Make Your Investing Day

by Dave Anderson

We have been calling this a Clint Eastwood-like stock market. 2003 was good, 2002 was bad and 2004 has been shaping up as not particularly good or bad-just ugly! Consider the fact that nearly one-third of the Dow Industrial stocks (blue chips) have declined by 15% or more so far this year. For example:

Investing is not easy but it can be pretty simple. If long-term investors will simply follow five rules, many mistakes will be avoided in otherwise frenetic, speculative environments.

Rule #1--Select an Asset Mix (between stocks, bonds and cash equivalents) that is right for the money you are investing. Obviously, there are times when it makes sense to lean more heavily into stocks or bonds than your disciplined goal would suggest, but as a rule of thumb investors should commit a percentage of their portfolio that is equal to their age in bonds (i.e. less in bonds for younger investors). Similarly, spending policies for endowment funds and retirement funds should dictate the appropriate asset mix targets. Currently, valuations would suggest holding longer bond exposure to a minimum. However, most investors should commit at least 25% to some sort of non-equity component and usually no more than 75% to stocks. It now appears that 1) credit spreads are too tight, while equity investors are too cautious, or 2) the equity risk premiums are extremely attractive, relative to bonds.

Rule #2--Broadly Diversify, so that portfolios are not over committed to one single sector of the economy. In the late-1990s investors' thirst for tech stocks seemingly could not be quenched. Even the cap weighted indices were more than 25% influenced by a few overpriced technology stocks. 175 of the S&P 500 stocks (or 35% of the names) have market caps of $10 billion or more and account for 80% of the weighting of results. Today, energy stocks account for about 8% of the index. Individ-uals might want to consider the opinion of an expert. Global oil demand is growing at about a 3% a year annual pace (fastest since 1978), but according to Royal Dutch Shell (RD/SC), "it will not continue."

Rule #3--Make Changes Deliberately, so that you are able to take advantage of dollar-cost averaging techniques. Often gradual changes keep true investors from making poorly timed, snap decisions that are emotionally based and not grounded on long-term fundamentals.

Rule #4--Fade the Headlines, will permit you to go against the grain, if investors are compelled to take action suddenly. Markets are efficient enough to price-in all of the known facts and patient investors should wait for an opportunity to go against the masses and make above average returns. If an investment is already "fully appreciated," the upside investment potential is limited. If everyone hates an idea to which you are attracted, then perhaps it will offer a solid return when others ultimately follow your lead.

Rule #5--Minimize the Friction (i.e. Cost) of investing funds. New York Attorney General Eliot Spitzer's recent revelations about bid rigging and kickbacks in the insurance industry offer just one example of how buried fees can get too high (e.g. greed, vs. ethics). We believe that most annuities have excessive charges, as do many mutual funds, but high portfolio turnover can also be costly, if it doesn't add value. The average equity fund turnover has gone from less than 15%/year in 1960, to 50%+ in the early 1990s, and in 2004, it was over 100%!

Follow my five rules and Make Your Investing Day.

If everyone hates an idea to which you are attracted, then perhaps it will offer a solid return when others ultimately follow your lead.

We believe that most annuities have excessive charges, as do many mutual funds, but high portfolio turnover can also be costly, if it doesn't add value.

 

Dave Anderson is Executive Vice President & Chief Investment Officer of Gold Trust Co., an affiliate of Gold Bank. He can be reached at 913.396.0305.