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From the Publisher
Beginning with this issue,
we are upgrading our newsletter in both appearance and content.
One of the main changes you should
see is more emphasis on the typical investor's portfolio and a corresponding somewhat lesser emphasis on our Model Portfolio
since no reader should necessarily focus on our exact choice
of funds or allocations.
We will continue to emphasize sound strategies and those fund categories we think have
the best prospects for the intermediate and long-term. All of our recommendations try to take into account
that no two investors are alike: No single piece of advice can work for all readers
since one's particular goals and objectives may call for a modified
approach.
We have indicated many times in the past that our Model Portfolio has two main
purposes: 1) to give you our idea of which fund categories and some specific
funds we think may do best in the future; and 2) to serve as a means of measuring
how well our choices did at various points later on, so that one can judge whether
our advice has been relatively "on target" or not.
One problem with our Model Portfolio has been that because we have
regularly included a large number of funds and changed
the funds somewhat frequently, many readers may
have concluded that it would be impractical, if not nearly impossible,
to try to emulate such a portfolio. We agree. Even I
do not have the exact funds or percentages as shown in the Portfolio. So,
remember that the Portfolio serves primarily for the above two purposes. One should
consider it a useful hypothetical tool, rather than a real portfolio.
In order to bridge the gap between this ideal Portfolio and most real ones,
effective this month, we are offering an alternative "condensed" Model Portfolio. This additional one
includes a maximum of only 3 stock funds and 2 bond funds, approximately
the minimum number of funds we feel is necessary to maintain a reduced
risk position, given the high degree of volatility in the markets.
In deciding how many funds to include in your portfolio, keep in mind
that putting all or most of your investments in just one, two, or even
three similar kinds of funds may result in the possibility of the kinds of large
losses many investors have experienced over the last 3 or more years. Also, by investing
in a variety of funds, you have a better chance of capturing at least
some of the categories that are doing well since stock and bond category
performance can vary widely, even as compared to the overall performance of
stocks and bonds in general.
We hope you like these
new directions. Please let us know at feedback@funds-newsletter.com
Best wishes for a successful 2003!
Sincerely,
Tom Madell, PhD,
Publisher
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How to Invest in 2003: Your Tolerance For Risk May Hold the
Key |
| Contents:
-Overview
-Recommended Allocations
-Full Model Portfolio
-Condensed Model Portfolio
-Model Portfolio Performance
Overview
Do you wish you could have gotten out of all of your stock investments in early
2000? Or maybe you even know of people who said they smartly exited in the late 90s sensing
that something bad was about
to happen. Unfortunately, only the tiniest minority of people were able to "pull
the plug" near the top. And for those who did exit the market a year or two
ahead of the trouble in anticipation of problems, I suspect that they will probably
return to the market in the future only after having missed a significant amount of
upside gains. None of these exiters would qualify in my
view as long-term investors.
To the contrary, the majority of fund investors, for better or for worse, have
at least some of their assets locked into their stock fund investments, especially people
who invest in retirement vehicles through their work, such as their 401(k)s. These
investors generally did not get into their investing with the idea that they could
successfully time or control their investment performance; rather, they tend to believe
that regardless of the stock market's ups and downs, so long as they hold their
investments until they quit working, and even beyond, they have little to worry
about. They cite stock market history as their guide, much as do those who see
that quality residential real estate held down through the years has almost never
failed to amply reward its holders.
For those who have wished to get out, or who actually have, the question remains
as to whether this is a viable strategy going forward. Can you get by indefinitely
on the relatively low earnings power offered by alternative investments? And, can
anyone really identify when the "right" time to get back into the market is? Most
research suggests not.
Recommended Allocations
Most readers of this Newsletter will probably identify more with the plight of the
long-term investor than with the "in and out" investor. Although it makes sense
to be flexible regarding changing market conditions while basing your investing on your own
particular present and future needs, we believe that in most cases, most
investors will be best served by always maintaining a portion
of their financial investments in stock-related investments. In regards to
our recommendations, therefore, it is
unlikely (but not impossible) that we will ever recommend that
one cut the percentage of stocks in their portfolio below 40-45%. Exceptions
might be for people: a) over 80; b) those who think there is some chance they may need
to access some of this money quickly;
or c) in case of the extremely unlikely onset of something resembling a Depression.
However, we also recognize that, for a variety of reasons, there are
some people who currently feel comfortable only with a smaller than average percentage
of their assets allocated to stocks. Therefore, beginning with this issue, we will
present not only our usual allocation recommendations to stocks, bonds,
and cash, but also our allocations for those who choose a more conservative path.
We base our allocation recommendations on a variety of factors: the
prevailing economic climate, givens regarding current returns available on non-stock
investments such as dividends on bonds and money market accounts,
and ongoing trends in fund performance. With that in mind, the column on the
right shows our
suggested overall allocation percentages for the current time:
| For Most Investors
Class
| Percent of
Portfolio |
|---|
Stocks
| 50% |
Bonds
| 50% |
Cash
| 0% |
For More Conservative
Investors
Class
| Percent of
Portfolio |
|---|
Stocks
| 35% |
Bonds
| 40% |
Cash
| 25% |
Our allocation recommendations remain unchanged since Nov. 15th 2002, prior to
which we recommended a 45/55 split favoring bonds.
Although right now, we are still not
that enthusiastic about stocks, we believe that 1) cash does
not offer an acceptable alternative and 2) that bonds, while at this moment still
appear attractive, present certain risks for the near future. Most bonds, similar to stocks
several years ago, have now been in a bull market of their own for many years
running. Typically, such good returns on bonds have been followed by
periods of subpar returns, and so an investor in bonds right now needs
to be alert as to the possibility that a reduced allocation may start to become
more appropriate in the months ahead.
Within stock funds, which categories currently seem to have
the best prospects? Neither growth nor value oriented funds appear
to have a clear advantage, although value funds tend to do better
during a bear market (from which, in our view, we have yet
to clearly emerge). And, if taxes on stock dividends are reduced as is
being proposed by the Bush administration, this should give a boost to
dividend paying stocks which often make up value oriented portfolios.
Once the bear market does prove to be over, however, then
growth should indeed pull ahead.
With regard to
small vs. large caps, we believe that small caps currently
remain somewhat better positioned than large caps based on better
long-term trends and lower
PEs. Finally, many large cap international stock funds are still tied closely
to US stock performance and so we continue to recommend the less
highly correlated and better trending categories of emerging markets and
Pacific/Asia minus Japan. And while we still like real estate funds
somewhat, the best of the previous gains appears to be over.
Another reason we are comfortable continuing to allocate 50% to bond funds is that
certain categories of bonds have only begun to do well relatively recently, and
therefore do not run the above-mentioned danger of being at the end of a cyclical bull market.
These include international bonds and some categories of corporate bonds,
especially high yield bonds. If however your bond investments do not include
one or both of these categories, we would recommend a smaller allocation to bonds
since we do not expect particularly good results outside of these categories.
Refer to our Model Portfolio composition below for a better idea of how much we suggest you
allocate to different categories of stock and bond funds.
The following
two tables show which categories of funds we believe have the best prospects for the upcoming
1st Qtr. of
2003 along with our allocations to these categories. We believe that the funds
shown are good ones and should do well although they are not necessarily the "best" ones out there.
There are many Web tools available for helping you to evaluate funds. Therefore,
we recommend you use sites such as www.morningstar.com to do that.
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