Meet the Street: Investing in Uncertain Times

The year 2001 is shaping up to be a year of the unexpected. We've seen several large declines and smaller rallies in the market, and are now facing an indefinite period of unprecedented uncertainty at home and abroad following the events of Sept. 11.

Jordan Heller Vice President, Financial and Estate Planning, American Economic Planning Group

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To get back to basics and to find out how investors can examine and adjust investment goals and expectations, Meet the Street turned to Jordan Heller, a financial planner and vice president at the American Economic Planning Group in Watchung, N.J.

Heller starts his clients off with defining their financial and investment objectives by their time horizons and risk tolerance among other key factors. He tells us how to formulate an investment approach that takes into account these elements. Staying on course and participating broadly, yet fully, in equities is important for long-term investors, he says, regardless of short-term jitters. While the current economic conditions warrant concern, he's optimistic about the future, especially about the positive impact of increasing globalization.

TSC: What do you think is the first step in pulling one's financial life together in these confusing times?

Heller: The most important thing for the individual investor right now is to define his or her objectives: Is it retirement? Is a special event coming up? Is it for education for yourself or your children down the line?

Each objective will be funded and invested in different ways. For example, if capital is needed within the next five years, you really shouldn't be in the equity market at all because you need a fixed amount of money, which must be there when the occasion arises. Therefore, you don't want to take on the volatility of the equity market. You would be better served with a fixed income-oriented investment approach.

TSC: What would be examples of that?

Heller: Munis , intermediate- to shorter-term bonds, high-yielding shorter-term bonds such as the (STADX Quote)Strong Advantage fund. But make sure the principal is safe because that is more important in this case than what you make above it. Still, you need to make above the inflation rate to keep your purchasing power.

TSC: What kinds of funds would you recommend right now?

Heller: Coming out of a recession, smaller-caps and value-oriented funds tend to do better. However, I recommend a portfolio structured to broadly participate in the market. This would include large-, mid- and small-cap stocks split between growth and value orientations.

TSC: What are the tax implications when you choose to sell funds that are down substantially?

Heller: When you sell out of funds that are doing poorly, you get to use $3,000 worth of tax losses (after netting them against your gains) as a deduction on your tax return. The remainder of your net losses gets carried forward to future years to offset against future gains. If the fund is not performing well because it is being untrue to its stated objective, or there was a switch of the fund manager, there is definitely a cause to rethink whether the fund can be used. If the fund is performing as planned, and it fits within the structured portfolio, then you're better off staying the course. So don't sell because it comes down. It may be the unfavorable market condition, not the manager.

If you have a need or desire for tax losses, you can sell the fund, take the loss and switch to a similar fund so that you can continue your market participation. However, you must remember that you can't reinvest in the same security within 30 days, according to the wash sale rule.

TSC: What is your view of the equity market risk now and going forward?

Heller: Many consider that this economy is in recession. The events on Sept. 11 worsened it. Offsetting this to a degree, however, is the fact that globalization has taken hold in the world to a greater extent than ever in previous cycles. Russia and China are very much participants now.

It used to be that only the U.S. and a handful of countries had the formula for economic development. Today, it has been applied worldwide. And that has actually cut risk, compared with 15 to 20 years ago, by a margin. While the current economic conditions seem in the short term like a serious problem, the reality is that the global markets working together will have a positive impact on the risk premium for decades to come. And therefore, when you do invest, invest broadly and invest for the long run.

TSC: So you recommend international exposure?

Heller: Definitely. International equity should always be a component in one's portfolio. International exposure's impact on our portfolios has actually declined over the years because of globalization, because the world economy works together more, so there is a higher correlation as to what happens in each country.

Additionally, many major U.S. corporations listed on the New York Stock Exchange have a much higher concentration of their revenues and profits coming from international markets than ever before. So you're already getting a high degree of international exposure in your domestic portfolio.