Focus on Personal Finance
A Mid-Year Investment Strategy
It may be time to reposition your portfolio. 

What goes up must come down. In the case of the Fed, the rate of descent has been much quicker than the climb. Through the first 5 months of the year, the Fed has cut interest rates 250 basis points, or a full 2.5 percentage points, unwinding the 175 basis point increase that occurred over a 12-month period during 1999-2000. These cuts will certainly spur renewed economic growth. However, the wild cards now appear to be volatile energy prices and a labor market hit by major corporate layoffs.

The bear has growled, and we are left wondering how soon he will go back into hibernation. Cumulative returns to the market indices for the 6 months ended March 31 were ­19.2% for the S&P 500 and ­49.9% for the Nasdaq. These are the worst two consecutive quarters ever for both indices.

This decline makes one hesitate in putting new money into stocks. Here, I'll tell you why disciplined investing requires consistent practices in good times and bad.

A prolonged bear market can actually benefit long-term investors who have the discipline to make regular monthly investments -- by extending the period of "cheap" buying opportunities.

CHECK YOUR BEARINGS

First, review your overall asset allocation. It's generally agreed by academicians and practitioners alike that the asset allocation decision is by far the most important one made by an investor. Yes, even more important than security selection in the long run.

For investors with a moderate risk profile, we currently recommend an allocation of 70% equities, 20% fixed income and 10% cash. Your risk profile should incorporate your planning horizon, which ultimately encompasses your ability to tolerate the ups and downs of portfolio returns (both financially and emotionally). Exposure to equities should be reduced for shorter horizons and increased for longer periods. Here's why. The range between best and worst historical returns for the S&P 500 Index is reduced quite dramatically when 5-year periods are compared to 3-year periods since 1977. For rolling 3-year periods, annualized returns have ranged from 1.9% to 33.3%. The range is 7.0% to 29.6% for rolling 5-year periods.

As the bear market has just verified, there's a greater probability of equity returns falling below the return to bonds when the measurement is less than a full economic cycle of growth and decline.

Many investors are concerned with pursuing the appropriate "style" of equity investments. The reality is that style,

DIVERSIFY, DIVERSIFY, DIVERSIFY

The most prudent strategy is to balance your equity portfolio between value and growth. Don't be concerned with trying to time the style rotation. For those investors who have been rewarded recently with value-oriented positions, keep those positions and direct your incremental investments toward growth-oriented stocks and mutual funds. Investments in individual equities require fundamental analysis of the company's current and prospective financial prospects, as well as an examination of the underlying business model.

Your checklist for diversity should include exposure to foreign equities (10%), small and mid-cap issues (20%) and large cap stocks (40%).

The bear has taken a bite out of most portfolios, but prospects for future growth are encouraging. Now is the time to have a disciplined investing plan.

Richard J. Alphonso, JD, CPA/PFS, M.S.T., and Raymond M. Hawkins, M.B.A., CFA, are president and investment analyst/financial planner respectively, of The Financial Advisory Group, Inc., in Houston. The Financial Advisory Group provides personalized fee-only financial planning, investment management and business consulting services.