Facebook Twitter

Don’t let bull market fool you: Investing is still a risky venture

SHARE Don’t let bull market fool you: Investing is still a risky venture

While investors in stocks and stock mutual funds are busy counting up the rewards they are reaping from a mighty bull market, they can easily lose track of the risks they are taking.

Sure, they know in an abstract sense that stocks can go down as well as up, that economic and interest-rate trends can turn unfriendly without warning - and that many other things can go wrong in the turbulent world of the financial markets.But in times like these, when the markets keep piling one strong year on top of another, it's hard to keep a clear appreciation of those hazards in your head.

The U.S. stock market averages, after racking up two-digit gains in 1995, 1996 and 1997, did it again in the first half of 1998. The Dow Jones industrial average climbed 13.20 percent from New Year's through the end of June last week.

Standard & Poor's 500-stock composite index jumped 16.84 percent, and the NASDAQ composite index rode a revival of enthusiasm for technology stocks to a 20.66 percent gain. This sort of thing has occurred so regularly of late it has come to seem like the predictable, reliable norm.

Tim Ferguson, senior managing director at Putnam Investments in Boston, suggested in a recent letter to investors in Putnam's large family of funds, "Reacquaint yourself with risk. If you have invested a good portion of your assets in the last five years and have seen consistent gains, it may feel as though risk has gone out of the mar-ket.

"In fact, the risk in your portfolio may have increased as the prices of the stocks in your portfolio have risen to new heights. Make sure you're not taking more risk than you want."

Notice that he didn't say anything about eliminating risk. The way the world of money works, that just isn't possible to do.

You can eliminate all apparent stock-market risk from your life by pulling all of your money out of stocks and stock funds, or never putting any of it there in the first place. But then you face the problem of where else to invest it.

And whatever you decide, you run the very real risk that the alternative vehicle won't deliver as good a return. Cash buried in your backyard may be safe from obvious risks like stock market crashes. But it is left unprotected from inflation. And since it cannot grow in its hiding place, it also puts you at risk of not meeting future needs and goals such as amassing an adequate retirement nest egg.

But if risk cannot be avoided, it needs to be recognized and managed. "Make sure your portfolio is fully diversified," Ferguson said.

The alternative to diversifying among different types of stock investments, and beyond stocks to other asset classes like bonds and money-market securities, is trying to figure out what the stock market is going to do next.

That job has many analysts right now even more puzzled than usual, if such a thing is possible.

"This market is a maze of contradictions and nonconfirmations," said Norman Fosback, editor of the newsletter Market Logic. "The transports are lagging far behind the industrials, the smaller-cap segment of the market has retreated . . .

"Since last October, the average mutual fund has gained less than half as much as the S&P 500, an indication of poor breadth in the advance to new highs. A high level of caution is appropriate."

But anyone who takes too defensive a position risks missing opportunities that a good many optimists insist are still there.

Sid Keith Mullins, who follows emerging growth stocks for the investment firm of Salomon Smith Barney: "It's my opinion that smaller-cap growth stocks have reached a classic bottom and are primed to beat the market over the next several months, fueled by stronger earnings growth and rising valuations."