“Investment returns will average 5 percent or less from common stocks as measured by the S&P500 over the next five years – a very subdued forecast. Stocks and high-quality bonds will probably generate returns approximating each other.”
Mr. Rodriguez cautions frustrated investors not to try to boost returns by taking on higher levels of risk. He believes equities are relatively richly priced, and he is a net seller of stocks, expecting turbulence ahead.
The women’s clothing retailer Charming Shops (NASDAQ: CHRS) is the one firm Mr. Rodriguez is buying, having already snapped up about 8 percent of the turnaround company.
As a long-term strategy, Mr. Rodriguez suggests balancing exposure between a good value fund and a good growth fund. Then every three or four years, the investor should sell the fund that has done well and buy its underperforming counterpart. Mr. Rodriguez calls the strategy “buying weakness and selling strength.”
“If investors did something along these lines,” he says, “they would end up with considerably better long-term investment results than by being skewed to any one particular discipline.”
Peter Landin is CEO of U.S. Institutional Business for Barclays Global Investors, a firm that manages more than $750 billion in assets, mainly for large pension funds.
“Our fundamental belief is that it is hard to pick individual stocks with the intention of hitting home runs,” Mr. Landin says. He believes most individuals should let professionals handle their investments, with the goal of managing a modest return above stock indices.
“What is important is not really the overall level of returns as much as the level of returns compared to the alternatives,” he says. “We have a favorable opinion of the stock market relative to the opportunities in fixed income or cash.”
Mr. Landin advises individual investors to buy index funds instead of relying on the home-run strategy. “Even most professionals tend to underperform the index,” he says. But for investors who do press ahead with individual stock picks, he cautions against buying companies using aggressive accounting practices, saying such firms are “effectively borrowing from future earnings and setting themselves up for disappointment.”
Mr. Landin says his firm is split 65/35 between stocks and bonds and that investors should also seek a balanced portfolio. With that in mind, he says the Enron collapse, which cost thousands of employees their jobs and their life savings, should serve as a lesson.
“I hope that this year – and the Enron situation in particular – has been a wakeup call for people to understand that no matter how much they believe in their company, they have to be aware of the significant downside risk of concentrating their investments and their jobs in a single stock,” Mr. Landin says.
“Diversification is key,” he advises, adding that holding 20 percent or more of your portfolio in a single stock should raise a red flag.
Linda Descano, director and portfolio co-manager of the Private Portfolio Group at Citigroup Asset Management in Stamford, Connecticut, has a different approach to investing.
Ms. Descano offers a mutual fund and managed accounts for “social awareness” investing, which enables investors to invest in a manner consistent with their values and beliefs.
With accounts ranging from $50,000 to $25 million, Ms. Descano invests mainly in large-cap stocks of U.S.-based multinationals across the economic spectrum.
“The majority of our clients are very sensitive to a handful of industries. Tobacco, nuclear power, and weapons are probably the three that there is a lot of concern over, with some concern over alcohol and gambling companies,” she says.
Ms. Descano has a positive outlook for the coming year but warns investors not to expect smooth sailing. “Over the next several months we will probably still hear a lot of negative news, and that is going to create more concern and volatility,” she says.
She recommends companies such as United Parcel Service (NYSE: UPS) and American Express (NYSE: AXP), which should benefit from an economic recovery, as well as PepsiCo (NYSE: PEP) and the drug company Pfizer (NYSE: PFE), which she expects to do well regardless.
For Ms. Descano, asset allocation is key. “The most important thing for an investor to do is work with a financial adviser to establish goals and objectives, develop an asset allocation that will help meet those objectives, implement that strategy, and monitor it and not get caught up in issues of timing and market ups and downs,” she advises.
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