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Real Smart Money
2007-06-27 21:46:00
My partner and I had lunch with the person who runs one of the preeminent university finance reach centers in the U.S. (really, in the world). He had three (okay, seven) words of wisdom for investing in the stock market: S&P index funds, small cap stock funds and momentum. Let’s take them one at a time.   Index funds, as championed by John Boogle and Vanguard, are a way for the investor to track the performance of the market. Indexers argue that most investors can’t beat the market and end up under performing and paying higher fees trying. According to our research guru, all S&P index funds show the same performance, the only difference being expenses, so pick the fund with the lowest expense ratio.    The market for small cap stocks is less efficient due to the more volatile nature of small companies and less analyst coverage. Thus, an insightful mutual fund manager can outperform a small cap average (what would g...
More About: Money , Smart , Investing , Mutual Funds , Real

Everything Old is New Again
2007-06-25 15:17:00
The Dow declined about 2% last week and long term U.S. Treasury rates continued their climb, now yielding about 5.25%. Investors in Blackstone made a lot of money when it went public. I continue to wonder if the money in private equity is in the fees they charge, see Fund of Funds, and not the deals they do.    Going back to interest rates, Bill Gross of Pimco, is halfway to making good on his May 28 prediction that long term Treasury bonds were yielding 50 basis points too low, see Insomnia. They’re up over 25 basis points since then and I wouldn’t bet against them making Gross’ 50.   The Bear – Bear Stearns, that is – had to pump $3.2 billion into two of its subprime mortgage funds to prevent them from going belly up (and no Bear likes to be on its back). Back in March, I wrote about the coming subprime debacle, see Yellow Sub(prime)marine. The only surprise is how well contained it has been thus far, but do...
More About: Market , Mutual Funds , Thing

Real Estate Funds are in a Class of Their Own
2007-06-20 15:23:00
Commercial real estate (office buildings, shopping centers, etc.) is considered to be a separate asset class from stocks and bonds. Thus, an investor can gain additional diversification by investing in commercial real estate. If you aren’t able to buy a group of apartment buildings or shopping centers, and most of us aren’t, the way to invest in real estate is through a REIT (Real Estate Investment Trust) which owns a number of properties or mortgages. Equity REITs own properties. Mortgage REITs are similar to long term bond funds. Of course, rather than trying to select one or two REITs, investing in a REIT/real estate fund is hiring a professional manager to do it for you and provides diversification. There are a number of excellent REIT/real estate mutual funds, see MUTUALdecision’s top ten Real Estate Funds list.   One attraction of REIT funds is their relatively high current yield. But beware, check the fund to see if...
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Straw Houses
2007-06-18 14:51:00
The Dow and the S&P are touching record highs. Not even the specter of rising interest rates can dampen this market. The last downturn in the market occurred in February and there was just a pause for it to catch its breath and run to record highs. Isn’t life wonderful?   Well, life isn’t so good if your mortgage lender is foreclosing on you and home foreclosures are rising. Take a look at Home Foreclosures Hit Fresh High which appeared in Friday’s Wall Street Journal. Deficiencies are on the rise and almost at levels last seen in the 2001 – 2002 recession. You’d expect foreclosures to be high during a recession, but not when the economy is growing. Even more ominous is the value of the collateral backing the mortgage. Home prices rose steadily from 2002 through 2005. Real estate was the place to be. Families moved into bigger homes (with bigger mortgages) and investors bought (speculated in) ...
More About: Real Estate Market , Market , Houses , Mutual Funds , Ouse

Too Much Income Can Be Hazardous to Your Financial Health - Part II
2007-06-13 13:59:00
In our last thrilling episode (Too Much Income Can Be Hazardous to Your Financial Health – Part I) we talked about the risks of holding bond (fixed income security) funds. Simply put, the current income is nice but neither the income, not the principal increase over time, absent a good fund manger. So what’s an investor to do?   Find a good conservative mutual fund which invests in dividend paying stocks. Why? Because dividends paid by good companies tend to increase over time. Take Bank of America, for example. (I’m using a stock rather than a mutual fund for this illustration because it avoids having to talk about purchases, sales and capital gains distributions.)  In 1997, Bank America paid a $.70 per share dividend. If you bought the stock near its high for that year, you paid $40 per share. Today, B of A pays a $2.24 dividend and its stock sells for around $50.   Notice, the dividend has increased 3...
More About: Investing , Dividends

Too Much Income Can Be Hazardous to Your Financial Health - Part I
2007-06-12 15:53:00
Bonds have higher yields then stocks. Bond funds have higher yields then stock funds. This means more current income for you. Bonds and bond funds are (generally) safer then stocks and stock funds.  They fluctuate less in value. That’s good, too. So what’s wrong with this picture? Bonds are fixed income securities. Their income doesn’t grow, nor does their principal value. As a matter of fact, the real value of their principal declines over time due to inflation.    Now, before you jump all over me, yes, there are inflation-adjusted Treasury securities that increase in value with inflation and floating-rate bank loan funds whose yield should increase if interest rates go up. Also, you can realize a (usually modest) gain in principal value if you buy a bond at less then its face value and hold it until maturity.   And, there are some managers who through astute analysis, forecasting and trading, add va...
More About: Health , Financial , Investing , Income , Mutual Funds

A Yen to Diversify
2007-06-06 15:51:00
As I’ve written before (Parental Discretion is Advised; A Euro, a Yen, a Buck, or a Pound; The CIA Guide to International Investing ), international mutual funds are an essential part of any investor’s portfolio. There’s an excellent article on global investing in the June 3rd New York Times: An Around-the-World Ticket for your Portfolio.    As you’d expect, the stock markets of Western Europe are highly correlated to the U.S. market. Makes sense, doesn’t it? A good portion of BMW’s profits come from the U.S., so if the U.S. economy turns down (and the U.S. stock market), so does BMWs profits and its stock price on the German exchange. Also, as you’d expect, the stock market movements of emerging counties, i.e., Brazil (68%), China (53%), India (43%), Russia (35%), are not as closely correlated with the U.S. market as are the Western European markets. (Of course, they’re also more volatile.) &n...
More About: Mutual Funds , Divers , Diver , Sify

Double, Double Toil and Trouble; Fire Burn and Caldron Bubble
2007-06-04 14:28:00
The S&P finally closed at a new high last week. The Dow hit another record high. The Chinese stock market sold off 6% in one day, yet the price of Chinese ADR’s (the shares of Chinese companies traded in the US) actually rose.   Sounds too good to be true, doesn’t it?   Against the Gods: The Remarkable Story of Risk tells the story of financial bubbles which have occurred throughout history. The best known is the Dutch tulip bulb craze which took place in the 1600’s. (I know, the Dutch seem like such sensible people.) The Dutch became smitten with tulips imported from Turkey.  The price of bulbs, depending upon color and rarity of the tulip, was bid up to ridiculous levels. After all, they don’t cure cancer and you can’t eat them (they’re poisonous). And this is where the story usually ends.    But there’s more. At one point, you could buy a nice townhouse on a goo...
More About: Market , Double , Mutual Funds , Fire

Insomnia
2007-05-30 14:50:00
  Bill Gross, the founder of Pimco, is the godfather of savvy bond investors and, if you’re looking for a good bond fund Pimco should be on your list.  He wrote a thought provoking piece in the May 28th issue of FORTUNE: How to Sleep Well at Night. Bill says that bonds are less volatile than stocks, provide a higher and steadier source of income, and allow you to sleep better at night. (That’s true, although I’m going to argue in coming weeks that good performing dividend paying stocks will provide a higher level of income than bonds over time, but that’s another story.)   Bill admits U.S. Treasuries, which are currently yielding under 5%, may be 50 basis points (.5%) overvalued. He also acknowledges that you can get just as good returns at the bank (I’d say in money market funds).    Why buy bonds? International recycling of dollars will drive yields lower, says Bill. Demand will drive up the price...
More About: Investing , Mutual Funds , Insomnia , Omni

Fund of Funds
2007-05-23 14:49:00
Wall Street’s principal product for retail investors these days is the “fund of funds.” As the name suggests, it’s a fund which owns pieces of a number of other funds with similar investment objectives. Recent examples I’ve seen include a hedge fund fund of funds, a private equity fund of funds and an international debt fund of funds.   Your broker will extol the advantages of a fund of funds, such as access to funds you couldn’t buy individually because their minimums are too high or you’re reducing your risk in a riskier investment class. Like the funds they invest in, funds of funds often have fairly hefty minimums and are illiquid. It may take you a month to three to get your money out and you can’t easily make addition investments or small withdrawals. The way I see you’re paying double fees – one to the mangers of the real funds and a second to the fund of funds manager (who may just ha...
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Parental Discretion is Advised
2007-05-21 14:26:00
International mutual funds should be a part of every investor’s portfolio. I’ve beaten this drum before (see A Euro, A Yen, a Buck or a Pound and The CIA Guide to International Investing).  But when the cover of BusinessWeek asks: What’s the Most Extreme Emerging Market on Earth?  (remember the Sports Illustrated curse) I begin to get a little nervous. Let’s stick with China for a minute. The Hang Seng (Hong Kong stock market) is up 30% in the past year. This is against a current back drop of Chinese government concerns about their stock markets becoming too speculative, widening the trading range of the Yuan, and possible U.S. trade limitations.     International markets will go down at some point in time and I take the above as warning signs that a correction might occur sooner rather then later. Does this mean you should sell your international mutual funds or not buy, if you don’t yet own any?...
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How to Hedge Your SUV
2007-05-16 15:12:00
Think gas prices will remain high or go higher? I do.  Demand is growing. Gasoline consumption is up 2% in the U.S. this year. China, India and the other new economies crave energy.  Ask yourself this: Are you plugging more stuff into the wall each year? Political instability in Nigeria, Iran, and Venezuela could limit supply. And, there’s only so much oil (natural gas and coal) in the ground. I’m not suggesting we’ll run out but it will become more expensive to extract it.   How can you benefit from higher energy prices? By investing in energy companies. There are two ways to do this. You can buy a Natural Resources sector fund or you can buy a Value fund which holds energy stocks. The sector mutual fund is the “pure play.” It holds energy stocks and, probably, stocks of minerals i.e., iron ore and copper, mining companies. The risk with a sector fund is that there a...
More About: Investing , Mutual Funds , Edge , Hedge

Help Wanted
2007-05-14 15:08:00
The Dow recently hit an all-time high. The S&P may be next. The Wall Street pundits are saying the markets are going higher. Stocks will go up. Interest rates will go down, based on last week’s inflation report, meaning that bond prices will go higher. But wait, Alan Greenspan says there’s a 1/3 chance of a recession before the end of the year (that’s within the next seven months, folks). A recession certainly won’t be good for stocks.    What’s an investor to do? Invest for the long term. How? By finding good professional managers, i.e., mutual fund mangers, and sticking with them.  These men and women come to work every day and think about nothing except how to invest your money. (Okay, they may also think about where they’re going for lunch and their kids soccer game, but all of us think about these things at work, don’t we?)   If a doctor shouldn’t operate on...
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All Holds Barred
2007-05-09 13:23:00
In poker you hold when you’ve been dealt a great hand (something that never has happened to me) or you believe the chances are more likely that you’ll end up worse off if you draw cards. Good poker strategy, bad investment strategy.   There is no such thing as a hold investment. (Yes, I know hold recommendations are issued every day, but they’re copouts.  I consider every investment recommendation that’s not a buy to be a sell regardless of what label’s put on it.) There are only two investment decisions – buy and sell. If you own (hold) a mutual fund and do not sell it, you’re making a buy decision. I should end right here, but I’ll continue.   If you own (hold) a mutual fund and you do not feel comfortable buying more either because of price, or outlook, sell it. (An exception would be if you held the fund in a taxable account and next week your gain would transition from short term to...
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Don't Fight the Tape
2007-05-07 14:21:00
The old adage simply means: go with the flow. Despite what we may think, despite what the economy is telling us, if stocks are heading higher, be along for the ride. If they’re heading lower, bail out.    I stated urging caution about the stock market two months ago (my opinion hasn’t changed, rising gas prices being the latest reason). Since then the Dow is up 8%, at an all-time high, and the S&P is up 7%, 25 points away from its all-time high. As I said in my April 2 posting, Hurricane Season, no one, including myself, can predict the market but we can make prudent investment decisions.  I’m glad the stock market has gone higher. It’s good for all of us (except you short sellers), but I’ve used this rally to rebalance my mutual fund portfolio (i.e., take money out of the stock market) and I hope you’ve done the same.   Of course the market may go higher. Don’t fight the tape, right?...
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A Euro, a Yen, a Buck or a Pound
2007-05-02 14:39:00
Or a Yuan. (With apologies to all you Cabaret fans.) Mutual fund investors need to be aware of the currency risks you’re taking (or not taking) when investing internationally. Is your mutual fund hedged against the dollar or not? Do you want your fund to be hedged or not? What difference does it make to you? Let’s start with the last question first.   Currencies do fluctuate is value (except for the Yuan, whose exchange rate is fixed by the Chinese government, but it will be revalued upward against the dollar at some point). For example, in 1999 €1.00 cost $.85. Today the exchange rate is about €1.00 = $1.36. (Condolences to any of you who are vacationing in Euro pe this summer.) Any dollar dominated investor, such as those of us in the good old USA, would have seen substantial appreciate in the Euro dominated investments (European stocks and bonds) we made a few years ago just based on currency movement.&...
More About: Investing , Mutual Funds , Pound , Buck

Through the Looking Glass
2007-04-30 15:00:00
Bond yields are supposed to increase with the length of time until the bond matures and you get your principal back. (When I talk about bonds I’m really mean any fixed income investment: bonds, bills, notes, CDs, and so on.) A basic, maybe the basic principle of investing is the risk/reward trade-off. You have to take risk to earn a return. The corollary is also true. The more risk you take, you greater should be your expected reward (return).   The risk/return trade-off means there should be a positive relationship between the expected return and the maturity of a bond. The longer to maturity, the higher the yield. Why? Because the longer until maturity, the greater the risk. Risks include inflation reducing the value of the bond, rising interest rates, having to sell the bond at a loss prior to maturity, and, except for US Treasuries, default by the issuer.     The yield curve (return vs. maturity) should be an upwar...
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When is a Door not a Door?
2007-04-25 15:10:00
When it’s an Exchange Traded Fund (ETF), according to John Bogle.   Mr. Bogle is the founder of the Vanguard funds and a champion of low-fee and index funds. He’s one of those people who’ve forgotten more about mutual funds then I’ll ever know.   An ETF is supposed to be similar to an index fund. ETFs and index funds are market baskets of securities designed to track the performance of a market index, such as the S&P 500. (Proponents argue that ETFs can have lower costs, greater liquidity, and be more tax efficient then index funds.)    In Mr. Bogle’s just-published book The Little Book of Common Sense Investing he argues that ETFs have been hijacked by day traders and that many ETFs will not track the indexes they’re designed to mimic and will not meet investors expectations. You can find a summary of his arguments in the April 30 BusinessWeek article What’s Wrong With ETFs?  (Yes, ...
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