Dear Dr. Don, I am a 45-year-old professional with roughly $31,000 in the market. My portfolio has been mostly tech, as you can see from my list. With the current correction, I am down more than 50% for the year. My time horizon is another 20 years before I will start to tap the funds. These investments are held in a traditional IRA account. My wife and I contribute to separate Roth IRA accounts and both have employee plans at our jobs. Hers is a 403(b) and mine is a 457 deferred comp plan. We also contribute to a few taxable mutual funds on a monthly basis. Our employers do not participate in the retirement accounts, but we both have pension plans through our employers that we plan to use after retirement. We both have about 20 years to go before we would be eligible for the full benefit of these plans. Over the past two years, I have moved in and out of several stocks only after they have made substantial gains. I have traded Dell (DELL) - Get Report three times over the past two years, IBM (IBM) - Get Report, Merck (MRK) - Get Report, Citigroup (C) - Get Report, Staples (SPLS) and several others. Now I find myself in a position of sitting tight. Your thoughts would be appreciated. J.K.
The good news is that this portfolio has a year-to-date return for 2001 of more than 22%. Since you provided me with your tax costs for these positions, I calculated that you've lost $24,000 in these stocks, or 44%, over the holding period. If you had these same holdings over the past 12 months then you'd have lost $60,000 in value, or 65%.
Being a long-term investor means that you don't face liquidity pressures that would force you to sell out of an investment at an inopportune time. It doesn't mean that you can't trade your portfolio, and it doesn't mean that you have to hold a stock forever. I've seen a lot of traders this year wrap themselves in the long-term investor flag after their stocks headed south. If the fundamentals facing a company or an industry change, you should be willing to act on that change. If you're selling stocks when they have substantial gains, and holding on to stocks when the bottom drops out, you've created a recipe for a portfolio full of losing positions. Waiting for them to become winners again isn't the answer.
If you don't want to make decisions in your portfolio, you need to either hire a professional money manager, or structure your portfolio to be better diversified. For example, you own Dell, IBM and
-- all computer equipment manufacturers. Those three stocks represent about 20% of your portfolio. Do you really want 20% of your financial assets invested in three computer manufacturers? A similar argument can be made for your telecom holdings. All told, you've got almost two-thirds of your portfolio invested in technology. That's a substantial bet that the technology sector will outperform the overall market.
To be successful in making a long-term position trade in the technology sector means that the sector has to outperform the overall market and you have to own the right stocks. I'm not a technology analyst, but if I were going to make long-term sector bets in technology, I'd own a technology fund and not individual stocks. That's also good way to hire a professional money manager for your portfolio.
Portfolio Manager feature to review your portfolio. That software separated your investments by sector. You have no exposure to five of the 10 sectors it lists and limited exposure to the financials. The sectors that you aren't investing in include: utilities, energy, industrial cyclicals, consumer durables and consumer staples. These holes in your portfolio can hurt your portfolio's performance over the long run.
By owning an index fund, an investor can own companies and sectors in the same weighting that they represent in the index. By not overweighting or underweighting sectors, the index investor will earn the return on the index, less any expenses. Exchange-traded funds and index mutual funds are two approaches to index investing.
Most investors don't like the passive approach of index investing. They want to beat the market, not be the market. My advice is to be aggressive with a small portion of your portfolio, a speculative component of 10%-15% of your financial assets, but have most of the portfolio invested in a well-diversified mix of stocks, bonds and cash. You're 100% in equities. Make some room in your portfolio for some money market investments, some bonds and some foreign stocks. Stocks should still predominate your portfolio, but the bond and cash positions will take some of the volatility out of your portfolio.
Don't look at these investments in isolation, they're part of your overall portfolio, which includes your Roth, 403(b) and 457 plans and your taxable accounts. A good place to start in determining your asset allocations is with
Jim Cramer's Asset Allocation Adventure. You'll be able to dial in the particulars about your financial situation and your market outlook and get back an allocation recommendation that you can use adjust to suit your needs.
Dr. Dr. Don Taylor has been an investment professional for nearly 15 years, most recently as the treasurer for a nonprofit organization where he managed more than $300 million in assets. He is a chartered financial analyst, holds a Ph.D. in finance and has taught investment and personal finance courses at the University of Wisconsin and at Florida Atlantic University. Dr. Don's Portfolio Rx aims to provide general investing information. Under no circumstances does the information in this column represent a recommendation to buy or sell. Dr. Don welcomes your inquiries and feedback at