Time to Get Back in the Game--Cautiously

Our Investment Outlook forecast for 2002 is optimistic, if not exuberant

So you're thinking the latest mini-bull market will lift you right out of the unhappy memories of 2001 and back to those up-up-and-away days of the booming 1990s? Well, you had better think again. We're in a new world of risk, with radically altered markets--and investors will forget the lessons of 2000 and 2001 only at their peril.

What lessons? That markets can go down just as fast as they go up. That concentrating on the latest winners will concentrate your losses, too. That New Economy recessions can be just as harrowing as the old ones. And, most hauntingly, that the world is still a dangerous place, and Americans' best-laid plans can be wrenched apart by forces far outside our borders.

Confronting and controlling those risks is the theme of BusinessWeek's Investment Outlook for 2002. Our forecasts are optimistic--but cautiously so. Wall Street is looking for an 8%-to-10% gain in the broad Standard & Poor's 500-stock index during 2002, but those gains will come in fits and starts. Take the 16% gain in the S&P from the lows of September: Wall Street is bidding as if it expects a robust recovery, even as the Street's own economists say the economy will grow only 2.4% in 2002. Even with bonds, you're going to have to go further out on the risk curve--away from Treasuries and AAA corporates to higher-yielding junk bonds and emerging-country debt--to get decent returns.

To protect yourself, branch out. While growth stocks have been in the tank, dividend-paying stocks have shown that they're not just for Grandma. Real-estate investment trusts appear poised for a third strong year. Specialty mutual funds--playing the merger game, dabbling in commodities, or picking losing stocks and selling them short--can broaden your portfolio and hedge your bets.

To control risks, you'll need to set targets--and discipline yourself to follow them. Jay Sekelsky, lead equity manager at Mosaic Investors Fund, looks for "growth at reasonable risk." He won't buy a stock unless the gain he expects when it hits his target price is at least three times the worst loss he would fear. Sekelsky's second rule, especially apt in the wake of Enron Corp.'s meltdown: "If I can't understand the financial report, I don't buy it."

The battering of the past two years has made Americans more realistic about stocks: In our BusinessWeek/Harris poll, 54% of investors say that stocks will pay just single-digit returns in the long run. But "faith in the market is still strong--the equity culture is not going away," says Jeremy J. Siegel, professor of finance at the Wharton School. Americans realize that investing is their key to future wealth--and coping with a new world of risk is the key to successful investing.

By Mike McNamee

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