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Professor Portfolio
A New Focus on Picking the Right Investment
 by Ernie Ankrim, Ph.D.
Director, Portfolio Strategy
Russell Investment Group
November 7, 2001
Many investors are struggling in the post-Sept. 11 world. However, a long-term perspective and discipline will present sound investment opportunities during this period of lower equity prices. Keep in mind, though, reward will be linked to effort.
The glory days of the late 1990s, when any technology stock or fund seemed to guarantee big profits, crashed with the Nasdaq in March 2000. Winners are out there, but they're much harder to detect. Today's investors must do their homework.
The Case for Equities
Frank Russell Company's Asset Allocation Group believes that investors can get reasonable returns on equities over the next three to five years. Of course, these returns will not compare well with those of the tech boom, but they can be solid — especially in this period of low inflation.
Many investors, however, are frightened. So they've retreated to positions very heavy in bonds, whose prices have gone up, and money market funds. While fixed-income instruments should be part of any portfolio, these investors have gone out of balance. (The fact that bond and stock prices go in opposite directions is just one of the reasons Russell stresses diversity and a long-term approach.)
Result? Investors are now paying more for bonds — and receiving less income. (When bond prices go up, yields go down.) As I wrote in Investment Behavior in the Midst of Tragedy, that goes against the proven wisdom, "Buy low, sell high." Money market funds? Their yields are already well below the 5-6% of recent years.
On the other hand, investors now purchasing equities are buying low. But wise investors don't buy just any stocks because their prices have fallen. They try to buy the right stocks.
The Difference in Stock Performance Is Growing
Stock selection is more important than ever because we're seeing a huge difference in returns among stocks within asset classes. I can't really say why. Perhaps some companies are better suited to deal with challenging times than others. I do know that in the middle '90s, in the United States, the degree of difference in returns across sectors was one-half to one-third today's levels. Some stocks will turn in great results while others are falling like a stone.
Selecting the right money manager and fund is just as important. Funds, too, show a wider range of performance in an increasingly volatile marketplace.
Is Your Manager on Track?
Most investors can't easily track the activities of fund and money managers. Today, some managers may be tempted away from their established — and published — strategies. Others may even shift their investment styles. The average investor won't know until it's too late.
What Now?
Let go of comparisons. Don't judge your returns by someone else's. Remember, every investor's goals are different. Casting an envious eye on a neighbor who boasts greater returns on a company or fund could be a terrible mistake. You're not competing with anyone but yourself. If your goals are being met, you're doing the right job. That's why investors who failed to diversify during the tech boom are now casting envious glances at those who did.
Stay rational, not emotional. Our investment markets have weathered all sorts of political and economic calamities. No one can predict tomorrow, but history demonstrates that the United States has the flexibility and strength to rebound from this latest shock, just as it has before. Patience and steadiness offer meaningful rewards.
Copyright© Russell Investments Canada Limited 2001. All rights reserved. See Legal Information. Date of first use: 11/07/01.
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