When Your Goal Is Getting Close - moderate-risk short-term investing - Brief Article

Kiplinger's Personal Finance Magazine, March, 1999 by Manuel Schiffres, Brian Knestout

Suppose you've been saving all these years for college expenses or for your retirement and the finish line is finally creeping into view. Prudence dictates that you begin to scale back on holdings of riskier stock funds and replace them with more sedate stock and bond funds. The reason should be self-evident. Stocks have demonstrated throughout the decades that they can deliver returns superior to those of bonds. But stocks have also proved to be far less predictable. In the worst case, a stock fund may sustain two losing years in a row and spend a couple more years erasing those losses. That just won't do if your child's tuition bill is coming due, or you are ready to retire in a couple of years.

If your investment plans look something like the "Best Funds for Retirement" or "Best Funds for College" packages described earlier, it may be impractical to overhaul your holdings completely, if for no other reason than the potential tax hit. A better idea might be to sell off parts or all of a fund or two and reinvest in more-conservative funds.

If you're starting from scratch--perhaps you're planning to buy a car or take an exotic vacation in four or five years--the "Best Funds for the Short Run" portfolio may be just right for you as it is.

And a fund that we think is just right for a moderate-term, moderate-risk portfolio is T. Rowe Price Dividend Growth. William Stromberg, manager of the fund since its inception in 1992, says every company he invests in must currently pay a dividend and must be expected to boost its payout on a regular basis. Stromberg, 38, tries to minimize risk by not paying excessive prices for growth stocks, by diversifying broadly, and by "sticking to my charter. My charter keeps me out of the more cyclical parts of the economy. It also keeps me out of stocks like AOL and Dell, which don't pay dividends. So I tend to lag when the market flies and pick up ground in more difficult environments."

The anchor of this portfolio is a 45% allocation to Harbor Bond. This is an intermediate-maturity, taxable-bond fund managed by Pacific Investment Management Co.'s William Gross, 54. Gross and his teammates begin by setting the fund's average maturity based on their long-term and shorter-term evaluations of the economy and interest rates. They then determine which sectors of the bond market look most attractive and try to buy undervalued bonds in those areas. Recently, the fund was positioned to benefit from further declines in long-term interest rates, says Brent Harris of PIMCO. The fund also had a heavy weighting in mortgage securities.

Rounding out the portfolio are two funds that buy undervalued stocks. Babson Value, managed since 1984 by Roland "Nick" Whitridge, owns about 40 large companies, in roughly equal weightings, that are statistically cheap and are showing some signs of growth to come. Whitridge, 61, trades stocks at a glacial pace. Royce Premier invests in small, undervalued stocks, focusing on what manager Charles Royce, 59, considers the highest-quality names in his universe. Though Premier gained just 6.7% in 1998, Royce considers it a year of vindication for his low-risk approach. The average small-company-stock fund broke even last year.

Best Funds for the SHORT RUN

FUNDS AND PERCENTAGE OF PORTFOLIO
Babson Value                      10%
Harbor Bond                       45
T. Rowe Price Dividend Growth     25
Royce Premier                     20

ASSET ALLOCATION: Nearly half in bonds and the rest in stocks

DESIGNED FOR: Investors saving for a goal four to six years away

MINIMUM TO REPLICATE THIS PORTFOLIO: $10,000 ($4,000 for IRAs)

HOW TO GET STARTED: In a regular account, start with Babson Value, then add, in order: Royce Premier, Harbor Bond and T. Rowe Price Dividend Growth. If you use an automatic-purchase plan, start with Dividend Growth, whose minimum to open an account is $50; then add Babson (minimum, $100) and Harbor and Royce (minimum, $500 each).