For Investors, Points to Ponder in 2002

Beware of chasing last year's winners, and learn a lesson from Enron by steering clear of rosy promises with hidden risks

By Robert Barker

"I Can Teach You How To Make Big Money" -- this improbable claim, inscribed on a business card that someone left on my car, greeted me on my first work day of 2002. The card also featured a big, fat dollar sign -- the old-fashioned kind you see on Monopoly cards -- and beneath it, the legend: MILLIONAIRE.

If only I dared promise readers as much. Instead, as we step on the gas and drive off into 2002, my column's fifth year, I would like to offer a few modest observations on the investment world as I see it today. I hope that one or more will help you.


  Asset allocation is the big decision for almost every investor. With most stock funds in the red last year and the average long-term bond fund up a solid 7.4%, according to Morningstar, many investors will be tempted to shift money from stocks to bonds. Think twice before you join that crowd. It's a lesson that's forgotten as often as it's taught, but here goes: Bond prices move in the opposite direction of bond yields. So, when bond yields go up, bond prices go down.

And that's just what I expect to happen this year as the Federal Reserve finishes its cycle of lowering interest rates, and -- with any luck -- the economy begins to grow its way out of recession. The time to buy bonds is when yields are high and have plenty of room to fall, and that's just not the case today. I'm not saying that a savvy investor would dump bonds altogether and buy stocks. I think every investor should own some of each -- but this isn't the time to be tilting toward bonds.

Similarly, some investors will start chasing the last year's hottest mutual funds. Among U.S. stock funds, the hottest of all in 2001 was Schroder Ultra (SMCFX ), driven to a total return of 73.5% by manager Ira Unschuld. I congratulate the fund's sponsor for having already closed the doors to new investors, whose potential for flooding the fund with fresh cash would very likely hurt future performance. That's a shareholder-friendly policy too few fund companies follow.


  You don't want to chance hurting yourself by firing off checks to some of the other superperformers of 2001. They included Pilgrim Russia (LETRX ), up 80.3%; Matthews Korea (MAKOX ), up 71.1%; Ameristock Focused Value (AMFVX ), up 60.4%; Corbin Small-Cap Value (CORBX ), up 53.7%; and Wasatch Micro Cap (WMICX ), up 50%.

Instead, consider doing yourself a favor, and think about buying what's cheap today and has potential for being revalued upward tomorrow. Did I hear someone say technology? Yes: Technology stock funds on average lost 38.1% last year, according to Morningstar. Many tech funds will lose money again this year. But if you pick one of the best tech-stock funds -- Dresdner RCM Global Technology (DGTNX ) and T. Rowe Price (PRSCX ) are two of my favorites -- you will stand a much better chance of helping yourself this year than you would by jumping on last year's winner.

For companies hoping to sell stock in initial public offerings, last year was a real disappointment. But for small investors, it was a year of real -- and rare -- opportunity, when such solid corporate citizens as Principal Financial Group (PFG ) and Kraft Foods (KFT ) came public at reasonable prices, earning IPO buyers nice returns at relatively low risk.


  A word to the wise: As the IPO market warms up this year, as I expect it will, look for the advantage to shift once again to the sellers. The best general advice on IPOs is to shun them as not worth their riskiness. That should apply once again in 2002, when issues from the likes of Verizon Wireless, PayPal, and Travelers are set to come to market.

Finally, I suggest you bear one other little item in mind this year as you approach investing: Consider an attitude adjustment. That is, consider dialing up your sensitivity to the improbable.

What do I mean? Before we all write off the disaster that was Enron exclusively to bad corporate behavior, it's worth recalling this: Based on quarterly reports that gave new meaning to the word opaque, it was impossible to understand how the company made money. That should have been all anyone needed to avoid investing in the company. The potential for profit was there for all to see, but the risks were hidden.

Enron shares weren't all that different from that business card left on my car. I Can Teach You How To Make Big Money, it promises. It lists a toll-free phone number (which, for your benefit, I won't pass along). But nowhere in view are the risks -- which I found out involve a multilevel marketing scheme -- that one would face on the way to the big money.

If you find yourself considering an investment that seems to have no obvious risks, regard it just as you would that multilevel marketing come-on: A piece of trash.

Barker covers personal finance in his Barker Portfolio column for BusinessWeek. His column appears every Friday, only on BusinessWeek Online

Edited by Patricia O'Connell

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