BALANCING PERFORMANCE EXPERTS TELL HOW TO RESPOND TO CLIMBING STOCK PRICES WITHOUT BEING TOO IRRATIONALLY EXUBERANT.

Byline: Barbara Correa Staff Writer

Through the winter of our economic discontent, financial planners across Southern California encouraged investors to stand tall, stay the course and resist the temptation to burn disappointing quarterly financial statements as fire kindling.

Today, following the stock market's strongest quarter since the end of 1998, those same planners are encouraging investors to relax, stay the course and resist the temptation to frame the best financial statements they've seen in years.

``I always get nervous when people are chasing performance,'' said Tom Miller, a certified financial planner at main street brokerage Waddell & Reed's Woodland Hills office. ``All the signs are pointing to growth, but I don't think it's going to be the kind of robust growth we've had in the past''

In the last four months, Wall Street has enjoyed its strongest rally since its extended downturn began in 2000. Sparked out of the doldrums by the outbreak of war in Iraq, stocks jumped in mid-March and have been climbing fairly steadily since then.

The benchmark Standard & Poor's 500 index spiked 14.9 percent in the quarter ended June 30, while the Dow Jones industrials were up 12.4 percent, their best quarter since the end of 2001.

For the most part, long-term investors are taking the gains in stride. About one-third of 401(k) investors who regularly monitor their accounts are using the recent rally as an excuse to tinker with their allocation structures.

In April, 401(k) plan participants started shifting money from fixed-income securities to stock investments, and by the end of June, stocks accounted for 61 percent of 401(k) holdings, up from 57.9 percent in April and 56.9 percent in March, according to the Hewitt 401(k) Index, a survey of 1.5 million plan participants published by Hewitt Associates.

Meanwhile, shorter-term investors are calling their financial advisers to ask about shifting funds to dividend-bearing issues to take advantage of the tax reductions on those shares, part of President George W. Bush's tax cut bill.

Still, advisers report that the 401(k) carnage of recent years has ushered in a new humility among clients, which is keeping a lid on any irrational exuberance.

``I've had very few calls from people who want to go back into tech or telecom,'' said Miller, despite both of those sectors posting double-digit gains in the first half of this year.

``We have not seen flows from mutual fund investors into the speculative side, into tech and telecom yet,'' said Jeff Tjornehoj, a research analyst at Lipper. ``They had a huge quarter, but people aren't likely to forget the wounds (they inflicted) anytime soon.''

Adding perspective to the recent rally, Tjornehoj adds that the gains made in the last several quarters have left most mutual funds about even with where they were a year ago.

``Those who went from cash to stable value are coming back into the market, but they are still leery and fearful so they're coming back slowly,'' said Percy Bolton, a certified financial planner in Pasadena. ``(Investors') greatest concern is where to go.''

Dan Sullivan, a portfolio manager in Seal Beach and editor of the Chartist newsletter, likes pharmaceuticals and Internet stocks, though as a market timer he's interested in anything that has shown resistance to the downtrend.

After staying entirely out of the market for a year, he re-entered in April with purchases of Ebay, Countrywide Financial, Teva Pharmaceuticals and Yahoo, which is up more than 30 percent since he bought it.

``We're cautiously optimistic,'' said Sullivan, who said he considers his investing strategy to be relatively conservative.

``A lot of these stocks were beaten down but showed good relative strength over the last year and many of them have broken out,'' he said. ``That's why we came back in.''

For the average investor, however, attempting to time the market is usually an afterthought, which is as it should be, according to 401(k) advocates.

Of 42 million participants in 401(k) plans, the retirement investment vehicle offered by about 80 percent of U.S. companies, three-quarters of them never change the initial stock/bond mix they chose when joining a plan, said David Wray, president of the Profit Sharing/401(k) Council of America, a trade group.

``They are passive managers. They join their plan and make an asset allocation and stay with that,'' said Wray. ``You will see flows that reflect current conditions but in relation to the overall corpus of the 401(k) system, they are tiny.''

The right balance? Wray is all for investors ignoring market swings. But he would like to see some involvement in the form of an annual rebalancing of assets, not to be confused with re-allocation.

Under rebalancing, you pick a specific day in the year, and stick to it. Once a year on that day, you look at the account balances and compare them to the stock/bond asset allocation you originally chose. Then you take profits made and calibrate them back to the original ratio.

Say, for example, an investor has 30 percent of the 401(k) assets in bond-related instruments and 70 percent in stock funds. In the last year, the stock funds are up 5 percent. Under the simple rebalancing concept, the investor would take that 5 percent and put it back into the bond side, smoothing market swings that add up over the years.

It's a very simple concept that is hardly ever used.

``The point is to try to separate the rebalancing decision from what's happening with the market,'' said Wray. ``If you had started investing 10 years ago and done that, you would have locked in all those returns in the '90s. In the last three years you would have been pulling out of bonds,'' he said, leaving yourself perfectly positioned for rising stocks.

The 401(k) investors who have failed to be proactive, however, can take heart in the upturn itself.

``Those who have been lazy and didn't get out ... they're just glad they're making money again,'' said Bolton, the Pasadena planner.

Barbara Correa, [phone]

barbara.correa(at)dailynews.com

CAPTION(S):

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Drawing:

(color) S&P 500 DOW JONES

Warren Huskey/Staff Artist