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How to balance the current market environment

The U.S. stock market, over time, tends to move upward in sync with the growth of the U.S. economy. However, this movement is anything but steady.

If you look at the Dow Jones Industrial Average (DJIA), you’ll find that the market has stalled for extended periods. Some of these have been when the index reaches a “round” number such as 100 (the high in 1906) or 1,000 (in the mid-1960s). It might be said that we are currently in a similar pattern around the 10,000-plus level, with the DJIA hovering between 10,000 and 10,500 in the first half of 2004.

Even though the DJIA has stuck close to the 10,000 mark, nobody can really tell if we have reached a plateau, or how long it will be until the market goes on to new highs.

Many observers believe that the equity markets will resume their upward trends, but they are cautious about when and by how much prices will rise.

Here are some suggested strategies to make the most of the current environment:

•Balance- Asset allocation becomes even more important in difficult financial times. Bonds normally provide a smoother ride, and this may be a good time to place a greater percentage of your portfolio in fixed-income assets. With interest rates quite low, it may be a good idea to keep to bonds with shorter maturities, so that you can reinvest at new, higher rates sooner.

•Spread the risk-Some assets and market sectors undoubtedly will do better than the broad averages, and some will do worse. The safest course is not to concentrate in any one investment. It is said that small companies and value stocks tend to lead the market out of slumps, and it is certainly prudent to allocate a portion of one’s portfolio in those directions. However, in many ways, this has not been a typical slump, and it may be unwise to count too heavily on a typical rebound.

•Dollar-cost average- Regular, periodic investments in a well-diversified stock or mutual fund portfolio let investors take advantage of price declines to build up positions, then buy fewer shares as the price rises. Although it may take courage to continue investing as the market swoons— and there is no guarantee that this “dollar-cost averaging” will produce a profit— it does lower the average per share price, increasing the chance of ultimate success.

•Rebalance- Not all assets grow at the same rate – which means your portfolio can shift away from the original allocation.

Periodic rebalancing usually is recommended as the way to keep a portfolio on target. It also can boost returns by moving funds into the bargain-priced asset.

•Sell covered calls- This is a low-risk method for producing income from a stock that doesn’t seem to be going anywhere. Pledging to deliver the stock at a set price within a fixed period of time, you receive a premium.

If the option expires without the stock passing that price, you can continue issuing options on it. The risk is that you will have to deliver the stock at the exercise price, forgoing any additional gains and paying tax on any capital gains realized.

•Seek guidance- There is no certainty the market will present the lackluster performance that these strategies address, or how long such an environment might persist.

That’s why it’s important to sit down with an investment professional to work out your portfolio strategy, then stay in touch to make sure your investments are meeting your needs.

Jeff Francis is vice president and senior investment officer for First Tennessee Brokerage. For more information about this or other personal finance issues, please call 865-971-2321 or visit your local First Tennessee financial center.


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