Pros Offer Allocations for 2001, but You Don't Have to Follow Them

This time last year, you realigned your portfolio in an attempt to follow the market pros and now find that your current portfolio is much smaller, thanks to an overweighting in tech.

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Will 2001 Be Haunted by the Specter of the Four E's?

Pros Offer Allocations for 2001. You Don't Have to Follow Them.

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Well, now Wall Street is screaming "diversify" and rolling out their new and improved portfolio allocations. Should you fiddle with your portfolio again? Be careful. This newfound advice may translate into buy high, sell low and could mean big tax hits for you. So now you're so confused, you're just about ready to sell it all and stash the cash under your mattress.

Wait!

Take a deep breath. While I agree it feels overwhelming, you can shift to a well-balanced portfolio without driving yourself nuts. We'll walk through some basic steps and tell you what the experts are recommending. But don't forget, the experts aren't always correct. Use their suggestions as a guide. The allocation of your portfolio depends on your age, your risk tolerance and your goals. Remember, Wall Street's so-called experts have enough money -- you don't. You need money for retirement, so be cautious.

Overall Portfolio Weightings

First, figure out the percentage of stocks, bonds and cash you're holding. If your overall portfolio is currently valued at $200,000 and you have $150,000 in equities, via stocks or mutual funds, then 75% of your portfolio is in equities.

Is that percentage too high?

The old saw used to be to subtract your age from 100. That's the amount you should hold in equities. "While it's not a perfect measure, it's useful as a benchmark," says Paula Kennedy, a senior manager in the private client advisers group at Deloitte & Touche.

The brokerage houses make general portfolio recommendations based on current market conditions and outlooks. For instance, for a standard growth portfolio with a three- to five-year time horizon, Merrill Lynch director of U.S. private client investment policy David Wilson recommends 65% in equities, 30% in bonds and 5% in cash. Salomon Smith Barney recommends the same. With a longer time horizon, Wilson suggests an 80% equity position with a 15% position in bonds.

You don't need an expert opinion, though. There are plenty of tools on the Web these days to help you create a portfolio allocation based on your goals and risk tolerance -- as long as you answer the questions truthfully.

Check your mutual fund company's Web site. Most have some type of allocator nowadays. If not, go to Schwab's Learning Center and take the "Developing Your Asset Allocation" course. (It's free and only will take you a few minutes.) Or check out Fidelity's asset allocation tool. Go to the Planning and Retirement section and click on General Planning. The Asset Allocation Planner will ask you a series of questions to help you determine your risk tolerance and will recommend an asset allocation based on your responses. Our weekend columnist Mark Ingebretsen recently dissected a few others as well.

These allocators and firm recommendations are based on models so you will fall into one of them based on your responses. While they are not completely individualized, they can be a great starting place.

Digging Deeper

The next step is to analyze the equity and bond portions contained within your portfolio. Look at each asset class. Check your large-cap vs. small-cap holdings as well as your U.S. vs. non.-U.S. holdings, says Neil Wolfson, a national partner in charge of the investment consulting group at KPMG in New York. Because small-cap stocks typically are riskier than their large-cap brethren, make sure those weightings reflect your risk tolerance. In addition, many professionals recommend a 5% to 10% holding in overseas stocks, since some of those markets move inversely to ours.

Then dig deeper. Look at your sector positions, like your technology, health care or financial stock holdings, and determine their weighting to your overall equity portfolio. If your equity portfolio is currently is valued at $100,000, and you have $40,000 in tech stocks, then 40% of your equity positions are in tech.

Is that too much? Maybe. J.P. Morgan equity strategist Doug Cliggott holds 25% of his equity portfolio in tech, which is roughly in line with the S&P 500.

But Lehman Brothers strategist Jeff Applegate recommends a 44% position. "We think tech valuations are very attractive now," says Charlie Reinhard, a senior U.S. equity strategist who works with Applegate. Specifically, Reinhard points to the 80 large-cap companies in the S&P 500. "The sector is not getting the long-term respect it deserves to produce earnings."

Merrill's Wilson agrees with the positive tech outlook. With the recommended tech position in their growth portfolio around 38%, they believe that over the long haul technology stocks afford above average growth and return.

So if you currently have a 30% tech holding, should you click-and-sell to adjust your portfolio to meet these recommendations? Hardly. These guys are not infallible, and weighting changes over time as certain sectors move up -- or down. Last year, many of them recommended at least a 45% tech holding, and look where that got you. Use these percentages as a guideline. At 30%, you're probably fine, assuming you can sleep at night. At 70%, you may need to consider some tax loss selling to get your portfolio back to reasonable balance and minimize your future risk.

But what if you hopped on the tech train at its highest point in March? Should you take the pain to bring your portfolio in line? As long as you're not exceptionally overweighted, both firms believe you should stay put. The numbers will catch up.

Determine the percentage of the other sector weightings in your current portfolio. Do you have exposure to the energy and utilities sectors? Both Lehman and J.P. Morgan see these as good places to be in a volatile market, recommending a combined 17% allocation. The demand for power and the continual deregulation will help boost both sectors, says Reinhard. Morgan Stanley Dean Witter's Byron Wien and Leah Modigliani hold 11% in their portfolio vs. the S&P's 10%.

Portfolios of the Pros
Sector	Morgan Stanley	Lehman	Merrill Lynch	S&P 500
Technology	21%	44%	38%	25%
Energy & Utilities	11	17	8	10
Healthcare	10	12	7	13
Financials	16	11	10	16
Other	42	16	37	36
Source: Firm research reports

A quick note on health care: The good days may be behind us. "We think the overall sector is becoming rich," says Reinhard. Both Morgan Stanley and Lehman have underweighted positions compared with the S&P's almost 13%. But if you are looking to invest money in the sector, Merrill's Wilson suggests the biotechs, like Genzyme (GENZ Quote) and Guidant (GDT Quote), or the hospital-services stocks, like HCA Healthcare (HCA Quote) and Tenet Healthcare (THC Quote).

Some Final Thoughts

"Even if you're 30 and have 40 years to retirement, you still need some bond exposure," says Kennedy. So while we focused on the equity portion of your portfolio, don't neglect your bond exposure. And it's important that you "ladder" your bonds so that they don't all come due on the same day. For the skinny on laddering, check out this earlier column by our bonds guru Beth Roy Stanton

And a few more tips:

As you get closer to retirement, gradually add more bonds and income-producing stocks.

Consider having a Las Vegas account, says Katz. This is your play money, representing a small portion of your total portfolio, and your livelihood should not be affected if you lose it. Use this money to chase the next "hot tip," if you must.

Be careful of overlap, warns Wolfson. If you keep throwing money into different stocks and mutual funds, you may end up holding the same position multiple times.

Remember, this is not a static exercise. Review your positions quarterly (not daily). Make sure your allocation is intact and you still believe in the positions you own.

So pour yourself some eggnog and make a New Year's resolution to get your portfolio in shape.

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