Vol. 12, No. 2,856W - The American Reporter - March 18, 2006

Market Mover

by Mark Scheinbaum
American Reporter Correspondent
Boca Raton, Fla.

BOCA RATON, Fla., July 3, 2002 -- Looking at my old UPI alumni wire, I noticed an exchange from a veteran reporter worried about his money, and a knowledgeable financial services colleague offering advise. The exchange is being replicated in coffee shops and brokerages houses around the nation, so I'll give you the exchange:

Question: My modest 401K was switched from money market to guaranteed 4.5 percent bonds. Better than losing the principal, or large chunks of it. What do you recommend for people like me whose incomes depend to an extent that is currently a little scary on the performance of the market?

Answer: I hear they're hiring greeters at Wal-Mart.

Seriously - and with apologies to the several stockbrokers on this wire - you can do worse than picking a diversified group of no-load mutual funds and generally sticking with them. Fidelity Investments funds have been good for me. The past couple of years in the market suck, of course, but the previous gains were larger than the current declines.

You say you don't know anything about the markets. Even the people who say they know a lot about the markets don't really know anything about the markets. Peter Lynch of Fidelity is one of the investing greats of all time. Lynch admitted the markets were unknowable but invested in good companies in businesses he understood.

However, if the market keeps going down at this pace, I might have to check with Wal-Mart...

Generally speaking, it's good advice. It has been my view that investment grade blue chip stocks are the place to be for the long term. For investors with less than $100,000 to invest, it is very unlikely that any self-directed discount brokerage account, or individual stock picking will beat the old name common stocks.

Of particular interest are the household name, nameplate stocks, mostly common growth stocks, or equity income funds. The myriad "sector" funds (oil, gold. healthcare, financial, Asia, etc.) only seek to copy the proven Plain Jane success formula of proven diversification.

I rarely place money in a mutual fund which does not have a 20 or 30 year track record. I actually prefer funds with a 40 or 50 year history. Even though managers might change, there is usually a corporate "style" which is followed. Indeed I care less about no-load, low-load, 12b1-load, rear-end load, etc than "total return" results.

Unless I am dealing with a special case involving a handicapped child, disabled retiree, terminally ill patient, etc., I shy away from bond funds. Fixed-income funds can be even more volatile than good stock funds. High "yield" is achieved by longer maturity dates. The rule of thumb for AAa-rated long-term bonds is a 12-13% principal move for every 1 per cent interest move, inversely related. Confused?

Well, invest $100,000 in a long-term bond fund when 30-year fixed mortgage rates are 7 per cent. They day you see those mortgages at 8 per cent your portfolio is worth $87-88,000. Get the idea. If you hit the economic Lotto and mortgages drop to 6 per cent, your fund is worth $112-113,000 but I don't see that happening any time soon. It's more likely that long term paper will be 9%. On that day your "safe" 4.5% "yield" fund is worth perhaps $76,000.

While it's nice to say that your $100,000 bond fund will be $104,500 next year, the investor who needs to liquidate in an emergency, could easily end up liquidating a fund in a year or so which is worthy only $80,500 ($76,000 + 4,500). Ironically, the frightened, cautious, or financially strapped investor most likely to crave the "safety" of a bond, is the person most likely to get clobbered.

(It's interesting to note that for institutions and wealthy individuals we must hedge these risks with sophisticated "collateralized mortgage obligations" of Freddie Mac, Fannie Mae, and Ginnie Mae with special features designed to float or iniversely track the normal price erosion caused by interest fluctuations. Minimum requirements for purchase are usually $100,000 lots with liquid net worth of $1 million)

And what about Dow 7,500?

A study we did a week ago for our pension clients indicated that we are actually more likely to see Dow 20,000 than 7,500 by the end of 2005. This is not pie in the sky.

Going back to the pre-1987 Crash high of 2,287 on the Dow, and working from the recently violated support level of 9,400, a climb from the August, 1987 levels to 20,000 in August 2005 would average a respectable +10 per cent per year. Handsome, but hardly euphoric.

I feel that this projection is independently corroborated by the pooled research staff at ValueLine, never known for irrational exuberance. The consensus of all of their analysts at ValueLine last month showed a 3-5 year projection of the S&P 500 +55%. They indicated that much of this gain will be towards the end of the 3-5 year window period.

Ibbotson & Associates of Chicago, the bible in econometrics and market studies, shows average market returns of 12%+ for 86 years in the blue chip markets. The ratio of crummy years to good years is 1:4. Even coming out of a third and possibly a fourth (2003) down year for the types of blue chip mutual funds discussed above, confirms that folks with the intestines, bankrolls, and patience, to use current low levels to dollar cost average will be rewarded.

Two final thoughts about investment grade stock and fund investments:

First comes the strategy called covered call writing, or portfolio insurance. If a person insists on buying individual shares of Walgreens, Wal-Mart, UPS, Burlington Resources, International Paper, Dell, and Lowe's (yes, we own all of them), I will not accept their account unless they permit the possibility of selling call options against their position. This is how insurance companies and trust companies make money in down markets. We always want to allow people to buy ("take away") our stocks at higher prices, and pay us for the privilege. If you think this ERISa-approved strategy for IRAs, Keogh's, and 401k accounts is too complicated or too risky, you're wrong on both counts. If you refuse to allow your broker or money manager to utilize this strategy, you should only go the fund route.

Secobnd, for those people who like the old Vanguard (Wellington), Fidelity Growth or Equity Income, George Putnam, Oppenheimer Total Return, Delaware Decatur, Delaware Balanced, Invesco, and other funds, and are not likely to need the money for several years, consider wrapping the fund in a "flexible premium tax-deferred variable annuity."

This week the annuity market was again maligned by the Wall Street Journal in a story revealing high pressure sales tactics to seniors. High pressure tactics are always wrong and always bad. Yet many cautious retirees are exactly the people who are best served by paying the extra 3/4-1.5 per cent in internal fees and mortality charges for the annuity.

My personal rules are to: use a company rated A+ or better; make sure all deposits are insured with a guaranteed death benefit; make sure the death benefit is raised each year; have mutual funds--called sub-accounts--which mirror your preferred investment style and goals; see if there is an "estate plus," bonus feature for a nominal extra fee; make sure these accounts are judgment-proof and avoid probate in your state; choose annuities which have free 10 or 15 per cent annual withdrawals and nursing home waivers in emergencies; see if there are dollar cost averaging and some fixed-income features you might want, and look for surrender periods (charges) which disappear in three, five, or at most seven years. Beware of "no surrender charge" policies of one-year's duration, often sold by banks, which do not have many of the above features.

The mutual funds wrapped in the annuities will produce no 1099 form or tax consequence unless and until you start taking out money via a "systematic withdrawal" (we never "annuitize"). Eventual your heirs may pay tax. Also remember that when used with after-tax money taken from other funds, CD's, stocks, or bonds, unlike a tax-deferred traditional IRA or 401k there is NO requirement to start taking distributions in the year in which you celebrate your 70th-and-a-half birthday.

As with any time of turmoil and adversity there will be some people making money under current market conditions. In addition to pure daily speculators and short-sellers, the biggest winners of all might be the folks brave enough to sock more and more money away into solid historic performers right now.

Mark Scheinbaum, certified NASD arbitrator, is chief investment strategist for Kaplan & Co., BSE, NASD, SIPC; former UPI Newsman and editor and publisher of Success business magazine, and is the daily business commentator on RadioAmerica's syndiated "GoodDay U.S.A."

Copyright 2006 Joe Shea The American Reporter. All Rights Reserved.

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