May 11, 2004  Email this  Print this
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Win the Stock Market Tug of War
by Steven Goldberg  The threat of rising interest rates and the promise of higher corporate earnings will likely play tug of war with stock prices for the rest of the year. Right now, the bears clearly have the upper hand. My hunch is the bulls will take command, and that we'll end up with a market that gains roughly 10% by year's end.
But the common sense advice is easy: If you're a long-term investor, that is you're putting money away for retirement that's more than five years away, you should use sell-offs like the one we saw Monday to shovel more money into stocks. You should be nearly 100% in stocks. What difference does it make what the market does in the next six months if you're investing for many years?
And as the adage goes, the stock market is a market of stocks. Some get tossed around and others are true anchors, especially larger, blue chip companies. Some large-caps for the long haul include the likes of American International Group (AIG) and Pfizer (PFE). You may also want to consider the basic materials sector, which is getting a lift from growing economies abroad and higher energy prices. Or if funds are more your speed, take a look at Selected American Shares or any of the stock funds in Kiplinger's long-term portfolio.
If, on the other hand, you're a short-term investor, and you plan to tap into your money in the next year or so to put a down payment on a house, or for any other reason, I'd avoid stocks like the plague.
Avoiding pitfalls
If the near-term path of the overall market looks unclear, there are some investments that I've been warning against for some time. I'm still wary of them.
Interest rates are going higher. No one knows how much higher, but this is plainly not a period in which you want to stretch for yield. The alternative, of course, is money market funds, which are yielding about 0.75% -- or less. But it's better to tread water than to drown. (Incidentally, many municipal money market funds are currently yielding slightly more than taxable ones.)
Short-term investors should consider Vanguard Short Term Tax Exempt (VWSTX) for some of their money. The fund yields a pathetic 1.45%, but it won't fall as rates climb. Its average bond matures in just over a year. Another safe bet is Vanguard Limited Term Tax Exempt (VMLTX). It yields 2.23% with just a touch more interest rate sensitivity. Its average bond matures in about 2.5 years.
Investors who have a few years before they'll need their money should do best with Vanguard Intermediate Term Tax Exempt (VWITX). It yields 3.24% and its bonds mature in an average of six years. This fund is good for the center of your plate.
While the yields are juicier on longer-term funds, I'd avoid them. You're likely to lose money in them. Also to be avoided are any of the leveraged closed-end bond funds. These funds are just too risky.
The leveraged funds have already fallen quite a bit, and so have Real Estate Investment Trusts. REITs are a longtime favorite of mine, but I think they have further to fall. They're still selling at more that the underlying value of the properties they own. And rising rates are poison to REITs.
Long-term investors should consider Third Avenue Real Estate Value (TAREX). This fund has gotten hammered just like REIT funds in the recent selloff. But it's likely to do better than REIT funds long term because most of its stocks are in the real estate business but aren't high-yielding REITs. Shorter-term investors should avoid REITs, as well as this fund.
High-yielding "junk" bonds have escaped most of the carnage in the bond market so far. But don't bet on that continuing.
Sure, junk bonds generally do well in an economic recovery. They're called junk bonds because financially weak companies issue them, and a strong economy lifts even many of the weakest companies.
But junk bonds rallied hard long before the recovery took root. As a result, junk bonds aren't offering the generous yields, compared to bonds issued by sturdier companies, that they usually do. That's likely to change -- and suddenly.
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