By: Jonathan Chevreau
Financial Post
June 27, 2002

The gallows humour in brokerage offices yesterday over WorldCom Inc. involved word-play like "World Con."

Thus, in a note, Don Coxe dubbed the latest accounting scandal the World Con Job.

"What is unfolding is one of those global financial crises that start small, but gets suddenly very big." Worldcon is not yet big enough to justify an all-out bearish attitude, Coxe cautioned. "It's just one of the hundreds of stories of deceit, deception and delusion that together defined the tech-telecom mania."

The bank's erstwhile bull, economist Sherry Cooper, declared "the final stages of the unwinding excesses of the U.S. stock bubble are upon us." She even suggested gold will act as an "alternative reserve currency" to the overvalued U.S. dollar.

Stocks sank on cue early yesterday before coming most of the way back. TheStreet.com observed selling was not panicky enough to declare capitulation by retail investors.

It may be premature to declare a bottom like the week after Sept. 11, but broadcaster Garth Turner believes we're "at or near" a bottom. "Except for the 1930s Depression, the U.S. market has been 40% to 50% higher two years after the kind of slide we are now experiencing." Investors are shell-shocked but markets "should bounce off the floor momentarily."

The Successful Investor editor Patrick McKeough agrees "the WorldCom scandal may be one of those events that occur just as a market hits bottom."

Not all stocks or sectors bottom at the same time, adds Bob Hoye.

Sir John Templeton always advised buying at the point of maximum pessimism. That point may have arrived, judging by the fact Templeton Growth Fund has a position in WorldCom. Templeton Management Ltd. president Don Reed says the firm is seeing many buying opportunities lately.

But bears like Dow Theory Letters editor Richard Russell and Weiss Ratings Inc.'s Martin Weiss are convinced there will be grounds for more pessimism. Russell insists we are in a long-term bear market and the trend for stocks and equity mutual funds is therefore down.

Florida-based Weiss says investors are "quickly coming to the realization corporate earnings and the economy aren't recovering the way Wall Street said they would. They're getting worse by the day. Investors are doing the only prudent thing they can -- selling into any rally."

Advisors worry the baby -- companies with clean accounting practices -- is being thrown out with the unclean bathwater.

"Frankly, the potential for further huge losses in the [telecom] sector scares the hell out of me," says advisor Bruce Lindsay, "That's the real theme in today's trading: let's just sell off the whole sector and be done with it."

But WorldCom "is no reason to abandon the stock market generally," says advisor Jim Rogers, "It is a case for ensuring your portfolio is broadly diversified, so the difficulties of any one company cannot have a deleterious effect on your overall portfolio performance."

Age, risk tolerance and asset allocation are the critical factors for anxious investors. Those at or near retirement should scrutinize their stock holdings. Anyone needing money within five years should not be in stocks at all, says Vancouver-based advisor Adrian Mastracci of KCM Wealth Management.

If your horizon is less than three years, equities should be as low as 25%, says Vito Maida. Those tempted to buy on weakness should understand the quality and value of the underlying business they are contemplating buying, he adds.

Investors must factor in unexpected or prolonged events which significantly alter expectations. The accounting scandals are one of these, Mastracci says. He makes two important points:

1. Before pressing the panic button, re-examine your long-term game plan for reaching financial security.
2. Asset mix is crucial. The mix of stocks, bonds and cash determines 94% of total returns. Individual stock picks (like WorldCom) account for 4% of returns, and market timing (like exiting the entire market over WorldCom) accounts for just 2% of portfolio returns.

Many investors became overweight stocks during the bubble, or gambled on sectors like telecom. No one security should make up more than 5% of a total portfolio. It's not too late to rebalance, Mastracci says. "There will be another Worldcom. When it happens you don't want it to be the one that kills your portfolio."

Author Gordon Pape is "deeply concerned" about the cumulative impact these revelations are having on investor confidence. Each "raises more questions about the integrity of the entire market system. We may see a chill on the stock markets that will last into 2003 at least."

Pape urges selectivity. Review all stock holdings. If you don't believe in a company for the long term, sell. If you have profits, sell some of the position.

He suggests avoiding indexes. "Owning some index positions will be a good strategy when the markets finally turn upwards. But short term, there appears to be more downside potential here."

Even diversification and "buy and hold" may not be effective, warns advisor Jack Singer, who expects a 20-year-long bear market. It's a market for stock pickers and fund pickers, he says. His suggested asset mix is an eclectic 9% cash, 18% precious metals; 47% resources; 17% high income and 9% real estate.

Advisor Stephen Gadsden says clients should stay the course until after the third quarter. "It's too late to run for cover and too precarious to speculate on forthcoming investment opportunities."

NOTE: The information provided above is intended for general informational purposes only. It does not constitute advice for anyone's specific situation. Everyone should always first consult directly with their advisors to determine the appropriateness of any information contained above before taking any action. KCM Wealth Management Inc. assumes no responsibility for any loss or damage arising from the use of, or reliance upon the above information.