Back from the Brink
Author : by John F. Wasik    -   Subject : Finance

Money management is more important than ever....

As the country copes with the aftermath of the terrorist attacks and our military retaliation, it's clear that America's economic woes have moved far beyond the shattered New York financial district. As early as mid-September some leading economists were saying that the attacks almost surely pushed us into a full-blown recession.

But, this is no time to panic, say the experts. The country was headed for a recession long before September 11, according to Burton Malkiel, professor of economics at Princeton University. He believes that the recent interest-rate cuts, combined with emergency government spending in the wake of the attacks, will help turn the economy around more strongly than otherwise would have occurred. He sees us in a "V-shaped recession that will be very sharp but that will show a recovery by the middle of 2002."

In the meantime, investors should stay the course, says John S. Longstaff, a certified financial planner with Plan Financial in California. "We've always told our clients that they can expect to make 9 percent to 12 percent in the stock market over time, not all the time. Unless something has changed with our clients' objectives, we tell them to sit tight."

History supports this wait-and-see approach. Bear markets typically last an average of 18 months, then rebound. This one has already lasted that long. And, while current events may prolong the recession, the bear market also offers some bargains for those investing for the long haul. The following sectors are likely to weather any downturn and may even benefit in times of uncertainty.

SECURITY

What clearly emerged from the September 11 horror wasn't so much an economic crisis as a security crisis, as airports, office buildings, and our open borders suddenly became vulnerable. In the future, the services of small companies that provide specialty security services will be in demand. Some suggestions from the experts: CompuDyne, which makes explosion-resistant windows and doors; InVision, which makes explosive-detection devices; and Viisage Technology, which specializes in face-recognition technology.

COMMUNICATIONS AND TECHNOLOGY

In the short term, corporations will be sending their employees on fewer business trips, thus relying more on telecommuting and teleconferencing. That means more fiber-optic phone lines, satellite and cell phones, videoconferencing equipment, and the hardware needed to make it all work. Some leaders in this sector include AT&T, Sprint, Nokia, Motorola, Verizon, Lucent, ADC Telecom, and Nortel.

FOOD AND UTILITIES

No matter what happens to the economy, people will still need to buy food and energy—at least enough to keep the lights and heat on. That bodes well for market leaders such as Kraft Foods, Sysco (food services), Philip Morris, and Duke Energy, experts say. Most of these companies have solid dividends and hold up well during downturns. Two other strong companies in this sector include PepsiCo and BP, according to Travis Pascavis, a certified financial analyst for Morningstar in Chicago.

REAL ESTATE
The best thing about real estate is that it does not typically move in lockstep with the general stock market. Although the market may slow down with the overall economy, certain sectors will do well. Demand will continue to be strong in the West and Southeast, benefitting from long-term population growth and demographic trends, such as a growth in retirement housing. Specialized builders and Real Estate Investment Trusts (also known as REITs, companies that invest in commercial, retail, and residential properties) will also do well. Some real estate mutual funds worth considering include the Fidelity Real Estate Index Portfolio (800-343-3548), the T. Rowe Price Real Estate fund (800-638-5660), and the Vanguard REIT Index Fund (800-871-3879).

HEALTH
No matter what happens to the economy, we're still getting older. That means we will continue to be big consumers of pharmaceuticals, medical devices, health care services, biotechnology, and artificial body parts. Some leaders in these industries include American Home Products, Amgen, Abbott Labs, Baxter International, Medtronic, and Becton Dickinson. Mutual funds that invest in health care companies include the Eaton Vance Worldwide Health Sciences Fund (800-225-6265), the T. Rowe Price Health Sciences Fund (800-638-5660), and the Vanguard Health Care Fund (800-871-3879).

FINANCIAL SERVICES
Despite the horror of September 11, there's still a lot of money in private hands. Experts estimate that the baby boomers will inherit some $10 trillion over the next few decades and will need help in investing and protecting that money. That bodes well for any financial services firm that manages money, such as Citicorp, Bank of America, Charles Schwab, Prudential, and funds such as Invesco Financial Services (800-525-8085), T. Rowe Price Financial Services (800-638-5660), and Fidelity Select Brokerage and Investment Management Portfolio (800-343-3548).

While the sectors above are likely to weather any downturn, others are going to be hard-hit. The travel industry has already been hurt considerably, and experts don't expect it to rebound any time soon. Other companies to avoid include automakers, steelmakers, appliance makers, and paper companies, since they're directly tied into the business cycle.

Whatever you do, don't try to figure out when the recession will end. No one can predict that. By panicking and jumping from stocks to bonds, for example, you are more likely to miss a rebound in stocks than to find a reentry point at the bottom of the market.

Keeping a cool head in turbulent times is the best way to bear-proof your portfolio, since the market tends to reward investors who recognize value and stick to long-term strategies.

John F. Wasik is the author of The Bear-Proof Investor (Owl, 2002) and The Late-Start Investor (Owl, 1999).

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