Seven Resolutions for the New Bull Market

5. Diversify by Sector and Company

I wrote about this in detail in "Diversification Raises Returns, Lowers Risk -- Here's Proof". You should have a maximum of 25% of your assets in any one sector (e.g., technology, financial services) and you should never have more than 10% (preferably 5%) of your assets in any one company. Unless you're in senior management, this rule includes investments (e.g., ESOPs) in the company you work for. I automatically cut by half any position that rises to 10% of a clients account, and I rebalance my sector exposure every January (for details, see "Here's How to Play the Portfolio Rebalancing Act.")

6. Moderate Risk With Fixed Income and Dividend Stocks

I'm primarily a growth manager, but not all my clients -- for example, clients approaching retirement -- can afford the risks associated with a pure growth strategy. Typically, 25% of the stocks in my portfolios have "value" characteristics -- high dividends, low volatility, low price-to-book ratios. These companies include REITS (which are Real Estate Investment Trusts) and energy stocks. I also add in fixed income exposure, primarily through no-load, no-transaction fee mutual funds such as Monetta Intermediate Government Bond Fund and NorthEast Investor's Trust.

You should be careful with adding fixed income exposure in 2003 because the consensus is that interest rates will rise. High Yield Corporate Bond funds are attractive (high current yields) as are short-term investment grade funds (low interest rate sensitivity). You can also buy bonds in a "ladder" strategy (e.g., purchase five equal lots of government bonds maturing two, four, six, eight and 10 years out; when the first bond matures in two years, roll the proceeds into a new bond maturing in 10 years).

7. Cultivate Skepticism

After a year like 2002, it's obvious that no one, including myself, has a perfect record forecasting the future. Investment managers were overwhelmingly convinced of positive returns in the S&P 500 last January, but, according to Lipper, 96% of equity funds gave negative returns last year. So before you invest with a manager or fund based on a hot 1 year return, double check the three, five and preferably 10 years of returns. When I'm assisting clients in configuring their 401(k)s, I hardly ever choose a fund with less than five years of history, and certainly never pick something exotic like a sector fund.

Excessive compensation packages to management are often a flag of trouble, because managers are running the company to optimize their own positions rather than shareholders'. In April 2001, Forbes magazine reported that Michael Eisner topped the list of highest paid CEOs for the previous five years, even though net income of Disney (DIS - commentary - Cramer's Take) had declined an average of 3.1% per year. At that point, Disney stock had already fallen from a high of $45 to $35, on the way to the current $18.

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David Edwards is a portfolio manager and president of Heron Capital Management, a New York management firm. Edwards was a contributor to Harry Domash's Fire Your Stock Analyst: Analyzing Stocks On Your Own available at Amazon. At the time of publication, his firm was held positions in Dell and Amazon.com, though positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Edwards appreciates your feedback and invites you to send it to David Edwards.