Forecast '99.

What are the best financial move to make this year? Here's a look at key investments to build wealth while buffering market bumps.

GOLDILOCKS FINALLY choked on her porridge. For years, the U.S. has enjoyed a "not too hot, not too cold" economy, which sent the stock market through the roof. The Standard & Poor's 500 Index, which historically has gained about 10% per year, returned 37.53% in 1995, 22.95% in 1996 and 33.35% in 1997, the best three-year streak on record. The boom continued well into 1998 and Goldilocks seemed to be sitting pretty.

Then foreign troubles threatened to infect the U.S. and our long bull market took a strong bearish turn. In the third quarter of 1998, the S&P 500 lost 9.93%, dropping the nine-month return to a paltry 4.51%. Smaller stocks suffered even more. Although things seemed to settle down in the fourth quarter, by no means are Wall Street's titans certain that the worst is over.

After a volatile '98, what could be in store for 1999? Hard times, perhaps, in the domestic and worldwide economies. But investors won't necessarily get sick just because the economy sneezes. A roundup of financial professionals consulted by BLACK ENTERPRISE formed the consensus that you should continue stocking up your portfolio, looking beyond the tunnel to the light on the other side.

Here's the rundown:

Economy. "I'm expecting a global recession in 1999," says Percy Bolton, an investment management consultant and certified financial planner in Los Angeles who has been recognized by Worth magazine as one of America's best financial advisors. "Problems in Russia, Asia, and Latin America likely will spill over to the U.S. and Europe. More hedge fund problems may emerge, making lenders cautious, and that could lead to a credit crunch here."

Richard Peace, a certified financial planner with Advantage Capital in Colorado Springs, Colorado, doesn't expect a recession, but he does see a slowing economy. "External problems around the world will be felt here," he says. "It's all interconnected." As Gayle P. McEvilley, a financial planner with Rinehart & Associates in Charlotte, North Carolina, puts it, "When foreigners stop buying our products, U.S. companies stop manufacturing. Already, you can read in newspapers about layoffs and cutbacks."

Inflation and interest rates. A slowing economy will make it easier for the Federal Reserve to fight inflation. Low inflation, in turn, means low interest rates. "Interest rates probably will stay flat or decline," says stock broker David Fields of Woburn, Massachusetts, who's affiliated with National Securities Corp. in Seattle. So don't expect to see plump yields from bank accounts or money market funds any time in the near future.

Femi Shote, a financial planner with the New England Financial Group in Waltham, Massachusetts, advises investors to keep an eye on Alan Greenspan, chairman of the Federal Reserve Bank. "The Fed is the most powerful institution in the world, and it's indicating it wants to lower interest rates to stimulate the economy. That means 1999 will be a great opportunity to make money, so why fight the Fed?"

Equity market outlook. A year ago, says Shote, it was hard to find good value in the stock market. Now, with prices down, the best companies in the world are on sale. "There's no reason to buy the second best," he says. "Take the easy path and buy great companies whose prices have fallen. The same is true for mutual funds: some funds with outstanding long-term records are down by as much as 25%. Buy them today, while they're cheap."

Cheryl Creuzot, an attorney and certified financial planner who is president of Financial Strategies Group in Houston, agrees that now is probably the time to buy stocks. "The domestic economy remains strong so there's no reason for panic, especially if you're investing for the long term. Investors who went into stocks after the 1987 crash have done very well." Indeed, every sharp market drop in recent years has been followed by a gradual rebound (see chart, "Riding the Bull After a Bear Run").

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However, don't expect a reprise of the 1995-97 bonanza. "I expect stock market returns to move down to their historical average," says Peace. "Stocks may return 10%-14% in 1999, rather that the 20%-30% returns we've been seeing. There's some value out there now, after the recent decline, but extraordinary returns shouldn't be anticipated."

Robert M. Cotton, vice president of investments with Prudential Securities in Chicago, is also positive about the stock market this year. "Unlike secured bonds or tangible assets, which have a tendency to outperform during periods when our economy experiences extreme recession or inflation, common stocks have a tendency to outperform during periods of economic normalcy. As I see it, investors should focus on sectors that have been sold off unreasonably hard. Oil services, financial services, real estate investment trusts (REITs), biotechnology, capital goods and some technology issues are among such sectors."

Large-cap stocks. The market surge of the past few years has been spearheaded by the largest companies, which are favored by institutions and foreign investors. For the most part, experts see this trend continuing. "Why buy pie in the sky?" asks Shote. "If great companies such as Citigroup are down by 40%, there's no need to buy anything else. Even if it takes two years for the stock to come back, investors will still earn 70%," he explains.

"In such troubled times I think investors should look first at high-quality companies," says Fields. "Large caps may do better because they're more liquid: investors can trade them easily without distorting share prices. With some small companies, one big trade can drive down the price."

Large caps may hold center stage, but the spotlight may shift away from multinationals. "Asia will be dumping goods around the world, which will hurt U.S. manufacturers, especially exporters," says Fields. "And, weaknesses in Brazil will likely spread throughout Latin America, our major export market. I think investors should look for companies with little foreign exposure," he adds.

Fields cites, as an example, the pharmaceutical industry, which does most of its business domestically. "My favorite companies in that field are Pfizer, Schering-Plough and Warner-Lambert." Shote concurs, calling Schering-Plough the best company in this sector.

Another domestic play: Buying stock in big retailers. "I recommend Wal-Mart and Home Depot," says Fields. "Wal-Mart's profit margins likely will be helped by falling prices on the merchandise it imports from Asia." Home Depot, also mentioned by Shote, stands to gain from low mortgage rates. "People will be buying more houses," Shote says, "so they'll be buying more things from Home Depot." Shote adds the Gap to the list of retailers worth buying, saying that it's outstanding in terms of earnings and the stock's relative strength. "The Gap has been quick to move from jeans to khakis, which are in demand now."

Shote and Fields also agree on Lucent Technologies, a high-tech leader. "Lucent has been gaining market share from its competition in telecommunications equipment," says Fields, who adds that he's upbeat on IBM, which has managed its international exposure well.

Another advocate of large caps is Joe Haywood, a financial planner with AFP Group in Los Angeles. "Consumer goods companies should hold up if there's a slowdown: the Coca-Colas of the world likely will outperform a stagnant market." Haywood also favors stocks that pay substantial dividends, saying they'll likely attract investors in 1999, and dividend-paying stocks generally are large caps.

Small-cap stocks. Not everyone is predicting the continued leadership of large caps; Peace sees the blue chips diminishing in importance. "The market might turn up later in the year and, if so, it probably will be the small caps and mid caps leading the rally," says Peace. "The values are better there." He's also upbeat about regional banking stocks such as BancOne. Fields also mentions BancOne as a top pick among regional banks.

Creuzot says that the so-called "flight to quality" that dominated financial markets in 1998 was irrational. "Why should investors abandon fast-growing small and medium-size companies to pay 20 or 30 times earnings for large companies that are growing only 6% or 7% per year?" she asks. "The small caps and mid caps have been beaten down so much that they offer considerable value now."

Long-term, Creuzot says, small-cap stocks have outperformed large caps. "Numbers from Ibbotson Associates, a Chicago research firm, bear this out." It's worth noting that the last serious bear market occurred in 1990; from 1991 through 1993, small caps posted annual returns of 29.2%, vs. 15.6% for large caps, according to Ibbotson.

Another big source of interest and investment is the Internet. It will continue to grow exponentially and investors will continue to make money there, says Fields. "America Online and Yahoo are both high-quality companies," he says. "Nevertheless, this is a highly volatile area so investors should spread their money over several Internet companies to reduce risk."

Among lesser-known companies, Haywood favors mortgage lenders such as Countrywide, Aames Financial and Beneficial. "With mortgage rates down, there'll be a rush to refinance. I also think Fidelity's Select Home Finance mutual fund will do well in this climate."

Bolton expects small caps to rebound so he favors keeping a portion of your portfolio in mutual funds holding small companies. "My picks here are T. Rowe Price Small-Cap Stock Fund, Managers Special Equity and Baron Small Cap. The small-cap market is very volatile so you should dollar-cost average when you invest new money." That is, if you're going to be investing, say, $6,000 in small caps, you might want to start out by investing the minimum purchase price ($2,000 for Managers Special Equity, for example), then gradually invest the balance over the next four to six months. If the market drops the day after your initial purchase, your subsequent outlays will buy more shares at lower prices.

Foreign stocks. International markets have sandbagged investors recently, but financial pros advise investors to sprinkle a few dollars around the world. "You need some overseas exposure in your portfolio," says Peace. Although he thinks Asian stocks will rebound eventually, for now Peace thinks Europe has the greatest potential, a sentiment echoed by McEvilley and Haywood.

"Europe is about where the U.S. was in 1994," says Haywood. "It's coming out of a period of slow growth. I expect European markets to accelerate in the next few years, just as U.S. stocks did in 1995-97."

However, Fields says investors should buy international stocks cautiously. "American investors don't know these companies well and it's hard to know how much confidence you should have in their financial reporting." Rather than try to decipher foreign accounting practices, you may prefer to put your faith in a mutual fund's portfolio manager.

Peace likes Nicholas/ Applegate International SmallCap Growth Portfolio and Putnam International Growth Fund, which have held up relatively well in difficult times. Bolton, too, suggests investing in international stocks through mutual funds with a good record of investing overseas. His picks: Lazard International Equity Portfolio, T. Rowe Price International Stock Fund and Vanguard International Growth Portfolio.

Investors looking for individual foreign companies face a challenge. "Outside of the U.S.," says Shote, "it's even more important to buy well-known companies such as Daimler-Chrysler and Glaxo because it's harder to tell how foreign companies are really doing. Even though I don't think you should invest in Japan now, I would recommend Toyota and Sony, which get two-thirds of their income outside of Japan."

Bonds. McEvilley says that investors "should fill their bond piece first," when they're putting together a portfolio in 1999, which may be a volatile year for financial markets. "Treasuries are the safest place to go." Indeed, Treasury bonds were a safe haven for investors during the summer of 1998 (see "Betting On Bonds" chart).

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Bolton agrees that investors should hold substantial amounts of bonds in this climate. "My model portfolio includes nearly 40% in bonds now. Of those bonds, your basic holding should be Treasuries, which have held up well. My preference is for intermediate-term Treasuries, maturing in about five to eight years, although you can go out to around 12 years if the yields are attractive."

Unfortunately, intermediate-term Treasuries may be safe, but they're unlikely to be spectacular investments, especially with current yields around 5%. High-bracket investors may prefer municipals, says Fields, because they're tax-free. "Buy insured bonds for safety," he says. "Buy long-term bonds if you're comfortable that you'll be able to hold them until maturity."

Peace, however, isn't a fan of bonds, preferring "ownership over loanership." That is, investors are better off in stocks, where they own a piece of the company. In the bond market, Peace says he prefers to invest in convertibles. These are bonds that pay attractive interest rates yet can be converted into a certain number of the issuer's shares.

"You get most of the stock's upside with less of the downside risk," says Peace, "and the interest helps your total return. Convertibles may be hard to analyze so you'll likely prefer to invest through a mutual fund." Peace cites Nicholas/Applegate Convertible Fund, saying that Nicholas/Applegate is a high-quality money management firm with a following among institutional investors.

Besides convertibles, Haywood says that utility stocks offer another alternative to bonds for income-oriented investors. "Both individual companies and specialized utilities mutual funds performed well in 1998, when most stocks turned down," he says. Electric utility dividend yields now range 3%-6%, comparable to bond interest rates, and utilities offer the chance for long-term appreciation as well.

Our advisors' best advice: hang in there. "In the long run," says Peace, "1999 is just another year. Stick to your long-term game plan and don't pay too much attention to daily price movements."

McEvilley says the trick is not to make any rash moves, no matter what the market does. "Unless you need the money tomorrow, why sell at the bottom? Over 10 or 20 years, investing in good stocks is the best way to create wealth."