For Novice Investors, Uncertainty Offers Opportunity

Posted: Oct 06, 2008 12:01 AM
For Novice Investors, Uncertainty Offers Opportunity

Stand on a street corner and shout: "Buy stocks now!"

Go ahead, I dare you.

A Good Samaritan might recommend a helpful therapist for you, while others would simply write you off as a delusional and suffering post-bailout syndrome.

Starting out in investing right now might seem especially irrational, but many investment experts consider this an opportune time.

Financial trauma produces long-term bargains, if you can cope with uncertainty. You'll move gradually into a market that has punished good companies along with the bad, which is the foundation of a value-oriented strategy.

"These once-in-a-generation opportunities represent a great time if you are a long-term investor and fundamentally believe in our free enterprise system," said Mark Brown, a certified financial planner with Brown & Tedstrom in Denver. "While circumstances of buying opportunities are never comforting, you won't get many chances to buy stocks on sale like this."

A new investor will find the greatest investment growth through equities rather than bonds, he said. Mutual funds or exchange-traded funds are preferable to individual stocks as you start out because they spread the risk.

Fully funding your company 401(k) retirement account is important for a beginner, Brown said. A good mix would be 60 percent large-cap stocks, 15 percent international stocks and 25 percent small-cap stocks, he said.

Don't be tempted to borrow from your account to buy a car or anything else because that money is sacrosanct, he warned.

"A lot of people have thrown in the towel and walked away, and the valuations in certain cases are compelling," said Jeffrey Saut, managing director of investment strategy with Raymond James & Associates in St. Petersburg, Fla. "Those are pretty good indications you ought to be looking at things."

His tip for beginners is that the first stock sectors to come around when the economy revives will likely be food and health care. He remains wary of financial stocks since it is difficult to determine their book values "because you can't figure out what's on their balance sheets." Bonds won't keep pace with inflation and a better bet is solid companies with dividend yields that also offer a chance at capital appreciation, he said.

Recent market days provide a primer for beginners.

"A terrific learning opportunity about what not to do, such as over-leverage and panic, and what to do, such as have a good cash reserve and a well-diversified long-term investment plan," said Curt Weil, a certified financial planner and president of Lasecke Weil Wealth Advisory Group LLC in Palo Alto, Calif.

Start with a monthly program of investing a fixed amount in an inexpensive index fund that mimics the entire U.S. stock market, Weil said. Diversification comes next, and he considers stocks, bonds and real estate investment trusts all "very cheap" right now.

For example, the $99 billion Vanguard Total Stock Market ETF (VTI) is an exchange-traded fund that includes virtually every U.S. stock and has a low 0.07 percent annual expense ratio. Although down 23 percent this year, it has a five-year annualized return of 4 percent. Exxon Mobil Corp., General Electric Co. and Microsoft Corp. are its largest holdings.

Weil's model portfolio uses low-cost index funds whenever possible to invest in the following allocation: 30 percent U.S. stocks, 30 percent foreign stocks, 10 percent U.S. bonds, 5 percent foreign bonds, 5 percent natural resources, 10 percent REITs and 10 percent cash.

"If you need the money within the next three years, stick it in a money-market fund or certificate of deposit," Weil said. "Successful investing is a game of patience and long-term thinking."

Once you're able to invest more extensively, set an allocation and review your holdings every six months by percentage, he said. If one group has gone up significantly, sell enough to bring it back to your original allocation and use the resulting cash to buy more of any group that has gone down. Such rebalancing forces you to sell when things are high and buy when things are cheaper, he noted.

"This is actually a great time for people to be starting out, as counterintuitive as that might seem," said Christine Benz, director of personal finance for Morningstar Inc. in Chicago. "The first step is to get an asset allocation that makes sense, given the person's age, years to retirement and risk tolerance."

For investors starting out, Benz offers these funds that have suffered significant declines but retain attractive prospects:

-- The $39 billion Dodge & Cox International Stock Fund (DODFX), down 32 percent this year, has a five-year annualized return of 11 percent. Top holdings include Novartis AG, Royal Bank of Scotland Group and Schlumberger Ltd. Requires $2,500 minimum initial investment; $1,000 for individual retirement accounts.

-- The $3 billion Sequoia Fund (SEQUX), down 13 this year, has a 10-year annualized return of 6 percent. It was recently reopened to new investors. Largest holdings are Berkshire Hathaway Inc. Class A, Mohawk Industries Inc. and Martin Marietta Materials. Requires $5,000 minimum; $1,000 for IRAs.

-- The $19 billion T. Rowe Price Equity Income Fund (PRFDX), down 17 percent this year, has a five-year annualized return of 5 percent. Largest holdings include GE, Chevron Corp. and JPMorgan Chase & Co. Requires $2,500 minimum; $1,000 for IRAs.