More free financial advice (run for cover!)...



Last time I suggested buying energy stocks because they tend to go up when gas prices go up, thus making the inevitable sticker shock at the pump a little easier to bear. Since then my energy fund has been my worst performer in my retirement portfolio! Actually that isn't as bad as it sounds. The other good thing about energy stocks is that they tend not to correlate with the rest of the market. You'll see news reports saying that the stock market is down on news of higher oil prices. So when my other stocks do well (recently) my energy stocks do poorly (they've been barely treading water), but when my other stocks do poorly, the energy stocks will often (not always!) do well. People use to invest in bonds for this reason (peace of mind when stocks go down), but today most bond funds tend to move in synch with the market and their return overall is barely more than inflation.

Anyway, if my advice isn't perfect, it may be better than that of the so-called "experts". Fortune magazine in 2000 picked it's ten best stocks for the decade. So far, one winner and nine absolute dogs! If you had taken their advice , their magazine is the only "Fortune" you'd have left today!

I've also done well in the past with my real estate fund. Real estate also tends not to correlate closely to the stock market. Real estate investment trusts invest in commercial real estate which has been on a tear the last few years, leading some experts to believe it's due for a "correction" (i.e., a huge drop). So I sold off some of that fund but fortunately not all of it as it is my current leader, up 13% since January 1. I've got low-cost Vanguard Funds for both Energy and Realty but CG Realty is probably a better realty fund (google CGMRX) and I also have a small share in FIREX, which invests in foreign realty and is thus even less likely to correlate with the US stock market.

I manage my own retirement account (and it's all I've got since I'm not in Social Security), which might be a good thing. A new report says that as far as mutual funds go, people who choose funds for themselves do much better than people who buy through brokers. Most of the time I ignore my investments (also good advice- the more actively you trade, the worse you'll probably do:

"Active investors turned over their portfolios 258% annually, and made 12% on their money. Passive investors with only 2% portfolio turnover gained 18%, a huge advantage."

As I result I made myself a rule that once I buy a stock or fund I will not sell it for at least one year, even if I think I've changed my mind later. Generally I try to buy with a plan to hold for five to ten years.

Here are a few other things I've learned as I've been rebalancing my portfolio:

When it comes to large stocks there are so many analysts and experts following so few stocks (500) that there is no way to outsmart the market. You may get lucky short term but in the end you'll be doing well if you just match the overall market. Therefore: buy index funds rather than actively managed funds. Because the annual fees for index funds are about 1% per year lower, you are doing 1% per year better right off the bat. To do otherwise is just to throw money away. And the fund manager who beat the market last year, or the last five years may not do it the next five years (and probably won't).

On the other hand, the best performing seqment of the market has historically been small cap funds. Small caps are stocks that are among the 3000 largest companies but are not among the 1000 largest. So they aren't tiny, but they aren't analyzed as closely as IBM and WalMart, so you have a better chance of finding bargains. Small cap value stocks (low Price/Earnings ratios) do best of all categories. OTOH, because Large Growth stocks have lagged recently, many think they are now the place to be! For small cap value stocks I'm in VISVX but if I had more money to invest I'd probably put some in FBRVX as well.

I also think health care will continue to do well as we baby boomers age so I have a good portion of my investment in the Vanguard Health Care Fund (VGHCX). The best fund I don't have (but wish I did) is CGMFX.

Finally, international stocks have done well and I have about 1/4 of my investment in international funds (I have VTRIX and PRASX and wish I had ARTKX too). Many experts consider DODFX to be the best international fund.

One word: Plastics! (#42 )

In short: Diversify (look at the R-squared value which tells how closely the fund correlates to other stocks), don't trade very often (buy and hold), don't buy "load" funds (no-load only), and pay attention to expenses! I usually buy index funds with expense ratios below 0.5% or actively managed funds with rates under 1%. Don't just buy hot-performing funds or sectors (all stocks tend to revert to the mean over time). Last year's hot sector (e.g., emerging markets) may stay hot for a few more years or may crash and lose 50% in the next two years. Think long-term!

And one more thing: Never, ever, ever take investment advice from a pastor!

Posted: Wed - February 7, 2007 at 03:03 PM          

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