Sit Tight or Start Shifting? A Review of Portfolio Basics

New highs for the Dow Jones industrials last week, new lows for the euro currency, a big jump in U.S. bond yields and a sharp drop in Internet highflier Amazon.com.

All of which caused you, in your personal investment portfolio, to do . . . absolutely nothing.

Does that pretty much sum it up? Global markets have been all over the map this year, and moves within some individual markets have been particularly violent, both up and down. But with most U.S. stock indexes now in positive territory for the year, and the typical stock mutual fund also higher, for most investors inaction hasn’t been unprofitable.

In fact, for quite a few Americans who’ve owned blue-chip stocks for the last few years, inaction has been quite profitable: Letting the portfolio ride has been the best strategy of all.

But with each uptick in the Dow (it’s already up 17.5% year-to-date, after rising 16.1% for all of 1998), with so many crosscurrents at work in markets, and with buying and selling of individual securities so easy over the Internet today (or in 401[k] retirement accounts), more people may be feeling as if they should be doing something to their portfolios.

If you’re itching to take some action, but you aren’t quite sure what that would be, the following might help. Consider it a kind of Cliffs Notes for a complete portfolio review.

If you go through a few of these steps, you might find you really don’t need to do much to your investment mix after all:

* Do a quick stocks/bonds/cash ratio check. Grab your latest retirement savings account statement and other investment account statements (including any stock option summaries) and do a back-of-the envelope estimate of how your financial assets are divided among stocks, bonds and cash (such as checking or savings account balances).

Are stocks, as a percentage of your total portfolio, in the range you expected them to be--and are you comfortable with that figure? If you feel as if you’re taking too much risk, you probably are.

Or perhaps, like many investors, you’ve opted to build up your cash balances over the last eight months. It’s great to have cash, but that’s no place for savings you won’t need for 10 or 20 years. Think about putting that money to work.

What about bonds? If it’s U.S. Treasury securities you’re thinking about, yields still aren’t terribly appealing (though they are on the rise, as the economy booms). A five-year T-note yields about 5.2%. A money market mutual fund, by contrast, yields about 4.4%.

You can, however, find higher yields on corporate bonds, especially higher-risk junk issues. And tax-free California municipal bonds may be worth a look, depending on your tax bracket. All of these bond categories can be owned via mutual funds.

If cash accounts like money funds are the best place for people who are more interested in capital preservation than capital appreciation, bonds are the next step up--a way to earn higher returns while still giving yourself far more capital protection than what stocks can provide.

* Look at the top 10 stocks owned by your principal mutual funds. You think you know where your money’s invested? If you own mutual funds, it’s worth checking from time to time to see what the funds are doing with your bucks.

Most fund companies disclose their entire portfolios only quarterly or every six months, but many, on their Web sites, list their top 10 holdings at the end of each month. That can at least give you a sense of what the portfolio manager has been up to.

If you worry that you don’t own enough Internet-related stocks, for example, you might be surprised to find that your fund’s top 10 list includes quite a few Net giants, such as America Online and networker Cisco Systems.

* Do a five-year performance check on your longtime IRAs. “Buy and hold� can still work as an investment strategy, but don’t blindly trust in it. As President Reagan used to say about dealing with the Russians, “Trust--but verify.�

If you’ve owned a particular mutual fund in one of your IRAs for five years or longer, do a review of the fund’s performance. How has it fared versus the average fund in its investment category, and versus appropriate market indexes? (Comparative data are generally included in fund literature, or on the fund company’s Web site.)

If your fund is lagging well behind its benchmarks over five years, consider making a change to a better fund in the same asset category, or perhaps to another type of investment, if there’s something in particular you’ve been eager to buy. There’s no reason to settle for subpar performance in perpetuity--this is money you’re going to live on in retirement, after all.

Remember: Selling an investment in a retirement account doesn’t generate a taxable capital gain, as long as you follow the proper “rollover� rules.

* Take another look at all of your 401(k) or 403(b) savings plan options. Before you decide to make investment shifts outside of your company retirement account, check to see if you have overlooked some appealing investment options within the account.

Your plan might have added choices over the last year (many have done so), and they might be exactly what you’re looking for in terms of making a portfolio change.

As my colleague Paul J. Lim points out in his column in this section today, many 401(k) plan participants don’t take the time to learn about what’s in their plans, and that can be costly.

* Stop worrying about the big investment winners you missed. A lot of people spend too much energy thinking about the ones that got away.

“I should have bought America Online when it was $30! Now it’s $142!� they lament. Well, sure--you should have. But you didn’t. And the more time you spend focusing on what you missed, the less time you have to find tomorrow’s winners.

Move on. If you’re hunting for individual stock ideas or for “sector� ideas (health care, technology, etc.) start with an assessment of what the world is likely to demand more of in coming years, and try to identify companies that either are leaders, or are trying to become leaders, in those fields.

Does that sound too simple? Sometimes it really is as simple as that. The Internet became an investing phenomenon because the Net itself is something many people have decided they can’t live without.

* Decide if the investment “itch� you need to scratch is about investing or about speculating. Maybe you’re not really interested in changing your basic portfolio, assuming it still serves you well. Maybe you’re just looking to make a smallish, short-term bet on something.

Over the last year, anecdotal evidence suggests that many investors who maintain a buy-and-hold stance with their core portfolios also have chipped off some cash to use for speculative purposes. Nothing wrong with that at all. It’s just important to distinguish between long-term investments and short-term speculations, because your objectives with the two will probably be very different.

For example, you might well be willing to tolerate a 20% drop in your long-term investment portfolio because you expect to hold that portfolio for 10 years or more.

But with a short-term bet, a loss of even 10% from the price you paid might be too much, because the point of making a speculative bet is to get in, and out, in a relative hurry. Too many 30% or 40% losses in your speculative account and you won’t have an account left.

* Think about how you will handle the next big market plunge--or declines in specific stocks. It’s not a question of whether there will be another big drop in the market, it’s just a question of when.

Many investors were shocked by how quickly stocks plummeted late last summer after Russia devalued its currency. The blue-chip Dow average and Standard & Poor’s 500 index both fell nearly 20% in the course of just six weeks. Smaller stocks fell even more.

Things looked grim for world stock markets last September. But investors who had planned in advance to take advantage of declines in stocks they like for the long haul were at least poised to take action. (Those who had the guts to actually buy when prices were whacked have, for the most part, been well-rewarded.)

If there are many big-name growth stocks whose prices today strike you as simply too expensive relative to their earnings potential, nobody’s forcing you to buy them. But if they are headed lower, for whatever reason, in the months ahead, you ought to think now about the prices you’re willing to pay for those shares--and commit to buying if the prices materialize.

You can’t look to the Dow index for guidance on this point. While the Dow streaked to new highs last week, many of its individual stocks were going in the opposite direction. Wal-Mart, for example, has slumped 14% from its recent record high. Drug giant Merck is down 19% from its high, and Microsoft is down 15%. That’s not to say they won’t get cheaper. But for people who want to pay less, these stocks are going in the right direction.

* Be willing to play a hunch. Some people can’t make investment decisions because they think they can never do enough research to be sure about something.

Face it: You will never be absolutely sure. Every investment involves some degree of pure chance.

If you’ve got a hunch about something, and it doesn’t involve jeopardizing your entire investment plan, go ahead and play it. You may be surprised how often your instincts are right. And even when they’re wrong, you’ll learn something that may help you make smarter decisions down the road.

Tom Petruno can be reached by e-mail at [email protected]. Petruno and other Times financial writers will discuss investment topics at The Times’ Investment Strategies Conference May 22-23 at the L.A. Convention Center. For information, call (800) 350-3211 or go to http://ukobiw.net/isc.