Asset allocation can enrich ailing stock portfolio
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By Sandra Sagisi
Special to The Advertiser
If your stock portfolio is headed toward the ocean floor, perhaps it's time to rearrange your deck chairs and plot a new investing course using a tried-and-true tool to navigate turbulent markets — asset allocation.
There is no one-size-fits-all strategy, according to three Honolulu investment veterans: stock administrator Paul Loo of Morgan Stanley Dean Whitter, financial consultant Ward Brown of First Hawaiian Bank and financial counselor Deborah Bocken of FSC Securities Corporation.
All agree that dividing assets to create a balanced portfolio is the key to a profitable future, but each of the experts had a different take on where cash should be parked given the current market environment.
Asset allocation divides your liquid assets into three different categories: stocks, bonds and cash.
• Stocks, often referred to as equities, historically yield a high rate of return over the long haul but also carry more risk. This category includes individual stocks, equity mutual funds, equity unit trusts and variable annuities.
• Bonds, also known as fixed-income securities, are certificates of debt that corporations and federal, state and local governments and their agencies issue when borrowing money. Falling interest rates can cause bonds to increase in value.
• Cash investments — such as certificates of deposits, Treasury bills and money market funds — offer a fixed-rate of return for a duration of time and are usually the least risky of the three categories.
Asset allocation is an ongoing process that keeps investors from putting all of their eggs in one basket. A properly allocated portfolio can minimize losses and maximize the protection of your investments.ÊAllocation has proven to be one of the best ways to cushion the downs of a bear market or the swings of a volatile market.
Taking stock
What to bank on in an improving Hawai'i economy and what to bear in mind in a Wall Street bear market are questions investors want answered these days. While Hawai'i stocks are experiencing a slight move toward what appears to be a healthy 2001 state economy, dot.coms and once high-flying tech stocks are struggling mightily in national markets.
There are some things investors can do to protect whatever money they have left after last week's sell-off. If you're in for the long-term, experts believe that this is a good time to bargain hunt for solid companies both in the Islands and on the Mainland. Or, if you don't have the stomach to weather a rocky market, this could be the time to park your assets and bank on low-risk investments.
Sitting down to determine an asset allocation that fits your investment goals could save you from suffering enormous losses in this volatile market. Here are what some experts advise:
• PAUL C.P. LOO
Paul C.P. Loo is senior vice president and branch manager of the Hawai'i operation for Morgan Stanley Dean Whitter. He has been in the securities business for more than four decades. He served most of his time in the retail branch administration for MSDW. He offers this advice when the markets go down: "Stay the course and always be diversified." Loo's favorite book is "Security Analysis" by Graham & Dodd. It taught him a "disciplined program of investing" over the long term.
1. What percentage would you put in stocks, bonds and cash in a market like this?
It depends on the financial tolerance of an individual and his or her particular needs. Someone who doesn't have much capital and wants a certain amount of income could have a different mix. People are different even though let's say, two people have the same money and the same age. One of them might inherit a million dollars, so each of them will need customized plans. They need to sit down to find out where they are with a financial planner.
2. What should we bear in mind in a bear market? An improving Hawai'i economy?
Defensiveness and diversification. Don't chose aggressive stocks during a down market. Today you shouldn't be all in technology, and some people are. Hawai'i's economy has done well for First Hawaiian Bank (BancWest). They've improved because of their strong participation in the West Coast, particularly in California. The key is to buy stocks before a market recovers. Invest when stocks have come down to bargain levels. Hawai'i stocks have done well, and they should probably be held at this point depending on the outlook of each company.
3. Expecting signs of a market rally locally and nationally any time soon?
We are in a saucer-shape bottom rather than a v-shape investors anticipate. This means there will not be a quick turnaround in the market. I think 2002 will be a stronger year for the market in general and Hawai'i will follow.
4. What would be a good asset allocation to maximize at least a 20 percent return over five years?
I would not shoot for a 20 percent return because most companies don't grow at 20 percent. The expectation should be lowered to 8 percent to 12 percent these days. Investors have had too high expectations over the past decade due to technology stocks. That was then, this is now.
5. How can investors protect themselves from risk?
Diversify and allocate according to your own needs and investment tolerance of risk.
6. Which Hawai'i companies and bonds do you feel have performed well this past year?
I select BancWest and possibly Bank of Hawaii as turn-about banks. I concentrate on mostly global and International stocks.
7. Which companies would you sink your teeth into and buy at a bargain today?
I am an administrator and cannot comment on this. But I would buy solid, well-diversified mutual funds right now. And there are many good ones out there.
8. Which funds would you recommend for the conservative investor?
I can't comment on this either.
• WARD BROWN
Ward Brown is the vice president in the private banking department at First Hawaiian Bank. He is one of four consultants in the financial planning division at FHB. He worked for two decades in the commercial banking industry consulting clients on investing their accumulated wealth before he went into private banking. His favorite book is "House of Morgan," by Ron Chernow.
1. What percentage would you put in stocks, bonds and cash in a market like this?
You need a diversification for growth. In any market condition, invest in stocks that are solid financially and are leaders or competitors in their industry. Find out if the companies are profitable and their earnings are stable and improving annually. If you're 50 years old or younger, you should have 40 percent of your investments in stocks, 40 percent in bonds, 20 percent in cash such as CDs.
2. What should we bear in mind in a bear market? A recovering Hawai'i economy?
Don't panic when stocks or rates dip because businesses operate in business cycles. This means it is likely the market overall will stabilize and rebound before the end of the year. If the Federal Reserve can reverse the trend, the economy should rebound. We can't really predict when things have reached bottom, but when interest rates are stable and inflation seems to be under control the likelihood is the economy is on its way up.
3. Expecting signs of a market rally locally and nationally any time soon?
Looks like we're coming out of an eight- to 10-year sluggish mode. It is likely that Hawai'i businesses will prosper if our local economy continues to take off. Last year was a record year for tourism and companies linked to tourism might do better. Bank stocks are projected to improve also this year. Stocks such as BancWest, Bank of Hawaii, City Bank and Central Pacific Bank. American Savings Bank, a subsidiary of Hawaiian Electric, will generally also do well when the Hawai'i economy is healthy.
4. What would be a good asset allocation to maximize at least a 20 percent return over five years?
If you carefully allocate your investments, you can easily make at least a 20 percent return in five years by properly placing your money in income-generating equities called preferred stocks, CDs and bonds. Preferred stocks are offered by big corporations. They yield a guaranteed return each year. They are less likely however to increase in value. Giant companies such as General Electric and General Motors offer these types of stocks, but you won't likely see local companies providing them.
5. How can we protect ourselves from risky investments?
You have to make sure you know the companies you are dealing with. Make sure they are not volatile to unforeseen changes in the industry. Deal with companies with steady, strong profits.
6. Which local public companies and bonds do you feel have performed well this past year?
BancWest, and Alexander and Baldwin.
7. Which companies would you sink your teeth into and buy at a bargain today?
Philip Morris is attempting to settle its multimillion dollar tobacco claims but has diversified into Kraft Foods and is about to purchase Nabisco. In my opinion, as long as there are no more surprises, the stock should be stable by year's end.
8. Which funds would you recommend for the conservative investor?
If you want to get out of the market and safeguard your money, there's always certificate of deposits. Currently, they average 4.5 percent to 5 percent return. CDs are safe haven until you feel the market takes off in an upward trend. You can always invest in mutual funds and leave it to professional money managers to assist you with your finances.
• DEBORAH BOCKEN
Deborah Bocken has been in financial planning since 1987. She received her certification from the College of Financial Planning in Denver. Bocker's advice is to stay away from get-rich-quick-schemes and believes that putting aside cash monthly to fund your long-term and short-term goals will help you achieve financial independence. Her favorite book is "Smart Women Finish Rich," by David Bach and, "The Only Investment Guide You'll Ever Need," by Andrew Tobias.
1. What percentage would you put in stocks, bonds and cash in a market like this?
Decide on your financial goals and a realistic plan to achieve your goals. Live below your means. Each paycheck, set aside 15 percent of your income for short-term and long-term needs. Determine your short-term needs (zero to four years — put the cash in money market or CDs). Look at your long-term needs and put it in growth stocks (40 percent large-caps, 40 percent mid-caps, 20 percent small-caps) and bonds. A guide for the stock bond ratio is to subtract your age from 100 and put that percent in stocks. For example, if you're age 30 (100 — 30 = 70 percent in stocks and 30 percent in bonds.)
2. What should we bear in mind in a bear market? A recovering Hawai'i economy?
Keep with your overall strategy through the ups and the downs. In a recovering economy, don't be distracted, just stick with your road map. Long-range plans help you keep on track.
3. Expecting signs of a market rally locally and nationally any time soon?
Signs of a market rally? No one has a crystal ball. This is why you need a long range plan as I said. The road map will not distract you from market volatility.
4. What would be a good asset allocation to maximize at least a 20 percent return over five years?
20 percent in five years? Considering equities have returned about 10 percent from 1926 to the present, this might not be realistic. These past eight years have led to unrealistic expectations.
5. How can we protect ourselves from risky investments?
Ask yourself, what are your risks? Do you have disability, health, car/home renters or life insurance? Have your bases covered and plan, plan, plan. A financial plan can be torpedoed by the unplanned. A successful financial plan takes time to strategize, implement and review — like leading a healthy lifestyle — it has a positive pay off. Contribute the maximum to your retirement plan — tax reduction and tax deferred compounding are major tax breaks. Start a ROTH IRA if you're eligible.
6. Which Hawai'i companies and bonds do you feel have performed well this past year?
I would recommend to a client to invest in stocks and bonds that are appropriate for their financial strategy. Most people get the best diversification in mutual funds.
7. Which companies would you sink your teeth into and buy at a bargain today?
If you've chosen your type of mutual funds that are appropriate to you, leave it to the professionals to chose the right stocks for you.
8. Which funds would you recommend for the conservative investor?
Aside from safe CDs, I can't really recommend any.
