March 7, 2004
The Bulls Are Back. The Brokers Are Wary.
By J. ALEX TARQUINIO
HEN Don Logvin met with his financial planner in October, he brought along some investment charts that he had created on his home computer. They showed that his stock funds were up 24 percent for the year, while his bond funds, highlighted in red, had returned only about 4 percent.
Based on those numbers, Mr. Logvin told his adviser to shift the bond holdings to stocks. "When something isn't performing the way it should, we discuss how to get out of it and get into something more profitable," said Mr. Logvin, 71, a former retail sales executive in New York who retired to Boynton Beach, Fla.
Because stocks have risen so much over the last year, Mr. Logvin's financial planner has urged him to be cautious about buying even more of them. Still, since October, Mr. Logvin has increased the stock portion of his portfolio to 60 percent from 40 percent - making it more aggressive than is often advised for those near or in retirement.
In light of the markets' run-up in the last year, many financial advisers say their clients have become increasingly bullish, perhaps even excessively so. A net $40.8 billion flowed into equity mutual funds in January, the third highest monthly total since 1992, according to AMG Data.
But many advisers say that while they try to rein in their clients' enthusiasm for stocks, alternatives can be hard to recommend, because so many asset classes are also richly valued. Bond prices, for example, will fall if interest rates rise, as some economists predict. And real estate, commodities and gold have all made hefty gains in the last year.
Some advisers say few of their clients are following their recommendations to lighten their stock load. Kimberly Sterling, a financial planner in Orlando, Fla., estimates that only about 5 percent of her clients have reduced their stock holdings as she has suggested, and that these tend to be the wealthiest investors. "A few of our clients are so wealthy that they don't need the money to live on," Ms. Sterling said, so it is easier for them to take profits and accept that their portfolios may have lower returns in coming months.
She added that the middle-class retirees she advises were generally staying in stocks. "They've learned that everything they have is dependent on the stock market," she said, "and it's scary." As employees, they received steady paychecks; now that they depend on the stock market, they have seen how volatile it can be.
People with fresh cash to invest also face a quandary. Irwin Neulight, 64, who owns a chemical import business in Santa Fe, N.M., said he had some new cash to invest and intended to put it into stocks, even though his financial adviser had been trying to hold him back.
After he invests the money, he said, his portfolio will be two-thirds in stocks and one-third in bonds - with nothing in cash. "Money markets and C.D.'s are paying practically nothing, 1 to 2 percent," Mr. Neulight said. "That's not a viable option."
Some Wall Street professionals, however, would caution him to go more slowly. "Some people still have a lot of cash," said Stuart A. Schweitzer, global markets strategist at J. P. Morgan Fleming. "At today's prices, I wouldn't judge this to be an especially good time to put that cash to work."
Mr. Schweitzer said he expected the market to rise 10 percent in 2004. As of Friday, the Standard & Poor's 500-stock index was up 4 percent, "so we're partly there," he said. "But it wouldn't surprise me if we had a small correction first."
He recommended investing gradually in stocks over the next 12 months.
Renewed enthusiasm for stocks hardly surprises Hersh M. Shefrin, a finance professor at Santa Clara University in California who specializes in the psychology of investing. He says many investors are subject to what he called "recency bias": their thoughts are dominated by what has happened most recently.
Just as many people who lived through the Depression mistrusted the bull market of the 1950's and 60's, Mr. Shefrin said, investors who profited in the late 1990's bull market tend to expect that era to return. "Many investors haven't forgotten the euphoria of 1995 to 2000," he said, "and they're looking for evidence that we're heading back in that direction."
Yet there are indications that investors' confidence may not be as unwavering as it was four years ago. One remarkable feature of the bear market was that many individual investors hung onto stocks, even as prices started to slide. But now, some investors say they would be more apt to sell.
"There are some signs that we're in another bubble," said Richard Kennedy, 68, a former corporate lawyer who runs an arbitration service from his apartment in Manhattan. "If I saw a run-up like we had in 1999 and 2000, I wouldn't feel bad about going to 25 percent to 50 percent in cash." He now has about 5 percent of his portfolio in cash.
Other investors say they would not hesitate to jump out of stocks in a downturn. Mr. Neulight's portfolio has just recovered to what it was four years ago, he said, adding, "I lost that time, in terms of a normal growth rate." He said that he missed an opportunity to sell in 2000. "If I thought we were in another balloon situation, I would be more quick to get out," he said.
Many investors expect the market to go back to its peaks of early 2000. Although the Dow Jones industrial average, now at 10,595.55, is not far from its peak of 11,722.98, reached in January 2000, the Nasdaq, now at 2,047.63, is still less than halfway to its peak of 5,048.62, reached in March 2000.
Professor Shefrin calls this anchoring to a reference point. Rather than questioning whether stocks were reasonably valued in early 2000, he said, "they imagine that the market is on the end of a bungee cord and will bounce back to its previous high."
He said he thought that the recent rally, even as it propelled stock valuations further from historical norms, had made some individual investors overconfident. From 1935 through 2003, the price-to-earnings ratio of the S.& P. 500 averaged 15.5, according to Standard & Poor's. The average P/E was 23.6 on Friday.
"We've gotten used to thinking of a P/E over 20 as normal because that's recent," Professor Shefrin said. But after peaking at 26 before the 1929 stock market crash, "it only crossed back over 20 in a persistent way in the mid-1990's."
"Before that," he added, "it was a very rare event."
Another hallmark of the recent rally is outsized gains in riskier stocks. Morningstar Inc. rates the financial health of roughly 6,000 American companies on a scale from A to F. In 2003, D-rated and F-rated companies had more than double the returns of A-rated ones, on average.
Indeed, the gravitation toward the riskiest securities crosses all asset classes, said Richard Bernstein, chief United States strategist at Merrill Lynch. "The market is paying Bentley prices for Volkswagen assets," he said.
High-yield bonds are more overvalued than they have been in 20 years, according to Merrill Lynch. Among commodities, some of the biggest gains have been in gold, which attracts more speculation than base metals, Mr. Bernstein said. And in foreign markets, he said, money has flowed to the riskiest countries.
"People are plowing money into emerging-market debt and equity funds, and ignoring the fact that they could get 4 percent dividends on a U.S. food company," Mr. Bernstein said. Investors often place too much emphasis on capital appreciation, he said, and too little on income.
HE said he thought it was time for investors to shift toward blue chips, and he recommended a portfolio weighting of 45 percent equities, 45 percent bonds and 10 percent cash. That would appear to be more conservative than most American investors' current stance, even among retirees.
Some older Americans are concerned about the prospect of renewed inflation, which can be a scourge to those on fixed incomes. Hard assets like real estate and commodities often perform well in periods of inflation, while financial assets like stocks and bonds usually rise in periods of economic stability, said Tony Sagami, a money manager in Austin, Tex., who handles accounts of at least $250,000.
"There are some things that just don't happen in nature," Mr. Sagami said. "Hard assets and financial assets going up at the same time, that's just not natural. Therefore, one of the two camps is blind."
He said he thought the Federal Reserve's policy of holding down interest rates would eventually prompt inflation of 8 to 12 percent. But he says he sees evidence of a real estate bubble, suggesting that real estate will not be a good hedge against inflation this time.
Instead, he is betting on gold, which has risen 13 percent in the last 12 months, to $401.25 an ounce. But he said it could hit $500 to $550 over the next year or two.
Until the stock market has a correction, he recommends that conservative investors hold "a wheelbarrow of cash, a bucket of TIPS" - referring to Treasury inflation-protected securities - "and a handful of gold." That would mean roughly 60 percent cash, 30 percent TIPS and 10 percent gold.
To be sure, Mr. Sagami is more cautious than most money managers. Some of his clients do not want to sit on cash and have taken their money elsewhere to invest in stocks, he said. "My clients tend to be nervous Nellies, so they are the last holdouts," he said.
Capital preservation does not seem a high priority for many Americans, even those in or near retirement, some advisers say. In Sunrise, Fla., Barry G. Katz, a financial planner, described his clientele, by and large, as "little old widows," a designation once practically synonymous with conservative investors.
Asked whether any of his clients were nervous about current stock market valuations, however, Mr. Katz paused several seconds, then said: "No, I don't think anyone is nervous. Some clients were nervous last spring and summer. But in the last quarter, they became less nervous. But I, as their adviser, became more nervous."
nytimes.com |
