Donna Block
SHAREWORLD
I’ve just returned from holiday in Plettenberg Bay, during which time my family and I decided to take a tour boat. We spotted lots of sea creatures but the waves were throwing us around quite a bit, causing my six-year-old to say, “Mommy looks just like a robot – red, yellow and green.” I’m not going to say what happened next.
I felt like that robot once again when I powered up the computer on my arrival back home to find the markets riding one of the wildest waves ever.
To be sure there are those who are riding it to riches. If you invested in the Nasdaq, populated by all the technology leaders, it’s up more than 80% over the past 12 months, and is up 16% year-to-date. You did well. However, the Dow Jones industrial average, populated with many “old-economy” stocks such as Coca-Cola, is up only little more than 6% over the past 12 months, and is down 8% for this year, even after its stunning 500-point one-day surge last week. To tech or not to tech, that is the question. New economy or old economy – what to do next? Answers I’m afraid I don’t have, but here are a few suggestions to make the ride a little smoother.
First and foremost, take your short-term money off the table. This is the money you will need for a down payment on a house six months from now, or school fees – it doesn’t belong in the stock market.
Try to diversify your holdings as much as possible. Many investors are now holding big tech bets. There’s no reason not to hold tech stocks, but many prudent financial advisers suggest that if you are an aggressive investor you shouldn’t have more than 40% of your share portfolio in technology, and 20% is the limit for a conservative investor.
If you’ve got tech stocks that have had huge gains, consider selling portions of the most richly valued ones (those with price- earnings ratios that are more than 2,5 times their projected rate of earnings growth). If you’re looking to cut back consider trimming any individual stock positions that represent more than 15% of your equity portfolio.
Keep the Internet stocks in perspective. Not every one is a new-economy sweetie. Amazon.com, eToys, iVillage and NetBank have taken a drubbing and are down big time. So what do you need to know to make money in this sector? First, understand that the Internet isn’t a sure thing. Investors are finally starting to pay attention to how much these companies lose. To make it as an e-tailer (a business known for thin profit margins) a company must have the scale and ability to execute flawlessly, and it has to use its advertising dollars well. Don’t jump at investing in new Internet startups. It could be very tempting to get in on the ground floor of a new venture, but do your homework first.
Also consider old-economy companies thinking in new-economy ways. Look at companies using cutting edge technology to expand their production or those that are going online to sell their products. An added bonus: many of these companies earn billions of dollars in profit each year and their share price may be way down.
The good news is that markets like these can offer great buying opportunities. Many blue- chip growth stocks have been knocked down to bargain prices. They may not be the fastest growers, but they provide the optimum combination of earnings growth and cheap valuation. Many blue chips are also still far from their highs and have room to grow.