| Sargent & Lundy Savings Investment Plan |
| RETHINKING YOUR RISK TOLERANCE |
| The following excerpts are from an article in the Wednesday,
August 19, 1998 "Chicago Tribune". The opinions of the author,
Robert Heady, may or may not reflect those of the SIP Committee.
Are your investments singing the Wall Street Blues? Do you think that the big drops in the Dow are just temporary, that the bull will roar again after the "correction"? Or are you finally planning to bit the bullet - by admitting that 20 percent to 30 percent annual yields are gone for now - and your blood pressure demands you park your cash in a safer haven? If you go that route, prepare to earn yields of only 5, 6 or 7 percent. That's what bank CDs, Treasuries and savings bonds are paying - tops. Yet, those numbers aren't too distant from the 8 percent to 10 percent average returns that many analysts are forecasting for stocks form this point forward. Granted, Wall Street has been on an amazing rip for the past eight years, and little wonder America's become spoiled. The Standard & Poor 500 Index has had a smashing 30.48 percent annual average rate of return over the last decade, based on compounded cumulative growth. So what happened? Didn't the experts tell you not to sweat it when the Dow took a hit earlier this year? That if you stay in the market for the long haul you'll do just fine? Well, because of the deepening Asian crisis, those same guys who claimed the financial problems in Hong Kong, Korea and Japan were "good for the U.S. economy because they help curb inflation," are now back-pedaling on their bicycles. "It's time," said one guru this week, "to reevaluate your portfolios and check the wisdom of your investments." So much for how smart those yokels are. Their erroneous guesses litter the highway like so much road kill, but, fortunately for them, no one remembers the last animal they hit. If you're like most people who lost money in the recent market drop, you're now leaning on the advice of your broker or financial planner, or you're paddling the money river all by yourself. Whatever course you take, remember these four pointers: 1. Not one soul knows what the market will look like six or 12 months down the road. Five brokers in the same room will give you five different answers. 2. Now's a good time to check your "risk tolerance" level. In plain English, ask yourself, "If my investments go bad, how much can I stand to lose before it starts to hurt me personally and affect my lifestyle, now and in the future?" Put a dollar figure on it. That's your tolerance level. 3. Keep your eye on two key factors in the United States and Asia. Everyone has a different opinion of what to watch, and what not to watch, to plot market direction. One reason America fails to monitor foreign indicators is that we've become mentally insulated against foreign financial troubles, believing it can't affect us here. Wrong. It's now impacting us directly. Follow whether Japan really shuts down its bankrupt banking system and reforms its crippled economy. If the Japanese government blows smoke instead of masterminding a massive, painful over haul, its yen currency will fall even more against the dollar, China will have to devalue its money, and all of Asia will be on the skids. That would hurt U.S. corporate profits and clobber Wall Street. The world would then worry about deflation. In the United States, the popular notion is that as long as interest rates and inflation are low, the stock market will keep rising. That may be true...for now. Historical analysis says one of the most critical inflation triggers is higher wages. When payrolls begin moving up during a tight labor market, it's an early sign that inflation may be in the wind. There's been no upward wage pressure so far - until the UPS and General Motors strikes. 4. Your safest investments are U.S. Treasuries and savings bonds backed by Uncle Sam, and FDIC-insured bank investments. Treasuries are currently paying about 5.3 percent on one-year T-bills and five-year T-notes, while Series EE bonds pay a market rate, currently 5.06 percent, for 30 years. In September, the Treasury will offer its new I Bonds, with a combination of two rates: a fixed rate throughout the life of the bond and an "inflation rate" adjusted twice a year based on changes in the Consumer Price Index. |
This page updated on 9/4/98