Uncertainty and indecision cast a long shadow over the markets in 2004. “Earnings growth was at 20 percent and the GDP was hitting 5 percent, and the market wasn’t responding,” Pace says. He notes that lately the stock market has offered greater risk and lower return, a trend that might continue for some time. This situation puts investors such as McMillan and Grafer on the defensive, and they are hunting for better opportunities. “The standard wisdom used to be 50 percent stocks, 40 percent bonds and 10 percent cash in your portfolio,” McMillan says. “But now I’m hearing from even conservative money managers that you need to have at least 20 percent in alternative investments.”
In addition to hedging against the dollar and buying bonds in Australia and New Zealand, she is looking into funds that short U.S. Treasury bonds, and into equity opportunities in China. The term “alternative investments” has been used to describe opportunities such as venture capital and hedge funds, where greater risk was tempered by potentially greater rewards. But McMillan says that what she has been doing lately “isn’t about going out on the edge. It’s about looking at how people have managed to make money lately, and diversifying.”
David Baird is an entrepreneur in Ottawa, Ontario, who in 2002 sold the security technology company he founded, and invested a portion of the proceeds in a portfolio of U.S. stocks. “They have done well in and of themselves, and if I spend that money in the United States, there’s no problem,” he says. But if he converts his gains back to Canadian dollars, they will be worth far less than they would have been a short time ago because of the weakening U.S. dollar.
Baird has been watching the dollar for any inkling of a further slide, out of concern over the same herd mentality that worries McMillan. “There are a lot of people like me around the world who lose money when they bring their returns back home. If they see the dollar sinking further, they’ll all pull out of the market together, and that could have an effect on the market,” he says. “I’d rather be ahead of that crowd than behind it.”
Yet, hope springs eternal on Wall Street. While the stock market in 2004 showed a tendency to revert to an uninspired mean, a rally in December allowed investors to boast of at least a small gain for the year. Dordevic and others believe this could be a signal that, even if the economic outlook is not becoming clearer, perhaps investors are learning to take a certain amount of uncertainty in stride. “There’s always a worry about something,” Dordevic says. In 2004, investors worried about terrorism during the political conventions and the Olympic Games. Then “people were delaying things and blaming the contentious election. Now it’s the dollar,” he adds. “But you can only hold your breath for so long. At some point, you just have to move on.”
Grafer agrees, saying he could give in to his fear that the conservative portfolio that protected him in the downturn will not keep pace if inflation picks up. With this in mind, he tinkered with his hedge funds to nudge his returns a bit higher, and he has decided, for the time being, that simply has to be enough. “You can easily become paranoid about your finances in this environment,” he says. “But you have to learn to let go and focus on what’s really important and move on with your life.”
Eileen P. Gunn is a Brooklyn-based journalist who writes about personal finance, careers & real estate. epgunn@hotmail.com Illustrations by Viktor Koen. Additional Information
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