Island investment experts urge caution with portfolios
| • | INVESTMENT PORTFOLIOS How would you invest $25,000 in today's market? |
By David Butts
Advertiser Staff Writer
After 2 1/2 years of a declining stock market, many buy-and-hold investors are re-evaluating their portfolios if not their futures.
When The Honolulu Advertiser asked several local financial professionals to invest a theoretical $25,000 for three months, the reaction from most was, "That's not investing; that's gambling." The feature even caught the eye of the state securities commissioner, Ryan Ushijima, who was concerned it could send the wrong message to investors. Investors need to determine how much risk they can tolerate, when they may need the money and only then proceed with a careful investment plan and the help of an investment professional, Ushijima said. "That's not coming out ..." Ushijima added. "Everyone is just trying to maximize (profits) in that three-month time frame and are taking unrealistic risks." The lesson for investors, says Ushijima, is the need to be prudent, to diversify investments according to each investor's goals and tolerance for risk. Here is a look at what Ushijima and several participants in the portfolio feature have to say about investing in today's market.
The first step, financial planners say, is not to hunt for the next hot mutual fund, but to assess your goals, your ability (perhaps reduced) to tolerate risk and your investment time horizon. Then you can build a portfolio to match.
Editor's note
"If you want to gamble with your money, go to Vegas. The food is better," said Ryan Ushijima, the state securities commissioner. "We forget that. I did."
As markets soared in the late 1990s, Ushijima invested in technology companies — including Microsoft and AOL — which have since tanked.
"I feel like I got set back 10 years," he said.
The question now is how to build back lost wealth in a market that shows few signs of being overrun by bulls.
Ushijima and other Hawai'i financial professionals worry that in the rush to earn more, investors may blindly follow tips that are not appropriate for their situations.
Many investors have been switching to the relative safety of bond mutual funds, but that too may be following the pack rather than examining personal needs and risk tolerance.
Bond funds have become the best-selling mutual funds of 2002 with a net inflow of $119.8 billion in the first nine months of the year.
"This extraordinary cash flow into bond funds raises red flags," says the Vanguard Group, one of the biggest U.S. fund managers, in a commentary on its Web site. "Are investors buying bonds for their income and risk-dampening qualities, or are they simply chasing performance?"
"People get the impression bonds are safe and you can't lose," said Ushijima. "But bonds fall."
Whether bonds are right for you — or what portion of your portfolio should be in bonds — depends on your time horizon and risk tolerance.
"If people really want their money back in three months," says Roberta Lee Driscoll, a Honolulu financial planner, "the place to put it is in bank savings, bank CDs or under the mattress. Even Treasury bonds have a risk to them."
But if you decide you are in a position to take on risk, your view may be very different.
"I'm going to be 40 in March," says Jim Rogers, a broker at Brookstreet Securities in Honolulu. "I have 27 years to retirement age. I'm in a job that is not physically demanding. I have adequate insurance. Why would I want to be conservative right now? I am in what's known as the capital formation years. When I reach, I don't know, 55, 60, I'll try to conserve wealth. But until then I'm in the building process."
When advising clients, Rogers sets aside his personal investment style.
He defines the client's objectives and risk tolerance and then decides what securities they should buy.
"As I become more decrepit in my age and become conservative, that doesn't mean my young clients will be more conservative," he said.
Of course, brokers can only tailor investments to the clients' goals if they are clear.
"Someone may tell us they have a long-term goal, but their version of long-term may be one or two years," said Bob Slate at Slate Financial Services in Kane'ohe. "That's why communication is important."
Ushijima says speculating should be left to the professionals. The small players are too likely to get burned, he says.
"Even the best investment professionals are not always able to beat the market," said Ushijima.
"The best money managers have access to the firms themselves. They spend all day looking at the economy and know the companies," Ushijima says. "You think you are going to beat them?"
Bloomberg News Service contributed to this report.
