Are you experiencing a midyear crisis?
The jump in oil prices, an unpredictable stock market and disappointing economic indicators in the first few months of 2005 were unwanted surprises that have left investors wondering which way to turn.
Many upbeat assumptions didn't become reality. Fortunately, midyear is an opportune time for a personal portfolio checkup to determine whether adjustments are necessary.
A growing trend is a more positive attitude toward stocks over bonds. In particular, industry groups whose prices were unduly punished in the past should do well in a second half characterized by modest interest rate increases and a decent economy.
"On the more pleasant side of the 2005 ledger - really all we've had in terms of good news - are very, very solid corporate profits," said Hugh Johnson, chairman and chief investment officer for Johnson Illington Advisors of Albany, N.Y. "Despite those strong profits, investors sold stocks because of fear about oil prices."
Increase your small-capitalization stock holdings because they should continue to outperform large caps, Johnson advised. Shares of exchange-traded fund iShares Russell 2000 Index, which replicates the Russell 2000 small-stock index, are a handy way to do this.
His latest breakdown for a model stock portfolio is 80 percent large cap, 14 percent mid cap and 6 percent small cap. Emphasize growth stocks over value stocks, Johnson continued, because bull-market groups such as technology and consumer cyclical stocks have been gaining ground.
"I'm more bullish on the stock market than bonds because we've had companies raising dividends at an unprecedented rate this year," said Richard E. Cripps, chief market strategist with Legg Mason Wood Walker in Baltimore, who favors larger-cap stocks and would keep 80 percent of a stock portfolio in them.
"We've also had stock buybacks by companies that feel good about their financial outlook and consider their stock to be undervalued," he said.
Reduce fixed-income securities, especially Treasuries, and shift that money into stocks because they should perform better over the next five years, Cripps said. Higher interest rates or inflation could hurt bonds more than stocks because so many investor bond holdings have long-term maturities and the value of their principal will decrease.
As part of a technology revival, Cripps and Johnson recommend stock in computer chip giant Intel Corp.
"Everyone says there's this worldwide slowdown, but we believe it's just a head fake, because there is long-term sustainable growth," said James Grant, a financial adviser with Scott & Stringfellow Inc. in Charlottesville, Va. "Get away from bonds and into stocks, especially since Wall Street has oversold the industrial and large-cap value stocks."
Focus your portfolio on stocks and certificates of deposit, Grant said. Pharmaceuticals have been strengthening, so he has been moving clients into the closed-end fund Hambrecht & Quist Healthcare Investors Fund, which offers a 7.87 percent dividend.
He said he wouldn't touch homebuilder stocks because he's nervous that they won't be able to sustain their accelerating earnings.
Other advisers share his concern.
"Residential real estate may be a bigger bubble than the stock market was in 1999 because higher interest rates will mean fewer people can afford higher-priced properties," said Louis Stanasolovich, certified financial planner and chief executive of Legend Financial Advisors in Pittsburgh. "In addition, there will be a need for liquidity among baby boomers, who will want to sell their homes and downsize as they retire."
Intermediate and longer-term bonds are a "formula for abysmal returns" over the next decade, he said. Because he isn't enthusiastic about U.S. stocks, either, he is shifting clients' money into alternatives such as the arbitrage funds Leuthold Core Investment, Metropolitan West Strategic Income and Pimco Commodity RealReturn Strategy Fund.
Familiar names dominate the midyear recommendations of these investment pundits.
PepsiCo Inc., the producer of carbonated soft drinks, and Medtronic, a maker of medical implants such as pacemakers and defibrillators, are Johnson choices.
Cripps recommends shares of semiconductor company Texas Instruments Inc., Wal-Mart Stores, the world's largest retailer, and farm equipment manufacturer Deere & Co.
Grant likes hamburger chain Wendy's International Inc.; Alcoa Inc., one of the world's largest aluminum producers; Wabtec Corp., a manufacturer of brakes for freight trains that should benefit as an extensive upgrade of trains begins; and chemicals giant Dow Chemical Co.
In funds, Grant recommends large value mutual fund Van Kampen Comstock and exchange-traded funds S&P; 400 SPDRS and iShares Dow Jones Select Dividend Index Fund.
Make any changes in moderation, experts advise.
"If you've had a well-structured portfolio, there's no real need to make midyear changes except to be a little more optimistic," said Alfred Goldman, chief market strategist with A.G. Edwards & Sons in St. Louis.
Taking a more conservative stance and moving into better-quality stocks are appropriate, Goldman said. The dollar is doing better, oil might have reached a short-term high and it would be a "really pleasant surprise" if the Middle East moves further toward democracy, he said.
Andrew Leckey is a Tribune Media Services columnist.