can move in two directions started fretting about the economy as their portfolios lost as much as half their value.
Now, after five interest-rate cuts this year, and a sense that the worst is over despite a slowing economy, experts say it's a good time to grit your teeth and give your portfolio a checkup.
"People may have a better feeling psychologically than they did at the end of the year," said Scott Kahan, a certified financial planner in New York. "They're a little more comfortable. So this is a good time to do a self-assessment."
The first step is to make a pledge not to make the same mistake that got a lot of investors into trouble last year. Back in the good old days of the bull market, a lot of investors allowed their portfolios to get seriously out of whack, with heavy weightings in large growth stocks and technology.
If those investors had rebalanced their portfolios, they may have missed out on some of the lavish gains, but they would have protected themselves from steep losses when the market soured, said Bud Kasper, a certified financial planner from Kansas City, Mo.
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Make sure you stay diversified to protect yourself when the market sours. | |
For example, consider that the S&P 500 had average annual gains of more than 20 percent between 1995 and 1999, Kasper said. By the end of 2000, the S&P 500's three-year average gain had drooped to 3.97 percent.
"What does that tell you as an investor? It tells you that you've got to do everything you can to prevent the negative years, because they will knock the socks off of you," Kasper said.
Kahan said it's a good idea to rebalance twice a year – once around midyear and once near the end of the year for tax purposes.
The main idea behind rebalancing is to trim your winners and add more to your losers, said Pat Jennerjohn, a certified financial planner from Oakland, Calif.
"Everybody knows you have to buy low and sell high but it's hard to do that," Jennerjohn said. "You have to have nerve to do that."
For example, Jennerjohn said you might want to trim your small-cap value holdings and add to large growth.
Click here to see how funds are doing in 2001
Small-cap value funds have been among the strongest performers in 2000 and 2001. While most funds had a dismal 2000, small cap value funds earned 8.94 percent during the year, according to fund-tracker Morningstar. In 2001, small cap value funds are up an average of 11.02 percent year-to-date as of June 14, according to Morningstar. The top performer in the category is up about 35 percent.
Meanwhile, large growth funds have been among the worst performers, off 13.18 percent in 2000 and down 16.17 percent in 2001 as of June 14. Some growth funds are off nearly 30 percent this year.
"If you have something that's had a really good run, now is an opportunity to rebalance," Jennerjohn said.
A diversified portfolio should have a mix of different types of stocks – large-, mid- and small-caps; growth and value; and some international – as well as some bonds. Your age, risk tolerance and investing window will determine your mix.
That means part of your portfolio will always look sick – depending on what's out of favor on Wall Street, Jennerjohn said. Don't sell just because it's not doing well.
"It's probably a good investment that's having a hard time," Jennerjohn said. "Think of the market as the culprit."
Look at a fund's track record to find out if it's a dog or just a victim of market conditions, Kahan said. If it is losing 10 percent, but the category is losing 29 percent, then you've actually got a winner. But if your fund is losing money while its peers are scoring double-digit returns, it's time to dump it.
"Don't look at the past six months," Kahan said. "Look at the past five, 10 or 20 years of returns."
A volatile market doesn't mean you need to abandon your asset allocation model, either, Kasper said. But if you've been losing sleep because of market losses, it's time to do a "gut check," he said.
"People found out they aren't as aggressive as they thought," Kasper said. "For the majority of investors, they should be tweaking their portfolios more conservatively."
A lot of people forgot about bonds during the heady days of the bull market, but investors who had some fixed-income exposure faired much better last year. Bonds were among the few winners of 2000, and they are continuing their strong performance this year as of June 14, Morningstar said. Long-term bonds are up an average of 4.51 percent, while intermediate-term bonds are 4.18 percent.
"People turned their noses up at bonds until last year," Jennerjohn said. "They're there to stabilize your portfolio."
You might want to consider PIMCO Total Return or Vanguard Total Bond Market Index Fund, experts say.
Even an aggressive portfolio should have some bonds, Kahan said.
You could invest in a good intermediate-term bond fund or buy individual bonds of different maturities using a "ladder" approach, Kahan said.
On the stocks side of your portfolio, you might want to consider options that are less correlated to the market, Jennerjohn said. That could mean a real estate fund like Columbia Real Estate Equity Fund or Oppenheimer Real Asset Fund.
Or, through Schwab you can choose IRA limited partnerships that invest in high-quality commercial and regular mortgages, Jennerjohn said.
You could also pick a fund that hedges your downside, like Gateway Fund. It invests in S&P 500 index stocks and then sells S&P 500 index call options against those stocks to generate income in the fund, said Morningstar analyst Dan McNeela. The fund also buys put options to protect them on the downside.
"It's like a covered-call strategy," McNeela said.
Gateway earned 6.6 percent in 2000, putting it in the top quarter of its category. It's down 1.31 percent year to date as of June 14, putting it 5.79 percent ahead of the S&P 500.
"Because they hedge their positions with options, they really minimize volatility," Jennerjohn said. "They throw off taxable income, so they're good for tax-deferred accounts."
Click here for CNNfn.com's special report, The Road to Riches
Another option is a market-neutral fund like Calamos Market Neutral Fund, Kasper said. The fund is up 6.91 percent year to date as of June 14 and is in the top 3 percent of its category, according to Morningstar. Market neutral funds use a combination of long and short positions to "neutralize" market risk.
"I'm impressed the way (the Calamos fund) has handled the markets in the down as well as the up cycle," Kasper said.
Another important factor to keep in mind with your midyear assessment is that some funds may have capital gains distributions. While funds mostly distribute gains at the end of the year, some funds issued distributions during the summer.
Last year, for example, Warburg Pincus Japan Small Company Fund and Warburg Pincus Japan Growth Fund made distributions in August that accounted for up to 55 percent of net asset value, according to Morningstar. The fund company blamed huge gains in 1999 and poor performance in 2000 that led to redemptions, Morningstar said.
Last year was a double-whammy for some fund investors because the funds lost money and had distributions.
"So look at the funds you own or ones you're considering buying," Kahan said. "All that information can only make you a smarter investor." 
* Disclaimer
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