What a terrible time to invest. Interest rates are about to explode, Israel is ablaze, war on Iraq is imminent, the real estate bubble is ready to burst, bin Laden's on the loose, all the good stocks have soared out of sight, and bullish sentiment -- enemy of the market -- is at record highs.

Yet there is no stopping the march of time. We still need to compound savings for our kids' college education, for weddings, for retirement, for homes. And the bond market's not much help: 3% per annum probably won't even pay for postage on your financial aid form in 12 years.

The bears would have us all stockpile cash and crackers, sit in a hot tub, hold hands, short the Dow to zero and await the apocalypse. But that seems a bit passive -- even un-American. We are a nation of doers, not worriers. We are a people of action, not fear.

If you are among the hundreds of thousands of investors who still have more than a third of your investable assets in cash, waiting for a better time to ease in as the economy recovers from recession, here's a heads-up:

  • The best time to invest in the past year was during the panic of mid-September following the terror attack.

  • The next best time was in October during the panic over anthrax.

  • The best time after that was in mid-February during the panic over corporate accounting.

    Get the picture? If you didn't start applying your cash during any of those three stretches, maybe you don't have the personality type to take advantage of hysteria. Instead, you might need to ease back into the market during a period of calm, like now, with stocks, funds or indexes that have the best chance of surviving the next panic -- which, I promise, is around the corner. Today I'll start with stocks; next week, indexes and mutual funds.

    Two 10-Year Portfolios That Beat the Market

    Last summer I created two 10-stock portfolios that I suggested could serve as a start for a 10-year plan. One portfolio contained shares of top-rated companies. The other contained stocks I believed were poised to exploit global and domestic demographic and industrial trends.

    News and investor sentiment in late July was similar to today's, but the economy was in much worse shape: Recession was raging, layoffs accelerating, industrial production plummeting. News was all bad, all the time. But soon it would get worse: Enron, the terror attacks, war and off balance sheet accounting were not yet on the calendar.

    And yet the portfolios did pretty well, as shown in the two tables below.

    The first portfolio, designed to limit risk, advanced without much volatility even in late summer, and it plodded to a respectable 9.1% return through the end of March -- 14 percentage points better than the -4.6% return of the S&P 500 index. The best returns came from a chewing tobacco manufacturer, two midsized regional banks, a bank transaction processor, a small industrial conglomerate and a medical devices maker.

    The second, speculative portfolio soared, sputtered and rose meekly again, ending the period up 2.3%. Strongest returns came from a brutalized big biotech, a consumer products giant, a discount retailer and a British designer of high-end semiconductors.

    To be sure, both portfolios would have performed much better if I had had the prescience to know that the week of Sept. 17 would bring the exact bottom of 2001. The first portfolio bought on the close of Sept. 21 would have advanced 29.7%, well ahead of the 18.8% advance of the S&P 500 since then. And the second, speculative portfolio would have returned 21% if bought at the close of the first day the market reopened, on Sept. 17, vs. a 10.2% return of the S&P 500. While these latter gains are gaudier, they are also a lot harder to achieve for most mortals, as you require nerves of steel to buy at such times.

    First 10-Year Portfolio
    Limiting risk, plodding toward gains
    Company Name 7/26 Close 3/28 Close Pct Chg
    UST (UST: NYSE) $29.40 $38.93 32.4%
    BankAtlantic Bancorp (BBX: NYSE) 9.89 13.00 31.5
    Fiserv (FISV: Nasdaq) 38.02 45.99 20.9
    SPX Corp. (SPW: NYSE) 118.05 141.58 19.9
    North Fork Bancorp (NFB: NYSE) 31.80 35.56 11.8
    St. Jude Medical (STJ: NYSE) 70.20 77.15 9.9
    Packaging Corporation of America (PKG: NYSE) 19.10 19.79 3.6
    Energen (EGN: NYSE) 26.25 26.45 0.8
    Washington Mutual (WM: NYSE) 40.35 33.13 -17.9
    Barr Laboratories (BRL: NYSE) 84.25 65.82 -21.9
    Avg. 9.1%
    S&P 500 4.6%
    Nasdaq -8.8%

    Second, Speculative 10-Year Portfolio
    Sputtering, slipping and recovering
    Company Name 7/26 Close 3/28 Close Pct. Chg.
    Immunex (IMNX: Nasdaq) $15.30 $30.26 97.8%
    Johnson & Johnson (JNJ: NYSE) 53.19 64.95 22.1
    Target (TGT: NYSE) 36.85 43.12 17.0
    ARM Holdings (ARMHY: Nasdaq) 11.10 12.35 11.3
    Harley-Davidson (HDI: NYSE) 52.03 55.13 6.0
    United Technologies (UTX: NYSE) 73.18 74.20 1.4
    Nokia (NOK: NYSE) 20.50 20.74 1.2
    American International Group (AIG: NYSE) 82.28 72.14 -12.3
    AOL Time Warner (AOL: NYSE) 44.91 23.65 -47.3
    AES Corp. (AES: NYSE) 34.10 9.00 -73.6
    Average 2.3%
    S&P 500 -4.6%
    Nasdaq -8.8%

    Rebalancing Your Portfolio

    If you give up on the idea of waiting for just the right time to enter the market, you can rebalance the first portfolio every six months or so. In this case, I'm two months late -- but that won't be any surprise to my friends. (I'm the guy who really will be late to his own funeral.)

    To develop my list of new names, I searched for top-rated companies, then ranked them from high to low by average grade for fundamentals, valuation, technical price action and ownership. I remove stocks that trade fewer than 75,000 shares a day, then go down the list, taking no more than two stocks in any sector. The new list includes: Local Financial ( LFIN), Roxio , MDU Resources ( MDU), Capital One Financial ( COF), Fortune Brands , Ralcorp Holdings , Cemex S.A. ( CX), Regis , Symantec ( SYMC - Get Report) and Unit ( UNT).

    Don't count on returns as strong as those in the last eight months; there's doubtless a lot of luck involved. I did some checking on a few of these companies, and liked what I discovered:

  • Regis is the world's largest owner and franchiser of hair salons, under the brand names Regis Salons, Trade Secret, MasterCuts, Supercuts, Cost Cutters, Hair Masters, Style America and, inside Wal-Mart stores, SmartStyle. Its forward P/E on 2002 estimates is 19, a bit higher than its 11% to 15% expected growth rate, and margins are increasing as the firm adds more in-house hair-care products to its mix. It is adding 160 to 200 salons in Wal-Marts worldwide each year alone; total sales in these stores hit $200 million last year, which is not bad at $11.95 per cut.

    Paul Finkelstein, president and chief executive, notes that while Regis is No. 1 in its industry, it owns just 4% of U.S. and 2% of worldwide market share, so there is plenty of growth headroom. The count now stands at 7,300 salons. Regis carries a fairly high debt load, but it has plenty of cash flow to cover payments. It's a rare retail play that is not endangered by fashion whims, as hair styles change glacially and are easily adapted to; it's also not endangered by technological obsolescence. Management execution is the key risk here, as companies become harder to control as they grow at this clip. Finkelstein recently sold a large number of shares; he says proceeds were earmarked for his grandchildren's educational trust and a new home.

  • Local Financial, the third-largest bank in Oklahoma, focuses on small- to medium-size business loans. John Rodis, an analyst at Stifel, Nicolaus, says Local has capitalized on bank consolidation in the state by marketing itself as being run by good ol' boys who don't have to run applications past honchos in Charlotte or San Francisco. Rodis notes that Local trades at 12 times 2002 earnings, a 20% discount to its peers, runs a clean operation sheet with no off balance sheet tricks, and is paying down debt. Combine the potential for a boost in P/E multiple with native 8% to 11% growth, and it's fair to expect shares to rise to $21 in 12 months from their recent perch at $15.75.

  • Roxio scares the heck out of me, frankly; it's one of those, ugh, technology companies. But it's fairly well priced, not well known, profitable, cash-flow positive and unencumbered by debt. It also dominates one of the few powerful computer themes going: Its software allows consumers to save, edit and share music and video on compact disks and DVDs. A basic version of its main product is embedded in Windows XP as well as the Macintosh. The question is: Does Roxio become a big stand-alone software company, like Adobe, or the maker of an increasingly commoditized utility? Glen Ingalls, analyst at Soundview Technology Group, says Roxio is too small for the big mutual funds to buy, as there are only 19 million shares outstanding -- but give it a few years and with decent execution it should grow up into a $1 billion market cap. Its P/E multiple on 2002 estimates is 20, about even with its expected growth rate.

  • Symantec has a huge installed base of anti-virus products, a powerful pipeline of new products and a good leadership team. Valuation is a bit high, with a P/E twice the rate of its estimated compounded annual growth rate, but you always pay a premium for the best.

    I will start tracking the new portfolio with prices at the close of April 2. I will also swap out a few of my speculative picks:

  • BISYS Group replaces American International Group ( AIG). AIG's convoluted financials are a source of concern. I'd rather go with a smaller, faster-growing company in the same sector. BISYS provides a wide range of outsourcing services to financial institutions. It's not cheap, but it's a well-seasoned leader with solid cash flow.

  • Northrop-Grumman replaces Immunex ( IMNX). Immunex was purchased by Amgen so it has to be replaced. Northrop is artificially depressed by questions over its bid for TRW, but should advance to a premium value once the deal is either accomplished or fails as the uncertainty diminishes.

    Make no mistake: There will be much better entry points through the year for all of these stocks and the broad market. But you've got to start somewhere, and it might as well be now, after a couple more days of sharp declines. Or at least track these ideas for the next six months, and if you like what you see -- come back in October to try the next installment for keeps.

    At the time of publication, Jon Markman owned or controlled shares in none of the equities mentioned in this column.