May 31, 04

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Loretta Nolan, president of Loretta Nolan Associates in Greenwich, is a "big believer in asset allocation."

Why Wall Street is skittish despite bright economy

War, election, rising interest rates and oil prices send investors scrambling for safe harbor

Despite improving economic news, Fairfield County investment advisers said investors are still wary of the stock market and seeking safer places for their money because of uncertainty over the war in Iraq, rising mortgage rates, gas prices and the presidential race.

"I don't call it the news any more, I call it the bad news," said Robert Kock, president of Investors Capital Management Inc. in Norwalk. "It's reducing the buying appetite for stocks in general. There's been an 8 percent sell-off in the market in a period of time when (corporate) earnings have actually been increasing."

Karl Molwitz, a partner with Personal Financial Planning L.L.C. (PFP) in New Canaan, agreed.

"The general public is focusing on all the bad news that is filling up the press about energy prices, Iraq and just general political unrest. It's hiding a lot of the good stuff," said Molwitz. "There are record profits being set at some of the S&P 500 companies. There's synchronized global recovery. But people aren't focused on it right now."

The uncertain times coupled with losses many investors sustained in recent years have made them skittish.

"Investors are not willing to take the same risks they took even six months or a year ago," noted Jeffrey A. Blutstein, managing director of Financial Logistics, which has offices in Ridgefield and Tarrytown, N.Y.

His firm is rebalancing and reallocating some clients' portfolios quarterly.

"Those allocations took place, but what we're finding what's happening recently is that they are becoming even more conservative," Blutstein added. "It's not really the world. It's really how the world affects our clients that affects the changes we made."

Molwitz, who runs PFP with his mother, Margaret Molwitz, said they have been doing much more "tweaking and adjusting" of portfolios than they had in the past. But he said they generally advise against straying too far from the original asset-allocation plan or "changing your strategy in a big way."

"A year and a half ago when we had our market bottom, all the people that decided it was too much, that it was all they could take at that point and sold out, look at what they missed," he said. "The people who stuck with it, recouped most of what they lost."

Loretta Nolan, president of Loretta Nolan Associates L.L.C. in Old Greenwich, said she is a "big believer in asset allocation and having the right mixture of stocks and fixed income." She doesn't like to see clients get completely out of the stock market.

"You may stay out too long," she said. "I don't believe in trying to time the market."

But many investors are staying away from stocks, said Molwitz, noting there's more than $2 trillion invested in money-market funds now. People are also using savings accounts, fixed-income accounts and other "temporary hiding places" rather than return in a big way to equities.

"When you look at the equity market, volatility exists and will always exist," he said. "But in consistent level of returns, in the equity market it's higher than any other asset class you can name, including real estate, bonds, gold."

Bonds, in particular, are a concern now that interest rates are expected to rise this year.

"Keep them short term," advised Nolan. "With a 10-year bond you're almost guaranteed to lose if interest rates rise. If it's two or three years, then you can ride it out until it matures and then reinvest."

Kock prefers Treasury inflation protected securities, or TIPS, a Treasury note or bond that offers protection from inflation because it adjusts to the consumer price index.

"A little bit of commodities in a portfolio will reduce the volatility and increase the return," Kock said, adding that buying them through an index counterbalances the increases or decreases in singular commodities.

With mortgage rates rising, mortgage applications are down, for both new purchases and refinancing, according to the Mortgage Bankers Association.

"That has a very direct impact on the real estate market. It's not immediate but it's going to have a direct impact," said Molwitz.

To reap the best tax benefit, Nolan advises those who want to own individual stocks to include them in their personal portfolio rather than in retirement plans.

"If you have the stocks in your IRA, you don't get the benefit," she said. "If you own equities, let the government subsidize your losses and pay a low tax on the dividends. You need to make your portfolio as tax efficient as you can."