Improving Your Portfolio Quality

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OCEAN CITY – Recession, war, and corporate accounting problems are weighing on stocks and generating concerns about retirement security. Your retirement security depends not only on your pension or 401(k) plan, but also on your IRAs, deferred compensation, stock options, taxable investment accounts, annuities, insurance, and more. All assets must work together if you hope to achieve your long-term goals.

There is renewed interest in investment fundamentals – the approaches to wealth creation and preservation that have proved successful over the long term. The most time-tested of these approaches are proper asset allocation and the selection of quality investments.

Though it is tempting to sit on the sidelines during times of uncertainty, now is a particularly good time to take a fresh look at your portfolio, to make sure you hold a variety of quality investments, and to be positioned for future opportunities. When conducting your review, it is crucial to include all of your assets in the mix.

We have entered a very different environment than the one that prevailed during the late 1990s’ bull market and the economic slowdown of the past two years. At Merrill Lynch, we believe the economy is showing early signs of recovery, pointing to a fairly quick end to the recession (in fact, it may already be over) and better-than-expected economic growth by the second half of the year.

But we do not foresee a return to the 20 percent annual stock-market gains of recent memory. In fact, we’re probably at the beginning of a period of sub-average returns. Why? The expected recovery appears to be already built into stock prices, which are at historic highs in relation to earnings.

The prospect of moderate returns is no reason to become passive about investing. Neither should you be "frozen" by the accounting irregularities that recently have cast a pall over the market. The questionable practices that have been uncovered are likely to give rise to reforms that will bring more transparent balance sheets and stricter financial reporting.

With gains harder to come by, it will be important to be even more focused and ready to take advantage of opportunities as they arise. Speculative issues should be replaced with high-quality stocks and bonds of companies that have solid balance sheets, strong cash flows, and attractive business models.

But it is important to remember that investing is not only about wealth creation. It’s also about wealth preservation. And prospects for modest gains in the short term are certainly better than the negative returns of the past two years.

(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)

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