Inflation, and the fight against it, has been very much in the public’s mind in recent years. The shrinkage in the purchasing power of the dollar in the past, and particularly the fear (or hope
by speculators) of a serious further decline in the future, has greatly influenced the thinking of Wall Street. It is clear that those with a fixed dollar income will suffer when the cost of living advances, and the same applies to a fixed amount of dollar princi-pal. Holders of stocks, on the other hand, have the possibility that a loss of the dollar’s purchasing power may be offset by advances in
their dividends and the prices of their shares.
On the basis of these undeniable facts many financial authorities have concluded that (1) bonds are an inherently undesirable form of investment, and (2) consequently, common stocks are by their very nature more desirable investments than bonds. We have heard of charitable institu
tions being advised that their portfolios should consist 100% of stocks and zero percent of bonds.* This is quite a reversal from the earlier days when trust investments were.
By the late 1990s, this advice—which can be appropriate for a foundation or endowment with an infinitely long investment horizon—had spread to indi-vidual investors, whose life spans are finite. In the 1994 edition of his influ-ential book, Stocks for the Long Run, finance professor Jeremy Siegel of the Wharton School recommended that “risk-taking” investors should buy on
margin, borrowing more than a third of their net worth to sink 135% of their assets into stocks. Even government officials got in on the act: In February 1999, the Honorable Richard Dixon, state treasurer of Maryland, told the audience at an investment conference: “It doesn’t make any sense for any-one to have any money in a bond fund.”restricted by law to high-grade bonds (and a few choice preferred stocks).
Our readers must have enough intelligence to recognize that even high-quality stocks cannot be a better purchase than bonds under all conditions—i.e., regardless of how high the stock market may be and how low the current dividend return compared with the rates available on bonds. A statement of this kind would be as absurd as was the contrary one—too often heard years ago—that any bond is safer than any stock. In this chapter we shall try to apply various measurements to the inflation factor, in order to reach some conclusions as to the extent to which the investor may wisely be influenced by expectations regarding future rises in the
price level.
In this matter, as in so many others in finance, we must base our views of future policy on a knowledge of past experience. Is infla-tion something new for this country, at least in the serious form it has taken since 1965? If we have seen comparable (or worse) infla-tions in living exp
erience, what lessons can be learned from them in confronting the inflation of today? Let us start with Table 2-1, a condensed historical tabulation that contains much information about changes in the general price level and concomitant changes in the earnings and market value of common stocks. Our figures will begin with 1915, and thus cover 55 years, presented at five- year inte
rvals. (We use 1946 instead of 1945 to avoid the last year of wartime price controls.)
The first thing we notice is that we have had inflation in the past—lots of it. The largest five-year dose was between 1915 and 1920, when the cost of living nearly doubled. This com
pares with the advance of 15% between 1965 and 1970. In between, we have had three periods of declining prices and then six of advances at varying rates, some rather small. On this showing, the investor should clearly allow for the probability of continuing or recurrent inflation to come.
Can we tell what the rate of inflation is likely to be? No clear answer is suggested by our table; it shows variations of all sorts. It would seem sensible, however, to take our cue from the rather con- sistent record of the past 20 years. The average annual rise in the consumer price level for this period has been 2.5%; that for 1965–1970 was 4.5%; that for 1970 alone was 5.4%. Official govern-ment policy has been strongly against large-scale inflation, and there are some reasons to believe that Federal policies will be more effective in the future than in recent years.* We think it would be reasonable for an investor at this point to base his thinking and decisions on a probable (far from certain) rate of future inflation of,say, 3% per annum. (This would compare with an annual rate of about 21/2% for the entire period 1915–1970.)
What would be the implications of such an advance? It would eat up, in higher living costs, about one-half the income now obtainable on good medium-term tax-free bonds (or our assumed after-tax equivalent from high-grade corporate bonds). This would be a serious shrinkage, but it should not be exaggerated. It would not mean that the true value, or the purchasing power, of the investor’s fortune need be reduced over the years. If he spent half
his interest income after taxes he would maintain this buying power intact, even against a 3% annual inflation.
But the next question, naturally, is, “Can the investor be reason-ably sure of doing better by buying and holding other things than high-grade bonds, even at the unprecedented rate of return offered in 1970–1971?” Would not, for example, an all-stock program be preferable to a part-bond, part-stock program? Do not common stocks have a built-in protection against inflation, and are they not almost certain to give a better return over the years than will bonds? Have not in fact stocks treated the investor far better than have bonds over the 55-year period of our study?
The answer to these questions is somewhat complicated. Com-mon stocks have indeed done better than bonds over a long period of time in the past. The rise of the DJIA from an average of 77 in 1915 to an average of 753 in 1970 works out at an annual com- pounded rate of just about 4%, to which we may add another 4% for average dividend return. (The corresp
onding figures for the S & P composite are about the same.) These combined figures of 8%
This is one of Graham’s rare misjudgments. In 1973, just two years after President Richard Nixon imposed wage and price controls, inflation hit 8.7%, its highest level since the end of World War II. The decade from 1973 through 1982 was the most inflationary in modern American history, as the cost of living more than doubled.per year are of course much better than the return enjoyed from bonds over the same 55-year period. But they do not exceed that now offered by high-grade bonds. This brings us to the next logical question: Is there a persuasive reason to believe that common stocks are likely to do much better in future years than they have in the last five and one-half decades?
Our answer to this crucial question must be a flat no. Common stocks may do better in the future than in the past, but they are far from certain to do so. We must deal here with two diff
erent time elements in investment results. The first covers what is likely to occur over the lo
ng-term future—say, the next 25 years. The second applies to what is likely to happen to the investor—both financially and psychologically—over short or intermediate periods, say five ye
ars or less. His frame of mind, his hopes and apprehensions, his satisfaction or discontent with what he has done, above all his deci- sions what to do next, are all determined not in the retr
ospect of a lifetime of investment but rather by his experience from year to year.
On this point we can be categorical. There is no close time con-nection between inflationary (or deflationary) conditions and the movement of common-stock earnings and prices. The obvi
ous example is the recent period, 1966–1970. The rise in the cost of liv-ing was 22%, the largest in a five-year period since 1946–1950. But both stock earnings and stock prices as a whole have declined since 1965. There are similar contradictions in both directions in the record of previous five-year periods.
Inflation and Corporate Earnings
Another and highly important approach to the subject is by a study of the earnings rate on capital shown by American business.This has fluctuated, of course, with the general rate of economic activity, but it has shown no general tendency to advance with wholesale prices or the cost of living. Actually this rate has fallen rather markedly in the past twenty years in spite of the inflation of the period. (To some degree the decline was due to the charging of more liberal
depreciation rates. See Table 2-2.) Our extended stud- ies have led to the conclusion that the investor cannot count on much above the recent five-year rate earned on the DJIA group— about 10% on net tangible assets (book value) behind the shares. Since the market value of these issues is well above their book value—say, 900 market vs. 560 book in mid-1971—the earnings on current market price work out only at some 61 ⁄4%. (This relation-ship is generally expressed in the reverse, or “times earnings,”manner—e.g., that the DJIA price of 900 equals 18 times the actual earnings for the 12 months ended June 1971.)
Our figures gear in directly with the suggestion in the previous chapter * that the investor may assume an average dividend return of about 3.5% on the market value of his stocks, plus an apprecia- tion of, say, 4% annually resulting from reinvested profits. (Note that each dollar added to book value is here assumed to increase the market price by about $1.60.)
The reader will object that in the end our calculations make no allowance for an increase in common-stock earnings and values to result from our projected 3% annual inflation. Our justification is the absence of any sign that the inflation of a comparable amount in the past has had any direct effect on reported per-share earnings. The cold figures demonstrate that all the large gain in the earnings of the DJIA unit in the past 20 years was due to a proportionately
large growth of invested capital coming from reinvested profits. If inflation had operated as a separate favorable factor, its effect would have been to increase the “value” of previously existing capital; this in turn should increase the rate of earnings on such old capital and therefore on the old and new capital combined. But nothing of the kind actually happened in the past 20 years, during which the wholesale price level has advanced nearly 40%. (Busi-ness earnings should be influenced more by wholesale prices than by “consumer prices.”) The only way that inflation can add to common stock values is by raising the rate of earnings on cap- ital inve
stment. On the basis of the past record this has not been the case.
In the economic cycles of the past, good business was accompa- nied by a rising price level and poor business by falling prices. It was generally felt that “a little inflation” was helpful to business profits. This view is not contradicted by the history of 1950–1970,which reveals a combination of generally continued prosperity and generally rising prices. But the figures indicate that the effect of all this on the earning power of common-stock capital (“equity capital”)
has been quite limited; in fact it has not even served to maintain the rate of earnings on the investment. Clearly there have been impor-tant offsetting influences which have prevented any increase in the real profitability of American corporations as a whole. Perhaps the most important of these have been (1) a rise in wage rates exceed- ing the gains in productivity, and (2) the need for huge amounts of new capital, thus holding down the ratio of sales to capital
employed.
Our figures in Table 2-2 indicate that so far from inflation having benefited our corporations and their shareholders, its effect has been quite the opposite. The most striking figures in our table are those for the growth of corporate debt between 1950 and 1969. It is
surprising how little attention has been paid by economists and by Wall Street to this devel
opment. The debt of corporations has expanded nearly fivefold while their profits before taxes a little more than doubled. With the great rise in interest rates during this period, it is evident that the aggregate corporate debt is now an adverse economic factor of some magnitude and a real problem for many individual enterprises. (Note that in 1950 net earnings after interest but before income tax were about 30% of corporate debt, while in 1969 they were only 13.2% of debt. The 1970 ratio must have been even less satisfactory.) In sum it appears that a signifi-
cant part of the 11% being earned on corporate equities as a whole is accomplished by the use of a large amount of new debt costing 4% or less after tax credit. If our corporations had maint
ained the debt ratio of 1950, their earnings rate on stock capital would have fallen still lower, in spite of the inflation.
The stock market has considered that the public-utility enter-prises have been a chief victim of inflation, being caught between a great advance in the cost of borrowed money and the difficulty of raising the rates charged under the regulatory process. But this may be the place to remark that the very fact that the unit costs of electricity, gas, and telephone services have advanced so much less than the general price index puts these companies in a strong strategic position for the future. They are entitled by law to charge rates sufficient for an adequate return on their invested capital, and this will probably protect their shareholders in the future as it has in the inflations of the past.
The Investor and Inflation
Investors who have given up on the gold market should realize
Investors who have given up on the gold market should realize
that now is a great time to get back in.
Primary wave c of cycle wave B is now in progress. Since it is a third wave, it should cause the price of
gold to rise substantially, because the third wave in any Elliott pattern is a powerful wave. Hence,
primary wave c will probably unfold in one of the following two ways:
• Primary wave c will rise to $633.78, the point at which cycle wave B will have retraced 0.618 of cycle
wave A.
• Primary wave c will travel a distance that is 1.618 times the length of primary wave a. Primary wave a
traveled for a distance of $195.95; primary wave c is likely to rise for a distance of $317.04 ($195.95
× 1.618), topping out at $662.29.
Investors who have given up on the gold market should realize that now is a great time to get back in.
Horatio Miller is editor and publisher of My Point of View, PO Box 27712, Philadelphia, PA 19118, Stocks & Commodities V. 9:4 (172-173): Elliott Wave And Gold by Horatio Miller
Northrop, EADS land $35 bln airborne tanker deal
NEW YORK (MarketWatch) -- In a major upset, the Air Force on Friday tapped Northrop Grumman Corp. and EADS to build 179 of its next-generation airborne refueling tankers, a deal worth at least $35 billion.
Aftermarket revenue for parts and maintenance could easily add another $60 billion to their coffers, making it one of the largest defense contracts on record. It could also grow to include eventual replacement of the Air Force's 500 Stratotankers, many of which are already more than 40 years old.
The contract was originally estimated to be worth $40 billion, but the deal Northrop and EADS finally agreed to was $5 billion less.
The first phase of the work calls for developing four test KC-45 aircraft for $1.5 billion. The plane had been dubbed the KC-30 through the bidding process.
Once the basic design has been hammered out, the contract calls for delivery of 64 more aircraft at a cost of about $10.6 billion.
The deal strengthens Los Angeles-based Northrop's chance of landing future airborne tanker orders and expands EADS' role in supplying the U.S. military. The partners have said the plane would be built at facilities in Mobile, Ala., creating 5,000 new jobs in the process.
Defense industry analysts had widely expected Boeing Co. to submit the winning bid, using a converted 767 commercial airliner as the platform for the new military tanker. The KC-767 is smaller than the converted A330 aircraft offered by Northrop and built by the Airbus unit of EADS (FR:005730) , the acronym for the European Aeronautic Defence and Space Co.
In after-hours trading following the news, shares of Northrop (NOC) fell rose 5.6% to $83. Boeing (BA) shares fell 3.2% to $80.11.
Boeing will be briefed on the decision on or after March 12. The Chicago-based company is likely to file a protest with the Government Accountability Office. The Air Force wouldn't provide details as to why Boeing was not chosen, but stressed its decision process was well documented.
"The records are clear and well documented, and Boeing has known all along where they stand in the process," said Sue Payton, assistant secretary of Air Force Acquisition in a news conference announcing the deal.
Once the protest is filed, the GAO has 100 days to either dismiss Boeing's complaint or find in favor of the company.
During the conference, Air Force General Arthur Lichte said the Northrop bid was chosen because its aircraft could carry more passengers, cargo, and fuel while also offering more flexibility and dependability over Boeing's offer.
"Overall, Northrop was strong in aero refueling and airlift, as well as in past performance, and offered great advantage to the government in cost," added Payton.
Later Payton added that the creation of American jobs was not a factor in choosing the Northrop, EADS offer.
The KC-45 is based on the Airbus A330 tanker that has already won four awards in Australia, Britain, the United Arab Emirates, and Saudi Arabia.
Dollar tumbles to three-year low versus yen Renewed risk aversion boosts Japanese currency, other low-yielders
LONDON (MarketWatch) -- Last week it was the euro; now it's the Japanese yen's turn to explore historic strength against the U.S. dollar.
The yen ended last week on a strong note, then extended gains in Asian and early European activity Monday to rally to its strongest level against the U.S. dollar in three years.
Foreign-exchange strategists linked the move mainly to renewed concerns about the U.S. economy and the prospect for further turmoil in the global financial sector.
The yen was 0.7% higher against the dollar at 102.99 yen in recent activity, after hitting 102.59 earlier in the session, according to data from FactSet. With the yen leading the way, the dollar was lower against most other major counterparts.
The dollar index, which measures the greenback against a trade-weighted basket of six major currencies, was quoted at 73.732 in recent action after dipping to its lowest level since the index was created in 1973.
Bouts of risk aversion have proven supportive to the yen in recent months as it leads traders to shun once-popular "carry trades." In a carry trade, a player borrows in a low-yielding currency, such as the yen or the Swiss franc, and then uses the funds to buy assets denominated in a higher-yielding currency.
Combined with underlying ideas the U.S. economy may already be in recession and expectations the U.S. Federal Reserve will continue aggressively cutting interest rates, the stage was set for further gains against the dollar by major currencies, analysts said.
Strong gains by the low-yielding Swiss franc indicated that risk aversion was the main theme of the day, said Roberto Mialich, a foreign-exchange strategist with UniCredit. The Swiss unit was trading near $1.0403 against the dollar, a gain of 0.1% on the day. Earlier, the dollar traded as low as $1.0305 against the Swiss franc.
Japanese stocks were hit hard as the yen rose. The stronger currency put pressure on Japanese exporters, analysts said. Tokyo's 225-issue Nikkei Stock Average dropped 3.6% to 13,114.30 and the broader Topix index sank 3.4% to 1,278.84. See full story.
Meanwhile, Japanese officials gave no indication of concern about the yen's gains -- a factor that further encouraged the currency's rally, Mialich said. If traders begin to perceive an attitude of "benign neglect" toward a stronger yen by Japanese officials, the currency could soon make a test of the 100-yen level against the dollar, he said.
The euro, which last week marched to record territory against the greenback, was slightly higher against the U.S. unit at $1.5166. The European single currency was 0.7% lower against the surging Japanese currency at 156.14 yen, and was holding a gain of around 0.2% against sterling at 0.7640 British pounds.
The pound, meanwhile, was on the defensive against the greenback, losing 0.2% to $1.9849.
The European Central Bank and the Bank of England both hold policy meetings Thursday. Both are expected to keep interest rates on hold for this month.
Stronger-than-expected European economic data, including last week's unexpected rise in Germany's Ifo index of business sentiment, have contributed to expectations the ECB will leave its key lending rate on hold, analysts said. More global coverage.
A preliminary estimate of consumer price inflation across the 15 nations that make up the euro-zone was in line with market expectations for a 3.2% rise in February, according to data released by European Union statistical agency Eurostat. That matched the record pace seen in January and remains well above the ECB's medium-term target of under 2%.
Bank of England policymakers, meanwhile, have acknowledged risks of an economic slowdown. But they've also emphasized near-term concerns about inflation, focusing on its potential impact on consumers' longer-term inflation expectations. The bank's Monetary Policy Committee is expected to leave its key rate on hold at 5.25% after cutting by a quarter-point in February.
"Markedly faltering U.K. growth and the very real risk of a sharp economic downturn mean that further interest rate cuts are clearly on the Bank of England's agenda," wrote Howard Archer, chief U.K. and European economist at Global Insight. "Nevertheless, [Thursday's] meeting of the Monetary Policy Committee is highly likely to prove too soon to yield the next 25-basis-point interest rate cut to 5.00% given current elevated inflationary pressures."
Meanwhile, the U.K. CIPS purchasing managers index for manufacturing posted a stronger-than-expected rise to 51.3 in February, up from 50.7 in January, news reports said. Market expectations were for a reading of 51.0.
Analysts said PMI data for the services sector due for release on Wednesday could have an impact on U.K. rate expectations.
"Sterling faces another volatile week, with the services PMI survey on Wednesday likely to trigger a very ... jittery 24 hours ahead of the BOE verdict on Thursday," wrote analysts at Lloyds TSB. "A sharp drop for the PMI and wider [spreads between the London interbank overnight rate, or Libor, and the central bank's base rate] could spark sterling selling," potentially pushing the euro to another round of new highs against the pound.
Diebold gets $2.63 bln bid by United Technologies
Proposed deal is $40-share; maker of ATMs had rebuffed earlier overture
NEW YORK (MarketWatch) - United Technologies Corp. proposed to acquire Diebold Inc., the producer of automatic teller machines, voting terminals, retailing systems and other technology, for $40 a share, or $2.63 billion.
In a statement late on Sunday, United Technologies (UTX) , the Hartford, Conn., industrial and technology giant, laid out its proposal to acquire Diebold, which is based in North Canton, Ohio.
It made the public proposal after Diebold's board rebuffed an earlier takeover overture from United Technologies.
United Technologies also has told Diebold that if it could conduct a due-diligence financial review, it might be prepared to boost the $40 deal price.
That $40 price is 66% above Diebold's (DBD) closing price Friday of $24.12. In premarket trading Monday, shares were up 65% to $39.83 while United Technologies shares remained unchanged at $70.51.
In the past year, Diebold's shares touched a high of $54.50 last July and a low of $23.07, on Jan. 23, 2008.
UTX says its proposal is fully financed. The deal would be conditioned on a due-diligence review of Diebold and on regulatory clearances, United Technologies said.
"Diebold represents an excellent fit with" United Technologies, UTX Chairman and Chief Executive Officer George David said in the Sunday statement.
United Technologies makes its case
In a letter dated Feb. 19, which United Technologies made public, David proposed to Diebold Chairman John N. Lauer a deal at "a significant premium to the current trading price."
David said that UTX's "resources and presence in markets globally would be significant assets" in helping Diebold expand worldwide and build profitability.
United Tech sees complementary characteristics between several of its businesses and Diebold. For one, UTX's Otis Elevator has a 400-location network of offices and service centers. And Carrier air conditioners and UTC Fire and Security have comparable business models, United Tech said.
United Tech also called itself "exceptionally technology intensive," spending more than $3.5 billion a year on research and development.
Financing would come from cash on hand and other "readily available" sources, the letter said.
In a Feb. 21 response, Lauer said Diebold's board took up United Tech's proposal "extensively" at a regular meeting. The directors voted unanimously that pursuing a combination with United Technologies "was not in the best interests" of Diebold or its holders, Lauer's letter said.
Eight days later, David told Lauer that after due diligence, United Technologies might be prepared to go beyond $40 a share. And he said that if UTX couldn't talk with Diebold's board, it would take the matter directly to Diebold's holders, which according to regulatory filings include mutual fund giant Fidelity Investments and Cooke & Beiler, a Philadelphia investment firm.
Early in February, Diebold estimated 2007 revenue at $2.95 billion, which would rise 6% to 8% in 2008. The company had said it was disappointed with the revenue growth it posted for 2007. And it also said it would cut about 5% of its global workforce to reduce costs.
Diebold also said then that the board's audit committee and regulators were continuing to review the company's accounting.
Morgan Stanley is advising United Technologies on the takeover proposal.
Gold and oil futures hit new highs as greenback slides
NEW YORK (MarketWatch) -- U.S. stocks on Monday fell ahead of manufacturing data likely to show industrial activity on the wane and as the dollar index declined to its lowest level since its inception in 1973.
The Dow Jones Industrial Average ($INDU) fell 79.05 points to 12,187.34, with 20 of its 30 components trading lower.
The S&P 500 ($SPX) declined 8.57 points to 1,322.06, while the Nasdaq Composite (COMP) shed 15.51 points to 2,255.97.
Shares of E-Trade Financial Corp. (ETFC) gained 2% on speculation the beleaguered online brokerage may be positioning itself for a potential sale. Read full story.
Diebold Inc. (DBD) shares jumped 61% on news United Technologies Corp. (UTX) had offered to buy the maker of ATM and voting machines.
Shares of United Technologies slid more than 3%.
Gold and crude-oil futures surged to new record highs, propelled by sharp weakness in the U.S. dollar. Gold for April delivery hit a record of $991 an ounce, while crude oil for April delivery soared to a record of $103.51 a barrel on the New York Mercantile Exchange.
"We anticipate holding a larger than ordinary exposure to bonds to cushion the wild equity markets," said Paul Nolte, director of investments at Hinsdale Associates.
Treasury prices on Monday were mixed to lower, with the benchmark 10-year note off 13/32 at 99.16, its yield ($TNX) up to 3.555%.
The Institute of Supply Management's manufacturing gauge for February may fall back under the 50% mark, indicating economic contraction, economists predicted, after regional polls in New York, Philadelphia and elsewhere indicated downturns.
Readings under 50% in the ISM index indicate that the manufacturing sector is contracting, but it takes a much weaker reading near 41% for a recession to be called, economists say.
The ISM data is due out at 10 a.m. Eastern.
U.S. stocks plunged on Friday, with the Dow industrials losing 315 points, the S&P 500 dropping 37 points and the Nasdaq Composite losing 60 points. American International Group led the downturn after posting its largest loss in almost 90 years of business.
World on a string,Is just one global fund all you need?
That's not a bad strategy for experienced investors who are capable of dealing with the complexity of multiple prospectuses, proxies and quarterly statements. But for newcomers or less-savvy savers, such an approach can be overwhelming.
Enter the global or world fund, an investment vehicle that gives you exposure to the whole world via a single fund investing in both U.S. and international stocks.
Such a fund can be just the ticket for savers starting out in the work force or for parents setting up IRAs for their children, folks who may have just $1,000 or $2,000 to initially invest and who will be adding a limited quarterly or monthly sum after that.
"These are proven strategies that over the years have done well or better than a diversified portfolio," he said. Two he likes are American Funds' Capital Income
Builder (CAIBX:58.37, -0.98, -1.6%) and Capital World Growth and Income
(CWGIX:41.36, -1.03, -2.4%) . Both carry initial sales charges, or loads, and require a $250 minimum investment.
"You have a team in American Funds that is made up of experts in both the international world and the domestic world, supported by a number of analysts who cover these funds," Herman said.
A few years ago few in the U.S. would have considered global funds as a one-stop investment solution, said Kai Wiecking, a Morningstar fund analyst. "It's good we've made that much progress to recognize that foreign equities belong in everyone's portfolio," he said.
The global funds allow even investors without much cash to have a stake in evolving world markets. While the U.S. currently commands the lion's share of the market capitalization in stocks worldwide, Wiecking and others assert that situation is likely to change as Asia continues to emerge as a market powerhouse.
Adam Bold, founder and chief investment officer of The Mutual Fund Store, headquartered in Overland Park, Kan., advises investors who want to use just one global fund to seek those that have matched or outperformed their peers.
He also likes the Oakmark fund, but makes a couple of other no-load recommendations as well: Polaris Global Value (PGVFX:16.79, -0.29, -1.7%) , which has beaten the S&P Index (SPX:1,330.63, -37.05, -2.7%) year-to-date and in one-year and five-year periods; and Julius Baer Global Equity
(BJGQX:40.68, -0.96, -2.3%) , a newer fund headed by the team of Rudolph-Riad Younes and Brett Gallagher, who have already proven their mettle on the now-closed Julius Baer International Equity (BJBIX:40.39, -0.71, -1.7%) .
"For the person who doesn't do that, wants to get something and have exposure to both, these funds make sense if you have the reality that mutual funds are not buy and forget investments," he said, noting that even one fund should get a once-over twice a year, either by the investor or an adviser.
Phillips Ruben, president of Boston-based Vision Financial Planning, makes use of Dimensional Fund Advisor funds as one-stop solutions for those investing only a small amount initially, but notes they're available only through a financial adviser. "They offer very broad diversification, are very tax efficient and very cost effective," he said
Going with just a single fund to start out, Ruben said, can prevent rash decisions, such as following trends in a particular fund or sector.
"I think a lot of people don't have the expertise to make the decisions to put together an effective diversified portfolio and this takes that decision-making piece out of it and puts it in the hands of the experts."
| Five global funds to consider | ||||
| Name of fund | Ticker | Expense ratio, load | 3-year return (annualized) | 5-year return (annualized) |
| Capital World Growth & Income | CWGIX | 0.77%, 5.75%, | 22.5% | 10.3% |
| Oppenheimer Global | OPPAX | 1.15%, 5.75% | 21.1% | 4.6% |
| Oakmark Global | OAKGX | 1.26%, no load | 24.6% | 18.6% |
| Polaris Global Value | PGVFX | 1.48%, no load | 25.4% | 16.3% |
| T. Rowe Price Global Stock | PRGSX | 1.2%, no load | 19.4% | 2.6% |
Source: Comstock
Bull rocket fueling up with $2 trillion
And in the space of a year, Nasdaq's technology payload triggered a flameout of our worldwide space adventure, with a total wipeout of $4.5 trillion net worth.
Now switch channels to a launch pad at Florida's Kennedy Space Center.
Imagine $2 trillion of cash building up like rocket fuel. Being loaded into a hissing, steaming, vibrating Titan missile. You got it - there's $2,000,000,000,000 being stock-piled in money market funds as investors sit nervously waiting for the next launch, waiting to catapult the S&P 500 and the Nasdaq back up into a bull orbit.
But there's also a heart-pounding fear rippling through the spectators in the bleachers - how do you pick "the bottom?" Will the next satellite launch in the next quarter? Or be delayed until 2002? More frightening, if we haven't hit bottom, how much deeper? Nobody knows. But we do know lots more fuel will be stockpiled! And that's my point. We could end up with $2.5 to $3 trillion in money market cash before we have lift-off!
Get the picture? A new image. Stop focusing on the crash of the MIR. Think positive. Look ahead. Plan. Something's building to ignition. And it will trigger. The longer we wait, the more fuel, and the bigger the explosion. True, bears fear an implosion. History suggests otherwise. Bulls always come roaring back.
History also shows that most investors invariably miss a next launch. The majority of America's investors, including pros, typically misjudge market turning points and take-offs. Like now, most are so nervous and gun-shy from the relentless descent of the past year they'll remain spectators in the stands, clutching their cash, passively watching the next bull lift off.
How about you? Getting an itchy trigger finger? You should be. Let's say you're a typical long-term investor. If you are, here are my picks for a model five-star "lift-off" portfolio. Winners that'll work for dollar-cost averaging in a bear market or for positioning your thinking when your nerve returns, when you decide the bull's ready to move, when you want to move out of cash into the market fast with an aggressive growth portfolio.
Top-gun funds, so good you can fill a portfolio by throwing darts at the list:
For a basic indexing portfolio, stick with funds tracking the S&P 500 and the Wilshire 5000, funds like Vanguard 500 Index
(VFINX:122.89, -3.41, -2.7%) and Vanguard Total Stock Market
(VTSMX:32.19, -0.89, -2.7%) are solid broad market funds. And if you
lean one way or the other, try Vanguard Growth Index
(VIGRX:30.16, -0.79, -2.5%) or Vanguard Value Index
(VIVAX:23.69, -0.68, -2.8%) .
Growth (GABGX: 31.93, -0.83, -2.5%) , Excelsior Value & Restructuring (UMBIX:54.06, -2.02, -3.6%) , White Oak Growth Stock
(WOGSX:31.71, -0.97, -3.0%) , and Legg Mason Value Primary
(LMVTX:52.75, -1.92, -3.5%) .
(TRBCX:35.33, -0.94, -2.6%) , Janus Growth & Income
(JAGIX: 33.54, -0.77, -2.2%) , Invesco Equity-Income
(FIIIX:8.76, -0.23, -2.6%) , Dreyfus Disciplined Stock
(DDSTX: 31.07, -0.85, -2.7%) , and the American Funds New
Perspectives (ANWPX:31.71, -0.78, -2.4%) .
If you're a real aggressive long-term investor, swap 10-15 percent of your large-cap asset allocation into sector funds in technology and biotech. Keep in mind, however, that about 25 percent of the S&P 500 is already made up of technology companies. Some of the best five-star tech funds are Firsthand Technology (TVFQX:36.33, -0.66, -1.8%) , Invesco Technology
(FTCHX:25.71, -0.68, -2.6%) , Fidelity Select Brokerage Services
(FSLBX: 59.56, -1.31, -2.1%) , and Vanguard Health Care
(VGHCX:131.54, -1.91, -1.4%) . Consider shifting five percent of your large-cap stock fund allocation into two or three.
Small- & mid-cap stock funds (25%)
(TAVFX:9.98, -0.30, -2.9%) . Then mix in a mid-cap winner like Artisan Mid-Cap (ARTMX: 27.50, -0.73, -2.6%) , Weitz Value
(WVALX:28.78, -0.78, -2.6%) , Strong Opportunity
(SOPFX: 34.31, -0.86, -2.4%) , and Oakmark Select
(OAKLX:23.44, -0.75, -3.1%) .
International stock funds (10%)
6:16pm 02/29/2008
Delayed quote data
(FDIVX:36.53, -0.89, -2.4%) , American Century International Growth
(TWIEX: 12.64, -0.29, -2.2%) , and Citizens Global Equity
(WAGEX: 21.01, -0.48, -2.2%) .
(SWYPX: 8.79, -0.04, -0.4%) , or Vanguard Short-Term Bond Index
(VBISX:10.36, +0.05, +0.5%) . And if you prefer municipals, go with SIT Tax-
Free Income (SNTIX:9.01, -0.06, -0.7%) and Vanguard Intermediate Term Tax-Exempt (VWITX:12.83, -0.07, -0.5%) .
Keep one eye focused on each channel - along with the continuing losses in the Dow, Nasdaq, economy, earnings estimates, interest dates, and spy planes, we also have a continuing buildup of money market cash, the rocket fuel being stockpiled for the next launch of the bull market. We don't know when. Or how much further down. Only that it will happen. And that the lift-off will probably catch most investors in the bleachers as spectators.
Remember, a solid five-star portfolio only needs eight to10 funds for a bull or bear market. With these 38 funds to pick from, you can probably pick the right ones for you by throwing darts at the list - so have some fun, use darts that look like NASA Titan rockets!
Paul B. Farrell, author of "The Winning Portfolio" and three books on online investing, has been executive vice president of the Financial News Network and an investment banker with Morgan Stanley. He holds a doctorate in psychology and a law degree.
Energy stocks swoon along with broad market
NEW YORK (MarketWatch) -- Energy stocks swooned with the broad market Friday as woes about the economy and lower oil prices weighed on the sector, but oil, natural gas and oil services shares still managed to hold on to slim gains for the week.
The Amex Oil Index (XOI:1,420.75, -37.53, -2.6%) fell 2.6% to 1,421. For the week, the index inched 0.6% higher. For the month, it rose 3.7%.
VLO 57.77, -0.50, -0.9%) set plans to buy back up to $3 billion of its stock and spend $2.4 billion to expand capacity by 90,000 barrels per day at its Port Arthur, TX refinery. Despite the moves, Valero shares fell 50 cents to $57.77.
Exploration and production firm Canadian Natural Resources (CNQ:74.84, -2.50, -3.2%) fell 3.2% $74.84 after a downgrade to market perform from outperform at Raymond James.
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