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Staying ahead of the forecast

Bob Dylan was right. You don't need a weatherman to know which way the wind blows. The same holds true for investing. To figure out what the latest hot investment ideas are, just look at what the marketing departments of mutual fund operators are cooking up.

Three years ago, it was technology funds. Any fund that had the word "Internet" in its title or implied that it had something to do with e-commerce was a magnet for indiscriminate investors. They threw cash into these funds without regard to their investment objectives, tolerance for risk or how diversified their portfolio was. All they wanted was a big winner.

One recession, a war on terrorism and dozens of accounting scandals later, investors aren't so eager to swing for the fences. Instead of squandering their money based on unsubstantiated notions of how much they stand to make, they're carefully allocating their hard-earned cash on the basis of how much they can afford to lose.

Investment research company Lipper took a look at 55 mutual funds introduced since the beginning of the year and found that through May, Smith Barney's Capital Preservation Fund captured $900.8-million _ or 65 percent _ of the $1.4-billion in the new funds. (The count includes funds that offer different load and fee options. Each class of shares offered by the same fund counts as one fund.)

Don Cassidy, a senior research analyst for Lipper, says the Smith Barney fund is a balanced-term trust invested in stocks and zero-coupon bonds. The bonds assure investors who hold the fund until the bonds mature that they will get back whatever they invested, no matter what happens to the stock portion of the portfolio. In short, Smith Barney signed up a whole lot of investors preoccupied with holding onto what they have.

"That's playing to the current climate of caution and fear. People don't want to lose money," Cassidy says. "Fund companies, generally speaking, don't try to be heroic and bring stuff out that will be hard to sell."

Other big sellers among the newcomer funds were value funds ($169.8-million in assets), mid cap funds ($79.1-million) and small cap funds ($45.1-million).

"Everyone now is starting a small cap value fund because it's one area of the market that really hasn't crushed people," says Douglas Kreps, portfolio manager for Fort Pitt Capital. "It's amazing what Wall Street does in terms of capitalizing wherever they see opportunity."

At a time when Kreps thinks it probably makes sense to start selectively buying tech stocks, compare the 67 or so tech funds launched in 2000 as the tech bubble was bursting with the one introduced so far this year. Friedman, Billings, Ramsey's Technology Fund, started in February, had $1.9-million in assets at the end of May.

Outside of mutual funds, alternative investments such as real estate and hedge funds _ many of which make money by betting on stocks falling _ are gathering a lot of investor interest.

While you can understand the fear that's motivating investors, you have to question whether chasing the latest hot investment idea is any less of a sin today than it was when tech stocks were on fire.

"It's one of those natural law mortal sins that is not open to interpretation," says Robert Fragasso, president of the Fragasso Group. He says investors greatly increase their risk by trying to pick the next hot investment. Instead of loading up on the latest fad, investors should be diversified at all times.

"The current hot sector should be part of the portfolio. Even when it's cold it should be part of the portfolio," Fragasso said.

Before devoting a portion of their portfolio to the fad of the month, investors should determine whether that investment is appropriate for their particular situation, says Parker/Hunter senior vice president Mark Luschini. That includes determining whether the investment suits your investment horizon and tolerance for risk, and how big a portion of your well-diversified portfolio is already in the sector du jour. Luschini says investors frequently make the mistake of jumping into investments that have performed well just as the market is about to turn.

"It is so difficult to time that that we suggest taking a more strategic approach," he says. "Having an allocation across a variety of asset classes will serve an investor well."

In fact, the hotter a segment of the market is, the more reason investors have to make sure its performance isn't throwing their portfolios out of balance. Investors who loaded up on tech stocks in the '90s would be sleeping a lot easier these days if they had rebalanced their portfolios by lightening up on tech stocks in early 2000.

Rick Pierchalski, chief executive of Berkowitz, Pierchalski, is rebalancing the portfolios of his investment company's clients. While many investors are looking for the safety of bonds, Pierchalski is taking profits from bond holdings and putting them into stocks.

"We think that cycle will come around. We don't know when it will come around, but it will come around sooner or later," he says.

Sounds just like something a weatherman would say. It just goes to show you that when you take a walk down Wall Street, it pays to be prepared for all types of weather.