Are capital markets coming back? As discussed last week, from the fourth most remote spot in the world, Bermudian residents are watching capital markets struggling to pull out of a three-year long slump. Slowly, the indexes are working their way into positive territory. Various sectors that have been out of favour are showing signs of life.

For instance, large cap company stocks, including some technology stocks, hit hard in this - dare we call it a US quasi-recession - have shown vigorous returns over the last few months. As one participant in an investing workshop that I gave recently said, "Does this mean we should be thinking about investing in large caps again?'' The answer is maybe, but a far better solution is setting up a diversified portfolio initially. That way no matter which slice of investment life, i.e. large cap, small cap, global bond or high yield bond dominates. You will always have some portion of your portfolio allocated to that asset class.

Emotional mistakes in trying to time markets: The biggest mistakes that investors make are in giving in to financial depression by selling out at a low valuation point, then chasing the new sector thing and buying at the high. Often one hears, "I'm going to wait until everything looks good again." Do you know something that investment professionals don't? We know that you can't time the market, but you can allocate your investments to anticipate market changes. Affluent investors are able to have this need accommodated for a fee by handing off their portfolio to an experienced investment manager, usually a CFA (Chartered Financial Analyst). His/her full-time job is to manage the various asset allocations in the portfolio and rebalancing where necessary to achieve the client's investment objectives.

How, you say, can I do that? "I don't have a lot of money to invest, I'd like something fairly safe, not too risky, and I don't have a lot of investment experience. How do I know that what I am buying is appropriate for my (small investor) investment objectives?"

Know thyself: The first step is to find out just how you do feel about investing. What is your comfort factor when you score yourself in answering questions such as:

"How do I feel if my investment drops 25 percent in value in a week: a) would I sell it and immediately to cut my losses, b) hold it for the long term knowing the market will come back or c) wait a little while, then sell it?

There are several great websites to test yourself on this issue. Go to http://cgi.money.cnn.com/tools/assetallocwizard/assetallocwizard.html or http://www.thepauper.com/questionnaires/riskassessment.asp.

The first risk assessor is very brief, the second one designed for paupers (a play on words that may be more than true from some investors) is far more extensive. See what your tolerance really is. If you have trouble loading these websites, write me directly and I will send it to you.

Educate yourself: One of the areas that never seem to be tested is the level of investor knowledge that a consumer really has. If you want the challenge of seeing just how much you know, go to the US Securities & Exchange Commission and take their investment test at http://www.sec.gov/investor/tools/quiz.htm#q1.

The SEC is very concerned about the lack of sophistication displayed by individual investors, many of whom readily admit they know little about buying investments. I've said it before and will say it again - many people spend far more time planning their next vacation than they do in taking care of their personal finances.

Okay, so you only have patience for one test and your risk tolerance comes in as moderate. The test websites will usually give you an allocation guideline to follow. How does that translate into a portfolio allocation? For a moderate, perhaps you would allocate your investment selections as follows. Please keep in mind that these are guidelines only.

50 per cent stocks - split equally between large cap and small cap, both growth and value stocks.

35 percent bonds, split two-thirds to a global bond selection and one-third high-yield bond group.

10 percent alternative class - hedge fund of funds.

Five percent money market.

That's all very well and you think "I have seen these pie charts before, but I don't have time or the expertise to pick what really amounts to eight different positions in stocks and bonds, nor am I sure I can find eight mutual funds that are considered top notch. Can an advisor do that for you?'' Possibly, but at a minimum investment amount of around $2,500 to start for each fund you may not have enough savings to allocate to eight different funds. The objective here is to achieve a balanced asset allocation, not purchasing one mutual fund that contains only large cap stocks.

However, you can approach your selections from another perspective. There are single mutual funds and fund of funds available today that are in essence very similar to mini-portfolios. They encompass all of the asset allocations necessary to meet your personal investor profile - in this case, moderate. The asset classes for your moderate investor profile would be distributed similarly to the diagram shown on this page and note that these allocations are for illustrative purposes only.

There are global fund companies, such as Fidelity, MFS, Janus, Eaton Vance, Bank of Butterfield and Bank of Bermuda that carry similar balanced-type mutual fund products. Look for the product that will fit your price range.

Watch for total costs on sales commissions (front charges or deferred charges), administrative fees (these are paid out of your investment each year to run the mutual fund) and trailers - which are fees paid to the broker each year after the initial sale has been executed. And be sure to find out how the funds have performed against their benchmarks and their peer group.

@EDITRULE:

Martha Harris Myron CPA CFP is a Bermudian, a Certified Financial Planner (US licence) practitioner and VP, Personal Financial Services at Bank of Bermuda. She holds a NASD Series 7 licence, and formerly owned a US financial services practice meeting the needs of 400 individual and corporate clients. Confidential e-mail can be directed to marthamyron@northrock.bm

The article expresses the opinion of the author alone, and not necessarily that of Bank of Bermuda. Under no circumstances is this advice to be taken as a recommendation to buy or sell investment products or as a promotion for financial plans. Investments are not guaranteed and past performance is no indication of future results. As a US citizen and a Bermudian, the author cannot own and does not own any of the fund company products mentioned in this article. The Editor of The Royal Gazette has final right of approval over headlines, content and length/brevity of article.