Rational Investing: Year-end investment losses likely to outweigh gains

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

The only investment-related magic about the clock striking midnight on Dec. 31 is that the tax year ends for most of us.

The gains and losses we took through the year, and especially the ones that just barely got in before the market bell rang at noon on that last day of 2002, should have helped limit our tax liability. It was a year in which there was no problem finding portfolio losses to offset gains, rather it was tough finding gains to offset losses.

It was an unprecedented three consecutive years of equity markets being down. Note the word equity. For investors who held investment grade bonds it was the third consecutive year of gains. That's right, those same investments that only a few years ago were considered suitable only for widows and orphans, handily outperformed stocks.

If the investor's portfolio was balanced between stocks and bonds, the return it provided could have ranged all over the chart, depending on what ratio of the two was held, the sectors in which the stock investments were held, and the quality and maturity dates of the bonds.

For the majority of investors with a balanced portfolio, the returns were still negative in spite of the presence of the bonds. That's because few invest more heavily in bonds than in stocks. There's a lesson to be learned there. It's the one of asset allocation and diversification.

Anyway, the tax bell has rung and we're into 2003, listening to the gurus talking about where the Dow, S&P and NASDAQ will be and whether we will have a rebound and which stocks to own, etc.

Consider saving the year-end publications that have covers splashed with such topics as The Best Place to Have Your Money Invested or Stocks You Must Own Now!

One can also save, and take with a grain of salt, those publications that warn that we will see a repeat of 1929 or of what happened to the Japanese markets. For the most part they have no more credibility than the cover stories about aliens promoted by the supermarket tabloids.

But human nature seems to get kicked into predictive gear the first of every year, sort of a reinforcement of what we would like to see happen, often to the detriment of thinking about what could happen. In spite of my own admonitions, I'll venture a few possibilities.

We will see a change in the double taxation of dividends, but it won't be 100 percent. The conservatives will make a compromise, because liberals will scream that it is designed to benefit the rich.

The same goes for the permanent repeal of the estate tax. Expect farms and family businesses to get a break, but woe to those considered of silver spoon status. Success will continue being punished and failure rewarded by the gang in Washington, most of whom have never been accountable for a bottom line.

Trent Lott will spend more money on hair spray than the average Ethiopian family will on food.

The markets will fluctuate surprise! Actually, it is going to be a stock picker's market. If, in spite of my cajoling, a reader prefers to trade stocks, he had better be prepared to be very nimble, because volatility is not going to lessen.

The overall economy will grow at better than 4 percent, but not all industries will benefit.

Unemployment, which is currently at 6 percent, a number that has in the past been considered full employment, will shrink, with most new jobs created in the service areas of the economy. Heavy industry will continue struggling, unable to compete with foreign labor costs. Unions will rail against foreign competition, but will be trying to negotiate higher compensation packages.

An unexpected event will cause a large sell-off in the stock market and a buying panic in Treasuries. In less than a week the markets will correct those overreactions.