LONDON, 16 August 2004 — A large number of investors today are becoming increasingly concerned, and equally confused, about the trends in their investments and the feedback they are receiving from the experts. To those investors, I urge them to establish a sort of discipline in their personal investments and to: “Stay calm and stick to the fundamentals.”

Many investors are simply affected with panic when it comes to their financial planning. Understandably, they react to fast changes in the global investment environment that would ultimately affect their invested assets.

In this kind of environment, there will be some experts who would counsel investors to take substantial risks in order to obtain decent rewards. To which I would say: No way! Investors who pay keen attention to the fundamentals - by following-up on value, carefully weighing the potential downside and avoiding stupid mistakes - stand a good chance of doing well in their investments.

There is nothing new or exceptional in that, of course, but this in itself should be reassuring. The fact that when you listen to the so-called “experts”, try to keep in mind that rarely has there been so little consensus among them about where the markets are heading. Let’s entertain some examples:

A US fund manager is so concerned about his clients’ portfolios that he placed all the assets in cash, because he believes the stock market is overvalued. The entire equity portfolio devoted exclusively to cash? Of course, it is the manager’s discretion to rather lose investment opportunities than money.

At the other extreme, you would find another fund manager who advocates that most investors should be totally in the equity market, because he believes that there is much more to be gained there than in cash.

Now we somehow understand why investors are confused and indeed concerned!

Add to this concern an array of unsettling queries on political and economic issues, and then one would really comprehend how intricate and relevant financial planning is to the individual investor. Where do you draw the line?

Consider the recent spate of articles that profess to show how you can strike it rich in various investment alternatives. What in fact do they recommend? Distressed real estate, venture capital, cheap stocks and, even “safe” derivatives. Notwithstanding these propositions, I assure you there is no magic to secure the financial integrity and rewards to the investor. What should the investor do?

The first rule is: Do not get panicked! Start by re-evaluating your entire portfolio. If the portfolio is in stocks, then it is not surprising to find your portfolio manager turning away from cyclical stocks to growth, convinced that their earnings are on the upswing. Of course, many small growth stocks sound like winners, but there is a high risk element associated with such a decision, and that is known as: Speculation.

However, there are reasons to be skeptical. Surely, stocks of companies stand to benefit from structural change in the global economy — whether they produce consumer goods, capital goods or industrial material in strong demand in emerging markets — sound like winners. This, again, is pure speculation and my advice to the investors is do not speculate on where markets are going to go. Instead, look for “cheap” stocks with good enough prospects to keep them going no matter what the broad average or trend does.

A conservative approach would be to buy large-cap high-yield stocks. The easiest tactic to follow is to purchase say the 10 highest-yielding stocks in the Dow Jones Industrial Average. I would perhaps recommend stocks of financially strong companies that yields more than S&P 500. Historical data shows that dividend income has accounted for almost half of the total return strategy on equity since 1926.

The contention here is for investors to hold stocks at all times if only because that would reduce their chances on missing out on the biggest short-term gains, which produce most of the appreciation in price.

Diversification in stock holdings by including US and European stocks tends to improve the quality of the portfolio. But one has to avoid “over diversification” and not let the enthusiasm for diversification overlook the risks of international investing which are by no means limited to swings in local politics and currencies. One should also keep in mind that most of the growth is expected to come from emerging markets, such as China and others. Bonds as opposed to stocks, do not offer the potential for huge capital gains. That, however, does not mean the high yields currently available do not have a place in the overall investment plans. On average, bonds have less downside than stocks at the moment, because they traditionally are less risky.

As I mentioned earlier, there is no such thing as consensus on the markets today. Investors would probably end up with a portfolio divided up more or less evenly between stocks and bonds, with a bias toward cheaper equities and very short and long debt, plus a healthy cushion for cash. Such a portfolio will not fare that badly this year.

Many investors would still find the current climate for traditional investments too unfavorable. I do not rule out more adventurous alternatives if the investor understands the overall intricacies of the investment and is willing to take risks.

In the final analysis, the odds of finding ample rewards in traditional moves are still good if you, the investor do your homework.

(Habib F. Faris is vice president at Clariden Bank, London.)