Susan.Foster: ‘I have kept my eyes shut tight ever since September 11th when it comes to looking at my dwindling IRAs and 401ks. Most of my money was in stock market index funds, with about 20% in bonds. I know that it is out of whack now, but am not certain if I should balance it back out. I guess I have been hoping that while keeping my eyes shut I would gain back some of the losses. Should I open my eyes and rebalance?’

☞ By rebalancing, you mean selling bonds (which have become more than 20% of your pie as they kept their value as the pie has shrunk) and using the proceeds to buy stocks ratio you at some point decided was right for you.

The first thing to say is that when you open your eyes, you may be surprised to see that the Dow closed Friday just 8% below it’s close of September 10, 2001. It could have been much worse (and there’s no guarantee we’ve seen the bottom).

The second thing to say is that, while rebalancing may indeed make sense, the only long-term bonds I’d be comfortable holding now are TIPS – Treasury Inflation Protected Securities (or a fund of them, a la Vanguard), because I worry that long-term interest rates may at some point rise.

Stocks are surely a better deal today than three years ago, when the NASDAQ was nearing 5200 (Friday’s close: 1469). But with the indexes already up 20% in the last few weeks, this may not be the perfect time to buy stocks, either. I think we could have a lot further to fall. Bear markets always have rallies, sometimes explosive rallies, and this may be one of them. (Then again, it’s all but impossible to time the stock market with much success over the long run.)

At least three things were killing stocks over the last three years. First: well, simply, they were wildly overpriced. The fever broke. Second: September 11 changed the world, and not – at least any time soon – for the more prosperous. Third: we had the accounting and ‘corporate governance’ scandals.

How are we doing on these three fronts?

The corporate governance concern may have run its course. (Did anyone every really care about accounting so long as stock prices were headed up?) But the reality is that where before we had a weak S.E.C., today we have a headless S.E.C., deliberately underfunded at that, along with a headless Accounting Standards Board. So the market may have grown bored with the problem, but it may be a little early to declare victory.

We’ve bounced back very well, economically and psychologically, from September 11. But we are told that spectacular damage to our economy is still Osama Bin Laden’s plan.

As to valuations, they are obviously far more sane than at the turn of the century. There are surely some bargains to be had (ask me in a year and I will tell you with assurance which they were). But the overall market – especially in the wake of the 20% run-up of the last few weeks – is still fairly rich.

It’s now been nearly six years since Alan Greenspan, alarmed by the steady and, in his mind, unjustified, rise in stock prices, delivered his ‘irrational exuberance’ remarks. The Dow then was 6500, the NASDAQ, 1250. In the six years since, the Dow has climbed 35% (which works out to a little better than 5% a year, plus dividends) and the NASDAQ has climbed about 16% (which works out to more like 2.5% a year, with dividends few and far between). So one might say that if stocks as a whole were irrationally exuberant in 1996, they may be rich even today.

Of course, interest rates are much lower, making any hoped-for stock market appreciation tempting (and those once-scoffed-at 2% dividends downright head-turning). But if interest rates stay low or go even lower, it could be for ‘bad’ reasons. (Look how low they’ve been in Japan.) And if the economy gets moving nicely, rates could go back up, which could blunt some of the otherwise-hoped-for rise in stocks.

So I’m still worried about the stock market. Then again, bull markets ‘climb a wall of worry.’ Perhaps we’ll get lucky. If I knew, I’d charge more for this advice.

In the meantime, no one says you must keep 100% of your money in stocks/bonds. You have alternatives. Two examples:

  • Money parked on the sidelines for a while in cash (or short-term securities). Some will kill me for this suggestion, as they believe all long-term funds should be 100% invested in stocks at all times.  If you believed that when the NASDAQ was 5200, don’t change your strategy now, when it’s 1469.  I’m just saying it’s legal to keep some of your long-term money on the sidelines, in short-term instruments, until the bargains become compelling.
  • Money invested directly in pipeline partnerships and real estate investment trusts that may yield 6% or 8% or more, some of it even tax-deferred. I would definitely not put all eggs in any of these baskets, but the BFS suggested here at around $16.75 on May 3, 2000 and then again November 27, 2000 has been paying its $1.56 dividend ever since.  It closed Friday at $23.24, up 38%, which makes it less attractive now than it was then – and who knows what awful things could happen to real estate investment trusts if the real estate market collapses and/or long-term interest rates rise? – but even at $23.24, it still yields 6.7%.  Or how about EPD and FGP, which yield just under 8% and 10% respectively?  I just bought some of each (but have not bought more BFS).
  • And how about diversifying a little overseas? Could the Templeton Russia Fund (TRF), which sells at a modest 9% discount to its net asset value (better a discount than a premium) be worth a small corner of your portfolio?  Russia almost seems to be becoming a real country.  You never know.

I wish I did know.  Then there’d be no need to be balanced at all.


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