Rebound Or Relapse?


government will stop doing that and then we’ll all have to pay the piper … maybe into 2004, maybe 2005 before the old bear market resumes.

B.E.: Given the likelihood of a return of a bear market, what should investors do?
GREEN: I think investors have to make long-term decisions about what parts of the market they are going to have their money invested in, what their personal asset allocation is, based upon their individual return objectives and risk tolerances. With those determinations made, investors are well served to stick to that asset allocation and only make minor adjustments in response to any wild gyrations of the stock market in the short term. If you are going to be active about it at all, be active in a contrarian fashion.

ELEY: My suggestion, which is a relatively safe strategy that can get you some of the higher returns through stocks over time, is to hold something in the area of a 40% to 45% position in stocks, but make sure they are stocks you believe are relatively low risk, with the remainder being in fixed-income [vehicles].

STEWART: With the caveat that I’m a specialist, just looking at the banking sector, I think diversification among different asset classes is the key, say about 40% to 50% domestic equity. Then you’ve got other asset classes that you might want to consider, such as real estate or real estate investment trusts. You might want to also look at non-U.S. equity investments, and if you think inflation is coming back, diversify into gold and precious metals.

PUGH: As we talk about asset allocation, we have to think about earning lower than average returns and what that means for you in terms of being able to meet your needs. That would influence your asset allocation process. If you have a higher need for higher returns, you’re going to do a different type of diversification than you would if you were more comfortable that that 5% to 7% type of returns were going to meet your needs over the longer term.

Just one other thing: I think
the type of environment that we are in, and will be in, is most suited to active managers, whether they are on the fixed [income] side or the equity side. I think that there is the ability to differentiate and incrementally add returns through that active process.

B.E.: Is there anything else investors can do to increase their returns?
STEWART: I tend to look for companies that have fairly strong cash flows and fairly good dividend payouts. I look toward things that I had a degree of familiarity with and things that I tend to utilize quite a bit. I am sure an investor can look to the [utility] company where he is paying the bill and if it’s publicly traded, I’m sure he’ll see a 3%, 4%, or 5% yield. Compare that to say keeping your money in a money market fund [yielding 1%].

GREEN: I have heard people talking about making back the losses, rebuilding their


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