Forecast '99 - financial analysis

Black Enterprise, Jan, 1999 by Donald Jay Korn

Investors looking for individual foreign companies face a challenge. "Outside of the U.S.," says Shote, "it's even more important to buy well-known companies such as Daimler-Chrysler and Glaxo because it's harder to tell how foreign companies are really doing. Even though I don't think you should invest in Japan now, I would recommend Toyota and Sony, which get two-thirds of their income outside of Japan."

Bonds. McEvilley says that investors "should fill their bond piece first," when they're putting together a portfolio in 1999, which may be a volatile year for financial markets. "Treasuries are the safest place to go." Indeed, Treasury bonds were a safe haven for investors during the summer of 1998 (see "Betting On Bonds" chart).

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Bolton agrees that investors should hold substantial amounts of bonds in this climate. "My model portfolio includes nearly 40% in bonds now. Of those bonds, your basic holding should be Treasuries, which have held up well. My preference is for intermediate-term Treasuries, maturing in about five to eight years, although you can go out to around 12 years if the yields are attractive."

Unfortunately, intermediate-term Treasuries may be safe, but they're unlikely to be spectacular investments, especially with current yields around 5%. High-bracket investors may prefer municipals, says Fields, because they're tax-free. "Buy insured bonds for safety," he says. "Buy long-term bonds if you're comfortable that you'll be able to hold them until maturity."

Peace, however, isn't a fan of bonds, preferring "ownership over loanership." That is, investors are better off in stocks, where they own a piece of the company. In the bond market, Peace says he prefers to invest in convertibles. These are bonds that pay attractive interest rates yet can be converted into a certain number of the issuer's shares.

"You get most of the stock's upside with less of the downside risk," says Peace, "and the interest helps your total return. Convertibles may be hard to analyze so you'll likely prefer to invest through a mutual fund." Peace cites Nicholas/Applegate Convertible Fund, saying that Nicholas/Applegate is a high-quality money management firm with a following among institutional investors.

Besides convertibles, Haywood says that utility stocks offer another alternative to bonds for income-oriented investors. "Both individual companies and specialized utilities mutual funds performed well in 1998, when most stocks turned down," he says. Electric utility dividend yields now range 3%-6%, comparable to bond interest rates, and utilities offer the chance for long-term appreciation as well.

Our advisors' best advice: hang in there. "In the long run," says Peace, "1999 is just another year. Stick to your long-term game plan and don't pay too much attention to daily price movements."

McEvilley says the trick is not to make any rash moves, no matter what the market does. "Unless you need the money tomorrow, why sell at the bottom? Over 10 or 20 years, investing in good stocks is the best way to create wealth."