Beating the Bear

Our panel of experts offers thebest strategiesto protect your wealth in today's market

about the dotcom bubbles, but about value investing and alternative investments like convertibles, so that there is an overall sophistication about the kinds of instruments that are available in the market.

B.E.: How do you get lay investors into convertibles?

LATEEF: That’s a good one. I think the case for convertibles speaks to the fear factor. You can make the case that they should look at convertibles because they are a more defensive way of participating in the equity market. You approach the returns of the equity market and, in some years, I’ve beaten the S&P. You do it with less risk. If you work with an advisor, you can ask [him or her about] a specific [mutual] fund. The bonds are sold in thousand-dollar increments, so that could be a deterrent [to some].

Francis: I think we have to continue to preach diversification and also knowing what the time horizon is for a particular allocation of money. So, if the idea is to buy a house in six months, the stock or the bond market is probably not the appropriate place. Leave it in a CD. If it’s to buy a house in five years or more, then maybe diversify the portfolio with some bond and stock exposure. If it’s college education and your kid is one year old, then heavy exposure to the equity market is probably appropriate. If it’s c
ollege in two years, it’s probably not. I think that diversification, understanding your time horizon and your risk tolerance are just the basic, fundamental things that one needs to go to before you buy any investment.

B.E.: How should investors go about rebalancing their portfolios in this environment?

FRANCIS: If someone has made the decision that they have a time horizon that can justify equities and a risk tolerance for equities, then I think that a balance between growth and value, large and small, is in order. One rule of thumb is to take kind of an index approach. You look at the market and [make the decision that] you’re going to be 85% to 90% large cap and 10% to 15% small cap. If you want a more aggressive stance than that, you can increase your small-cap exposure. If you are less risk-oriented, then you would increase [your] fixed-income allocation, before you start moving off into other types of asset classes.

RAY: I’ll pass along to the readers what I pass along to my own family members. As a general rule of thumb, you can take your age and subtract it from the number 120 [to determine the percentage of stocks that should be in your portfolio.] If you are 40 years old, you would want to be 80% exposed to equities and 20% exposed to bonds.

B.E.: How involved should professionals be in helping you make these decisions?

FRANCIS: Actually, I think that individual investors probably do themselves a disservice by only relying on professional advice, because they don’t really know what to react to [or] what is good information [or] bad information.

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