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‘95 LOOKS GOOD FOR INVESTORS

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Hi there, Utah investor, how do you like 1994 so far? Oh, really? That bad, huh? Sorry I asked. But cheer up, I have it on the best authority that 1995 will be much better. This time next year, 1994 will be only a bitter memory as you count your profits in a securities market that has rebounded from this year's selloff.

How do I know this? I asked Allison Smoot, senior vice president in Smith Barney's Salt Lake brokerage office.Smoot is among the top 5 percent in commissions of the state's investment counselors with 1,100 accounts totaling $70 million and ranging in size from $500 to $6 million.

This year, she concedes, she has been doing more "hand holding" than anything else, guiding her nervous clients through a volatile year while trying to keep them from joining the herd of investors who have have bolted from the market to the security of bank CDs - thus locking in losses from their stocks and bonds investments.

"What we're seeing is a classic case of people who have bought high and are now selling low," said Smoot. "It should be just the opposite; they should be buying now, not selling."

That's what she is telling her clients, but she concedes it's a hard sell. People are upset at watching their investments decline since late last January when the specter of rising interest rates began a yearlong assault on stocks and bonds.

The Salt Lake office of mutual funds giant Fidelity Investments confirms that view, noting that for the first time in 8 months it had seen a net outflow from its equity funds.

Investors pulled $100 million from stock funds in November, said Fidelity. In contrast, $550 million was added to the Fidelity equity funds in October.

And don't expect major relief in December, warns Smoot. Many investors will be selling this month to lock in capital gains losses for tax purposes and '94 likely will end with equity and bond losses pretty much across the board.

Ah, but 1995 should be different, says Smoot. How does she know? Well, she doesn't know, of course; no one does, and if they did they probably wouldn't share the scoop with the rest of us. But history is on our side, assures Smoot.

Consider: in every year ending with a 5 over the past seven decades, the S&P 500 has gained an average of 39.2 percent. The best year was 1935 in which the S&P rose 47.5 percent, but even the worst year, 1965, logged a 12.5 percent gain.

Not convinced? OK, how about this: In the third year of every presidential term ('95 is the third year of President Clinton's term) the S&P has risen 88.2 percent of the time overall and 87.5 percent of the time when a Democrat was in the White House.

Collectively, the market has risen a median 22.8 percent in the third term of all presidents and 23.4 percent when a Democrat was the chief executive. That's up from 6.6 percent overall and 2.6 percent for Democrats in the second year of their presidential term, which in Clinton's case was this year.

Still need convincing? All right, you skeptic you, consider that only once since World War II has the market declined two years in a row - 1973-74 during the Arab oil embargo.

If nothing else, consider that during the past 50 years, only 13 years have ended with the S&P lower than when the year began.

"Those are all reasons to be in the market in '95," says Smoot. "Dumb reasons, maybe, but good reasons."

As a last resort, Smoot says she bought a crystal ball. "But every time I look in it, it's cloudy, always cloudy."

Too bad. But the real reason to stick with risky "investments" over the "security" of government-guaranteed deposits, she says, is the virtual certainty, based on history, that over the long term investments will keep up with or beat inflation while savings will not.

Need proof? Just ask any retiree who thought his guaranteed pension of $350 per month in 1970 was perfectly adequate to finance his golden years but was reduced to literal poverty by the end of that decade of double-digit inflation.

OK, fine, you say. But why not have your cake and eat it too? That is, be in nice, safe CDs when the markets are in the tank and then get back into stocks when the market starts moving up. Nice try, says Smoot, but if it were that easy we'd all be rich.

That tactic is called market timing, and there are plenty of gurus churning out investment letters who claim to have a system that will have you in the market when it's on a roll and out when it rolls over a cliff and all for only $120 a year for a subscription.

The real problem with market timing, says Smoot, is not that you'll be in when it goes down, but that you'll be out when it goes up.

Consider this: The annualized return of the S&P 500 for the 1,276 trading days from 1982-87 was a hefty 26.3 percent.

But if you were out of the market during the 10 biggest up days in that period, your return would have been only 18.3 percent; out 20 of the top days you'd earn 13.1 percent; out 30 days you'd be up 8.5 percent and if you missed the top 40 of those 1,276 trading days, your return would have been 4.3 percent.

For a 4.3 percent return, you might as well have kept your money in a passbook savings account and skipped the aggravation. Clearly, to time the market you must be able to dodge in and out, calling tops and bottoms with incredible day-to-day precision and you must do it year after year after year.

If you don't think you're up to that challenge, Smoot has the answer. Allocate your assets among a variety of investments, based on your age and investment goals, with stocks and stock funds used only for the money you can afford to leave alone for at least a complete market cycle of three to five years and preferably more like 10.

Then be patient and let compounding and the long-term upward trend of the market go to work for you. When the Dow drops 500 points, as it did on Black Monday in October 1987, you don't panic and sell everything at a loss. You chuckle and shake your head as the lemmings run over the cliff, secure in the knowledge that this, too, will pass.

Maybe you even call your broker and buy some more shares - that's what John D. Rockefeller did during the Crash of '29.

*****

Additional Information

Presidential election cycles

And S & P Performances

President 1st year 2nd year 3rd year 4th year

Democratic median 12.5% 2.6% 23.4% 17.5%

Up years 67.0% 50.0% 87.5% 87.5

All presidents median -1.0% 6.6% 22.8% 16.5%

Up years% 47.1% 58.8% 88.2% 88.2%

The futility of market timing

Investment period S & P 500

Annualized Return

Full 1,276 trading days +26.3%

Less the 10 biggest up days +18.3%

Less the 20 biggest up days +13.1%

Less the 30 biggest up days + 8.5%

Less the 40 biggest up days + 4.3%

*Statistics courtesy of Ibbotson Associates, Chicago, Illinois