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The study, "Dumb Money: Mutual Fund Flows and the Cross-Section of Stock Returns," was conducted by Andrea Frazzini of the University of Chicago and Owen A. Lamont of Yale. A copy is at http://mba.yale.edu/faculty/pdf/lamontdumb_money.pdf. Investors tend to blame fund managers for poor returns. But by focusing on the decisions that investors make in shifting money into and out of various funds, the professors found that fund managers were more victims than perpetrators of poor returns. "It is hard for a fund manager to be smarter than his clients," the researchers wrote. And, on average, according to the study, those clients are really "dumb" about which funds should be bought and sold. To illustrate, the researchers point out that investors in 1999 sent $37 billion to the equity mutual funds in the Janus fund family but only $16 billion to those at Fidelity Investments, even though Fidelity's domestic stock funds had three times more assets under management. Undoubtedly, this was motivated in large part by the Janus funds' heavier technology allocation. Over the next two years, the Internet bubble would burst and technology stocks in general, and Janus's funds in particular, would perform horribly. If investors had not so heavily favored Janus over Fidelity in 1999, they would have lost a lot less money during the bear market of 2000 to 2002. The professors concede that this example is extreme. But based on their analysis of domestic equity mutual funds from 1980 to 2003, they emphasize that it is by no means unique. Frazzini and Lamont compared the stocks that were most popular among mutual funds with those most out of favor. To identify these stocks, the professors looked at the percentage of each stock's outstanding shares owned by mutual funds. They calculated the change in that percentage attributable to investors favoring some funds over others, an indicator they called flow. The 20% of stocks with the most negative flow over the trailing three years - those with the biggest decline in fund ownership - performed 10.7% better per year, on average, than the 20% with the most positive flow. That means investors who bought the stocks with the most negative flow and sold short an equal dollar amount of the positive-flow stocks would have had a 10.7% return each year, on average. And such a strategy would have been very low-risk, because it involved no bets on the direction of the overall market. To be sure, the professors did not take transaction costs into account, so an investor's actual returns in following this strategy would have been lower. But the professors emphasize that because turnover was low, those returns would have still been substantial. The professors found that the performance of stocks whose flow percentages were between the two extremes fell right into line improving, on average, as the flow became more negative. Each transaction in the hypothetical portfolios was made by using information that was publicly available on the transaction date. In principle, any investor could use this strategy by finding data on mutual funds' holdings and their assets under management data that is available from the SEC and from investment Web sites. In practice, however, the required calculations would be daunting. You may be able to profit from the professors' insights just by sticking with the funds you own or by investing in an index fund that mirrors the market. Resist the temptation to buy the flavor of the month. That alone would improve returns for the average fund investor, according to the professors.
As every first-year finance student knows, there is a not-easily-measurable number called the equity risk premium. Simply put, this premium is the extra return that stocks have to pay, because they're riskier than safe government bonds, in order to attract investors. It's the same reason that individual numbers on a roulette wheel pay more than odds or evens: higher risk, higher return. For decades, the returns on stocks have usually been much higher, relative to bonds, than risk alone would seem to justify perhaps as much as six or seven percentage points higher. Some economists have suggested that the equity risk premium is reasonable, if you account for very rare but very costly events, like depressions and wars. But there is still much debate, and there are other explanations for the gap in returns. Think about the two types of securities in terms of supply and demand. The market for safe government bonds includes investors who can't buy stocks at all: foreign central banks, other government agencies, some institutional money managers and certain kinds of trusts. Moreover, financial planners may be too eager for their clients to buy safe government bonds. If their paychecks depended solely on whether their clients made or lost money, they might try to avoid losses at all costs. In other words, it may just be ridiculously easy to raise money for bonds. Or investors' expectations of stock returns may be irrationally low, focused more on crashes than booms. Either way, the equity risk premium wouldn't explain the entire gap in returns. We do know, though, that the risk premium must be some part of that gap. According to research by William Goetzmann and Robert Ibbotson, two finance professors at Yale, that premium has stayed fairly constant over long periods through virtually all of American history. For lack of a better reason, there may just be something special about American capital markets, so that a high equity premium would tend to revert to some sort of long-run average. In other words, the equity premium may be a partial predictor of future stock returns and even the future growth of the economy. Yet many financial economists believe that the equity risk premium has been dropping in recent times. "Over the last 20 or 30 years there have been dramatic changes in the financial markets," said John Heaton, a professor of finance at the University of Chicago. "Investors have become just more comfortable with the stock market. Part of that is education. The other thing is sort of a classic finance effect, which is that the level of diversification that investors have available to them has increased." Professor Heaton said that with the coming of age of American financial markets, many types of investors have found it easier to diversify their assets. It's easier for entrepreneurs to bring their businesses to the market. Homeowners can take equity out of their houses. And the ability to diversify makes the buying of risky assets, like stocks, more palatable. Professor Heaton suggested that the equity risk premium might now be around three or four percentage points. A result is more money available to the corporate sector. "The cost of capital is going down, and therefore we're going to see more investment," he added. "The riskier projects that investors would have shied away from are now going to be taken on."
In funds, side effects typically are an offshoot of the types of funds being purchased or the strategy being followed. Investors recognizing these symptoms in themselves should sense that something is amiss and that a change in funds, strategy or attitude might solve the problem. If your mutual-fund investments are giving you any of the following conditions, consider what you might do to feel better about your portfolio: Restlessness, insomnia, headache, indigestion & increased sweating: These typically are the result of investing in funds that give you the willies. They might be too volatile, concentrated in a single industry or country, built on an asset type that tends to run from feast to famine or in an intriguing-but-scary category such as emerging markets. Your fund portfolio shouldn't be making you nauseous or keeping you up at night. If it is, look at how you might calm things down so you can rest easier. Decreased investment drive or difficulty picking another investment: Many investors say they can stomach risk so long as they don't actually lose any money. When they actually see their shares values fall they lose a lot of their desire to invest, because they question if they have the skills to make money in funds. When one or more funds in a portfolio are not world beaters, that doesn't mean your fund-picking methods are flawed; it may just confirm the idea that even the best selection methods can't deliver winners all the time. Double vision: This side effect usually occurs when an investor has success in a fund and wants to diversify but instead adds only funds that buy similar assets. That keeps the portfolio in the investor's comfort zone, but it minimizes diversification and increases overall risk. An investor who owns four funds within one fund category is likely to get the performance of an index tracking those assets, while paying higher-than-indexing costs. That's a mistake. Euphoria, prolonged dizziness: Sometimes a fund pick goes so right that investors keep piling more and more money into it. This is what happened to many people at the peak of the bull market, when they went overboard on technology believing it would never come down. As this feeling grows, investors tend to let their portfolio get out of balance. The feeling tends to go away only when the market turns, at which point it becomes more painful than a typical downturn.
Yet cracks are appearing in the foreign-stock juggernaut. In one of last year's hottest markets, there are growing jitters about rising interest rates in Japan. Among smaller markets, a sudden swoon in Iceland's currency last week tripped shares there and dredged up memories of the late-1990s' Asian currency crisis, which devastated that region's stocks for a time. On Friday, Philippine shares slumped after the government declared a state of emergency, citing an alleged coup plot against President Gloria Macapagal Arroyo. On Wall Street, some pros are telling clients to be wary of chasing foreign markets in the near term, even though the long-term story remains compelling. Brokerage Morgan Stanley on Feb. 6 advised investors to reduce their bets on Japan and emerging markets in favor of what the firm said were undervalued U.S. shares. But a few numbers show why it's difficult for Americans to tear themselves away from the foreign story. In India, the Bombay Stock Exchange 500 index is up 7.6% year to date after rocketing 37% last year. Brazil's main market index has surged nearly 15% this year after a 28% jump in 2005. By contrast, the S&P500 index is up about 3% since Jan. 1. That was its gain for all of last year as well. The bulls are running hardest in some of the world's less-recognized bourses, whose stocks aren't likely to be found in most of the foreign mutual funds available to American investors. Saudi Arabia's main market gauge, the Tadawul all-share index, hit a record high last week and is up 23% this year. That is on top of last year's 104% advance. In fact, the Saudi market hasn't had a losing year since 1998. Neither has the Romanian market. It has tacked on a 21% advance year to date. Certainly, there are fundamental underpinnings for the robust gains in many foreign markets. Saudi Arabia's economy, not surprisingly, is booming thanks to the wealth that high oil prices have generated for the kingdom. Brazil's trade surpluses have lifted its economy, and the government is paying down foreign-owned debt and lobbying credit-rating firms for an upgrade in the country's bond rating, which is on the cusp of the coveted investment-grade mark. In Japan, share prices have been powered by rising corporate earnings and the belief that the economy can sustain its recovery and close the door on more than a decade of misery. What's more, referring to classic valuation yardsticks such as price-to-earnings ratios, many analysts believe that foreign stocks overall aren't overpriced, even if they aren't the screaming bargains they were a few years ago. In its Feb. 6 report, Morgan Stanley said emerging markets "do not look materially overvalued." Nonetheless, the firm added, the continuing run-up in many markets has left much less room for error. Japan is one place where investors seem to be genuinely worried that stocks have risen too far, too fast. The Nikkei-225 share index has stalled out and is flat year to date after soaring 40% in 2005. The market has been hurt in part by rising yields on Japanese bonds, as investors bet that the economy's rebound will spur the Bank of Japan to lift interest rates from rock-bottom levels this year. On Friday, the yield on five-year Japanese government bonds hit 1.11%, up from 0.86% at year's end and the highest level since 2000. In tiny Iceland, where the main stock index has zoomed 417% since the end of 2001 (compared with a mere 12% gain for the S&P 500 in the same period), financial markets got a scare last week after U.S. credit rating firm Fitch issued a warning about "all the signs of economic overheating rising inflation, rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness." Fitch's warning triggered a sudden plunge in Iceland's currency and stock market on Tuesday. By the end of last week, however, Iceland's market storm had blown over. Its share index lost a modest 1.4% for the week and still is up 20% year to date. The selling spilled into some other smaller markets worldwide amid fears that Iceland, like Thailand in 1997, might be signaling a broader retreat by global investors from overvalued currencies and securities. The Thai currency's collapse was the start of a meltdown across Asia as foreign money fled. Thailand's stock market plunged 55% in 1997, while the South Korean market dived 42% and Singapore's stocks slid 24%. And there was little net damage to other emerging markets. In the Philippines, the coup threat clipped as much as 2% from share prices on Friday, but the market recovered half of that loss by the close as buyers jumped back in. A thwarted terrorist attack on a huge Saudi oil facility on Friday seemed to be mostly ignored by world stock markets. Investors' broad enthusiasm for emerging market stocks, in particular, reveals a sea change in how those economies are perceived, and why they now must be considered a vital element in a diversified portfolio. The stunning rise of China, of course, has laid to rest any thought that the growth in many up-and-coming economies is a flash in the pan. The Economist magazine, in a report in January, estimated that emerging economies' combined output in 2005 accounted for more than half the global total. In other words, the developing world has overtaken the developed world in terms of share of gross global product. Three other numbers in the report stood out: Emerging economies have five-sixths of the world's population, hold two-thirds of the planet's foreign exchange reserves, yet their stock markets account for just 14% of global capitalization. All of this suggests there is much more potential for wealth generation in those markets in the long run. Likewise in Japan, where stocks still are playing catch-up after years of dismal results. Europe may be more of a question mark, given its aging population and subpar economic growth. But you wouldn't know that from the strength of most European stock markets this year. The basic problem for investors who love the foreign story is that although the investment case for the next five to 10 years is solid, the next six to 12 months is worrisome. The higher many foreign markets climb in the near term, the greater the risk that any sell-off could turn vicious in a hurry if enough investors with huge, built-up capital gains tried to cash some in. We know that markets don't go straight up forever, even though there are times when it seems as if they will (anyone remember Nasdaq's boom in 1999?). At a minimum, Americans would be well-advised to proceed slowly with foreign investing now. There may be no reason to change a regular investment plan, such as in a 401(k) account. But only the bravest of gamblers would be thinking about shifting a huge chunk of their portfolios overseas all at once. Related Articles: Foreign Stocks Can Still Reduce a Portfolio's Risk - Mark Hulbert, NY Times Should Your Portfolio Vote 'Yes' on European Stocks? Conrad De Aenlle, NY Times Vote No on Europe: Vintners Are Example of Europe Living in the Past - J Flanigan, LA Times Investors See Gains Abroad - Craig Karmin, WSJ Investing in Foreign Stocks/Funds - James Glassman, Washington Post
Just under half of all families held retirement accounts in 2004, down from 52.2% in 2001, the date of the previous survey. The stock market has rebounded from its low in 2002, but the Fed's survey illustrates the lingering damage inflicted by the stock market collapse. At the same time, it underscores how the surge in housing prices has propped up otherwise shaky balance sheets, even as housing prices in some markets appear to have peaked. The typical family's savings either in retirement accounts or elsewhere fell to $23,000, almost $7,000 less than three years earlier. Meanwhile, the median indebtedness of the three out of four families who had some form of debt rose by a third, to $55,300. The erosion of savings affected the wealthy and the poor alike. The savings of people at the top 10% of the income scale declined by 6%, to $365,100; their income, on average, fell by about the same proportion. Meanwhile, the typical American's income rose marginally. The financial picture is particularly unsettling for those households headed by a retired person. The typical savings of such a family fell to $26,500 in 2004, from $34,400 in 2001. "Everybody is having a terrible time," said Alicia Munnell, who heads the retirement research center at Boston College. According to calculations by Munnell, even the group aged between 55 and 64 - the only age category to increase savings in the last three years - has only amassed a small fraction of what people need to maintain their lifestyle in retirement. Home prices provided pretty much the only upbeat news. Just over 69% of Americans owned their own homes in 2004, according to the Fed data. The median value of their homes jumped to $160,000 in 2004 from $131,000 three years before, a rise of 22%. Among households headed by retirees, nearly 76% owned their homes in 2004. The median value of their homes also jumped 22%, to $130,000, compared with $106,500 in 2001.
The hedge-fund industry has outperformed many conventional investments. Hedge funds gained nearly 8% annually in the five years ending Dec. 31, although performance has faltered recently, according to Hedge Fund Research. The S&P 500-stock index, by comparison, gained just 0.5% a year in the same period, and the average diversified U.S. stock fund gained just over 2% annually. Some companies are launching mutual funds specifically designed to mimic hedge funds, including offerings from Janus and American Century Investments, and the funds' names make it clear that they are pursuing hedging strategies. But some analysts and financial advisers caution that when traditional mutual funds adopt alternative investment strategies, it could bring added risk and higher fees. Some advisers also fear that mutual funds may be rushing into a hot strategy just as hedge funds' performance is beginning to cool. Allianz Global has asked shareholders of several of its funds to eliminate restrictions on owning illiquid securities, or securities that are thinly traded. But the company has warned that this could boost trading costs. Allianz spokesman Phil Neugebauer says the board felt the changes would benefit shareholders by giving fund managers a broader range of investment options. Funds' proposals for loosening investment rules have generally won shareholder approval. But many investors may be unaware that their mutual fund plans to adopt new investment strategies. To be sure, fund companies generally solicit votes for proposed changes by sending proxy statements, but often shareholders ignore these. The biggest changes are coming in traditional stock funds, a number of which are now shorting stocks for the first time and using complicated derivatives. Some mutual funds have long used basic derivatives, such as stock-index futures, but a growing number are now expanding into more exotic types. Bond funds, too, are changing tactics to boost returns. Shareholders of Seligman U.S. Government Securities fund voted recently to allow the fund to increase its investments non-government bonds and in derivatives. And Principal Global late last year altered its government bond fund to begin including commercial mortgage-backed securities and using derivative strategies. The SEC places limits on funds' ability to use alternative investment strategies. Still, in late 2003, SEC staff recommended the commission study steps that could encourage wider use of hedge-like strategies among mutual funds within the limits allowed. Though the commission didn't follow that recommendation, that's an issue which the SEC remains interested. Traditional mutual funds that use hedge-fund techniques currently hold between $200 billion and $300 billion in assets, estimates financial consulting firm Cerulli Associates. While that's a small slice of the $8.9 trillion in mutual-fund assets, analysts expect this segment to grow, especially if equity markets continue to show weak performance. It's too early to say whether the new strategies are boosting performance. Still, when a mutual fund begins using hedging strategies, that can be a sign that "somebody's starting to roll the dice," says Jeff Tjornehoj, an analyst at Lipper. Investors should be wary if a fund whose performance has been near the bottom of its category suddenly asks for more flexibility.
That is because many types of stocks that are considered risky based on factors like valuations, volatility and recent performance have generally continued to produce much bigger gains than less-volatile stocks. Shares of companies based in the emerging markets have continued to beat those in the developed economies of Europe. Back in the US, small-caps, as measured by the Russell 2000, has surged 8.6%, while the S&P500 is up just 3.1%. In other words, the market has kept rewarding risk takers and handsomely so. Bernie Schaeffer, the chairman of Schaeffer's Investment Research, is in the risk-taking camp, and thinks that this trend will continue until the bull market ends. If investors can earn more than 4% in risk-free cash, he said, "what's the incentive for investing in an underperforming asset" like large-cap stocks, when such shares are expected to produce only mid-single-digit returns? But those who are more risk-averse say they have plenty of reasons to be concerned. In recent months, the market has "been stuck in a trading range " said Ernest Ankrim, chief investment strategist at the Russell Investment Group. "And in a trading-range market," he added, "trends can be deceiving." Look beneath the surface and you'll find that riskier assets are not doing all that well. Among the best-performing industry groups in 2006, Mr. Ankrim noted, are agriculture and steel not the types that generally attract the most aggressive investors. The worst-performing groups have included online retailers and online service companies, which have been volatile holdings in recent years. Chris Orndorff, head of equity strategy at Payden & Rygel, says he thinks that speculation has yet to be fully wrung out of the market, but that the risks investors are taking "are a little more discerning." "The difference between this year and a couple of years ago is that people are not losing sight of valuations." Recently there have been major sell-offs in expensive stocks, like Google, that failed to meet earnings expectations. This leads him to believe that investors aren't willing to give their investments, especially riskier ones, a long leash. So how can long-term investors take on enough risk to reap some of the market's rewards while still being able to sleep at night? A simple way is to consider valuations within all asset classes. Investors who still want to bet that small caps will beat large caps, for example, may feel more comfortable betting on less-expensive small stocks. Over the last three years, the average small-cap stock fund returned 26.8% a year, on average. But funds that stuck with small stocks trading at below-average price-to-earnings ratios returned 27.6%. And by some measures, these funds were less volatile. Investors may want to consider another strategy: hanging on to their winners in this case, small-cap or emerging-markets shares for a bit longer. That may seem dangerous, given the importance of booking profits periodically. But Sam Stovall, chief investment strategist at S&P, recently studied this issue and found that it's often better to follow the adage of letting your winners run and cutting your losers short. Mr. Stovall examined how stocks in the best-performing industry groups each year perform during the next year. Since 1970, an investor who bought a portfolio of the previous year's best-performing industry groups, held it for a year and then repeated the process, would have earned nearly 14% a year. That is nearly twice the average annual gain of the S&P500 during that 36-year stretch. To be sure, it is important to rebalance your portfolio periodically so that you sell some winners and buy losers to reduce overall risk. But Mr. Stovall says that you can do this while still giving your winners more room to run. Instead of selling highflying small stocks just because a year has passed, for example, consider setting a target for them, as well as for your other asset classes. If you have 25% of your portfolio in small stocks, wait until that allocation changes by 5 to 10 percentage points before rebalancing. In other words, you might let them grow to, say, 35% of your portfolio before doing some trimming. Finally, the risk takers and the risk-averse agree on one tactic in the current market: holding onto a chunk of cash. Mr. Schaeffer says investors should hold more cash today than they usually do. Under normal circumstances, investors would look to add to their bond holdings for extra ballast. But Mr. Schaeffer argues that the bond market is so overvalued that "the return is not worth the risk." For example, in the Treasury market, the longer maturities are paying lower yields than short-term debt.
But the S&P study removes a lot of the most volatile issues like sector and international funds and focuses on domestic general-equity funds. It clearly points investors away from chasing the best recent performers, because they're not likely to be winners for long. According to the study, just 15.5% of large-cap funds were able to maintain a spot in the top 25% of their peer group over three consecutive years. The numbers get worse when you look at midcap funds (10.2%) and small-cap funds (9.8%). Over five years, just 1.9% of funds buying large-cap stocks were able to maintain a top-quartile ranking, compared with 3.1% of small-cap funds and no midcap funds whatsoever. The results are better when a fund merely needs to maintain its standing in the top half of its peer group. Roughly one-third of large-cap funds consistently were in the top half of performance, slightly better than for funds invested in smaller stocks. One interesting side note to the performance measurement is that funds that are among the very worst performers tend to stay there, frequently burdened by heavy costs and poor management. So while picking from the top of the fund pool is not necessarily going to deliver a long-term winner, it's a better bet than selecting a dog and hoping it becomes a big winner. "A lot of times, investors are attracted to the wrong things because they are using performance as their first screen," says Jeff Tjornehoj, a research analyst for Lipper. "What they want is consistently above-average returns, but what convinces them to buy is top-quartile or top-decile performance over the last year or two. A lot of funds that are best over the long haul don't ever break into that very top group in any one-year period, they are just good and above-average year after year after year." Says Tjornehoj: "A good fund is known by its above-average performance, not necessarily from being at the front of the pack in each period. If investors set their expectations as 'above-average over time,' they are much more likely to be satisfied than if they buy a fund at the top of the heap and expect it to stay there." What the S&P study shows is that the funds that are capable of remaining at the top of their peer group have a few elements in common, most notably low costs, long-tenured managers and the ability to minimize losses when the market turns sour. If past performance is your primary guide, you're likely to be disappointed in the results.
Currencies are symbols of national sovereignty, and countries are reluctant to give them up. But nations can impose enormous costs on their citizens when they take extraordinary efforts to maintain independent currencies. Benn Steil, a senior fellow at the Council on Foreign Relations and co-author with Robert E. Litan, senior fellow at the Brookings Institute, of "Financial Statecraft", argue that the globe's mιlange of 200-plus currencies, backed only by the faith of investors, is inefficient and dangerous. Many emerging economies, they say, would be well advised to swap their currencies for strong, stable, widely used ones like the dollar or euro. Steve Hanke, professor of applied economics at Johns Hopkins University, has examined economic development in 32 countries that adopted foreign currencies from 1950 and 1993. He found that they had faster rates of GDP growth, lower inflation and greater fiscal discipline than their counterparts who hung onto their sovereign currencies. Professor Hanke has been an adviser to Ecuador, which in 2004 was among the best-performing economies in Latin America, growing at a 6.6% rate with inflation at 2.7%. It's not like dollarization is a magic drug. It certainly doesn't end the risk that countries will default on dollar-denominated debt. Panama has been using the dollar since 1904 and has repeatedly run into difficulties. And El Salvador's economic performance hasn't outpaced those of its Central American neighbors. Some Latin American countries, notably Mexico, have tamed inflation without abandoning their own currencies. But economists say that smaller countries can encourage investment by lashing their monetary fortunes to larger regional powers. In Latin America, companies that need to make long-term investments like utilities are forced to borrow in dollars while they operate in local currencies, leaving them exposed to currency risk. And when small monetary boats tie themselves together or link themselves to larger ones, it encourages stability.
1) You don't have any friends on Wall Street. You may want to make money. But so does the Street. And the more the Street makes, the less investors pocket. 2) Your neighbors are delusional. They spend too much, they own investments they don't understand and their overall portfolio isn't faring nearly as well as the one or two stocks they boast about. 3) Most stock mutual funds are laggards and it's hard to find the winners. Sure, there are funds with great 10-year records. But you can't buy their past performance. Instead, what you get is the future -- and often that isn't nearly so dazzling. 4) There are no "magic" investments. Yes, investments enjoy brief surges of popularity and, for a few months or even years, they can seem like a sure thing. Think technology stocks in early 2000, hedge funds in 2003 and real-estate and energy stocks in 2005. But the magic never lasts. See a crowd gathering? Grab your cash and start running in the opposite direction. 5) You can control risk and investment costs, but you can't control returns. So why do investors spend so little time on risk and costs and so much time on returns? Beats me. 6) There's no substitute for saving money. Next time you crack open your wallet, think on this: The dollars you spend today are delaying your retirement. 7) Sophistication is usually an excuse for Wall Street to charge fat fees. If you don't understand an investment, don't buy it. Most folks can do just fine with a handful of plain-vanilla mutual funds, preferably market-tracking index funds. 8) Rich people often have more dollars than sense. Hedge funds? Venture-capital investments? Make no mistake: You have to be truly wealthy to afford the potential losses involved. 9) Your portfolio's growth is driven, more than anything, by how much you save and by how you divide your money between stocks and conservative investments. Your savings rate depends on your ability to delay gratification, while your stock allocation depends on your risk tolerance. So what exactly is your investment adviser doing for your portfolio? Good question. 10) If an investment is exciting, it probably won't be especially profitable. Investors love to buy hot growth companies, trade mutual funds and take a flier on initial public stock offerings. Before you join the fun, however, consider how much you might lose -- and how many paychecks it will take to recoup the money lost. 11) There is nothing like the prospect of a fat payday to skew advice, so be leery of all investment recommendations from commission salesmen. That brings me to a pet peeve. Investment advisers will often claim that most folks aren't smart enough to invest on their own, so they need an adviser's help. And yet, in the next breath, they will defend high-commission products like variable annuities, mutual-fund B shares and equity-indexed annuities, saying they only sell this stuff because that's what customers want. 12) Land appreciates, houses deteriorate. Like your car, your home sits out in the rain. You know your car is depreciating. Why should your home be any different? Keep that in mind next time your neighbors tout the investment value of their new kitchen. 13) Sound investment strategies don't change with the news. By all means, read the personal-finance magazine's 2006 market prediction and listen to the television reporter's breathless dispatch from the floor of the New York Stock Exchange. But for goodness sake, don't act on this nonsense. 14) Your worst investment enemy is often found in the mirror. You could still end up with wretched returns if you chase hot investments or panic when the market declines. 15) Tax deductions are money losers. True, if you are in the 25% federal income-tax bracket and you incur $1,000 of mortgage interest, you will save $250 in taxes. But the other $750 is coming out of your pocket. 16) Leverage bites when you get it wrong. Most people wouldn't dream of borrowing money to buy stocks. Yet, it's considered prudent to borrow 90% of a home's purchase price. Most of the time, your leveraged real-estate bet will work out just fine. But cross your fingers, and hope you don't suddenly have to sell just as real-estate prices are sinking. 17) If financial forecasters are unanimous that stocks, or bonds, or the dollar are about to plummet, they almost certainly won't. The reason: These soothsayers and their clients have already acted on their prediction -- and it's already reflected in market prices. 18) Insurance is a necessary evil. When you buy insurance, you are paying somebody else to take on risk that you can't afford to bear. That can be a smart move. It will also cost you, however, so you shouldn't buy more insurance than you really need. 19) You can't get rich by spending money. The folks with the big house, fancy cars and designer clothes are, no doubt, loaded. But they may be loaded with debt. 20) Investment experts who promise market-beating returns deserve our profound skepticism. After all, if they are so wise, why are they still working for a living? And if their investment ideas are likely to be so profitable, why are they sharing them with us?
As tax-friendly as ETFs are, it also pays to compare their records with similar conventional mutual fund competitors. For instance, Vanguard 500 Index's (VFINX) tax-cost ratios for the trailing one-, three-, and five-year periods ended Jan. 31, 2006, are lower than those of both of its ETF rivals: SPDR (SPY) and iShares S&P 500 Index (IVV). That means Vanguard shareholders lost less of their returns to taxes than investors in the ETFs. Vanguard 500's actual aftertax returns also are better than its exchange-traded rivals'. Similarly, at the end of January, the five-year tax-cost ratios and tax-adjusted returns of traditional index funds such as the Schwab 1000 Index (SNXFX) and the TIAA-CREF Equity Index (TCEIX) were better than those of their ETF counterparts--iShares Russell 1000 Index (IWB) and iShares Russell 3000 Index (IWV), respectively. This shows traditional fund managers who pay attention to taxes - for example, by assiduously harvesting losses to offset gains - can be more than competitive with ETFs. Before we examine the particulars, let's review why ETFs should be more tax-efficient than traditional mutual funds. ETFs are not immune from capital gains distributions; they may make them, for example, if the indexes they track change or if one company in a benchmark acquires another and pays a premium to do so. A variety of factors should make distributions rare, though: ETFs are currently all index funds, which have lower turnover than actively managed funds. This helps limit their realization of capital gains. ETF investors also trade shares among themselves, not with the fund, so ETF managers don't have to sell securities to pay off redeeming shareholders. Only large investors, known as authorized participants, deal directly with the funds, and ETFs can satisfy those redemptions by giving those large investors baskets of their underlying portfolios' stocks instead of cash. Finally, ETF managers also can use that in-kind redemption process to get rid of the stock shares with the biggest unrealized gains, thereby limiting the ETF's potential for distributing gains. The system seems to work. Capital gains distributions have been rare in recent years at most ETF shops. Indeed, we looked at the tax-cost ratios (which measure how much a fund's annualized return is reduced by the taxes that an investor in the highest tax bracket would pay on distributions) of ETFs that have been around for at least five years. We found that in six of the nine diversified domestic-stock fund categories the average ETF had a lower five-year tax-cost ratio through the end of January 2006 than the typical conventional open-end mutual fund. ETFs showed the biggest advantages in the mid- and small-cap blend and growth squares of the style box, where high-turnover strategies that can generate a lot of capital gains are common among traditional funds. The exceptions were the large-cap categories, where the average traditional fund's tax-cost ratios (0.39% for large blend, 0.13% for large growth, and 0.69% for large value) were lower than those of the typical ETFs (respectively, 0.48%, 0.26%, and 0.73%). Lower expense ratios may be working against ETFs here, because, like regular funds, ETFs tap their income to pay expenses. Because large-cap ETF expense ratios are a fraction of those charged by the average conventional offering in the category, the ETFs had more income to distribute. Those are the broad category averages. When you compare individual ETFs head-to-head with traditional counterparts, they look pretty good, too. The tax-cost ratios of the vast majority of domestic and international ETFs with five-year records ranked in the lowest half of their respective categories and broad asset classes. A Few Exceptions to the Rule There were just a few funds, such as StreetTracks Dow Jones Wilshire Small Cap Value (DSV), iShares Cohen & Steers Realty Majors (ICF), and iShares Dow Jones US Real Estate Index (IYR), with higher than average tax costs. StreetTracks Dow Jones Wilshire Small Cap Value has issued capital gains distributions in every year of its existence, including one that amounted to 4% of its net asset value in 2004. This is due, in part, to the fact that the index this ETF tracks has an unusually high turnover rate: It reached 54% in 2004. The offering's turnover could be lower and tax efficiency better in the future, though. In 2005 it adopted a new benchmark that has rules designed to keep the fund from automatically kicking out stocks on the benchmark's size and style borders. IShares C&S Realty Majors and iShares Dow Jones US Real Estate Index haven't made many capital gains distributions, but they have distributed a lot of income. In most cases ETFs are more tax efficient than conventional mutual funds in the same asset classes or categories. Nevertheless, ETFs can surprise you. We'd be wary of those tracking benchmarks that require a lot of turnover, such as Rydex S&P Equal Weight (RSP), which has a turnover rate of 55%, or PowerShares Dynamic OTC (PWO), which has a turnover rate of 112%. These ETFs have been successful at avoiding capital gains thus far, but it's not certain they can keep that up indefinitely.
The new study, "Live Prices and Stale Quantities: T+1 Accounting and Mutual Fund Mispricing," was conducted by Peter Tufano, a professor of financial management at Harvard Business School; Ryan Taliaferro, a doctoral student at Harvard; and Michael J. Quinn, a vice president at Analysis Group Inc., a consulting firm. A copy is at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=881615. Mutual funds typically calculate their NAVs just once a day, reflecting the prices of their securities when the stock market closes at 4 p.m. Many people assume that each fund does so by applying these closing prices to the securities it owned as of the close of that day's trading. That assumption is incorrect, according to Professor Tufano and his colleagues. Instead, they say, it is standard practice for mutual funds to calculate their share values by applying that day's closing prices to what their portfolios held at the close of trading on the previous day. That means that their calculations do not take into account any trading activity that took place on that day itself. Professor Tufano and his colleagues emphasize that this approach to calculating asset values known as "T+1 accounting," shorthand for "trade date plus one" is used by many more than just a handful of funds. After interviewing a number of fund industry professionals and fund auditors, the researchers concluded that it "is the norm in the U.S. fund industry." The researchers note that the mispricing that comes from T+1 accounting is not the same as the stale pricing that was the basis of the mutual fund trading scandal exposed several years ago. That investigations focused on funds whose securities had not traded for several hours when NAV's were calculated at 4 p.m. This is often the case for foreign securities, for example, whose last prices were set as of the closing of the exchanges on which they trade. For exchanges in Asia, that can be 14 hours earlier than the close of trading in New York. Professor Tufano and his colleagues focused not on stale prices but on stale quantities. How much inaccuracy can T+1 accounting cause? The researchers could reach a definitive answer for just 26 funds, those for which they could get complete trading data over a several-year period. At one fund, they found, the accounting method led it to report that it had lost just 0.73% on a particular day when, in fact, it had lost 4.74%. At another fund on another day, the reported return was 3.66% when the actual return was 5.31%. The consequences depend on a number of factors. For example, did the fund execute a given day's trades at prices better or worse than the closing prices of the stocks bought or sold? And how many fund shares were bought or sold on that day? Could T+1 accounting be exploited to realize unfair profits? That would require knowing when a fund was buying or selling information that fund shareholders don't typically have. The researchers noted that a fund insider would have that knowledge, but they said they didn't know whether any insiders had actually taken advantage of it. For buy-and-hold fund shareholders without insider knowledge, T+1 accounting means that they may sometimes be subsidizing frequent traders. If a fund's NAV is artificially high on a given day, and there were more sellers than buyers, buy-and-hold investors are subsidizing the shareholders who sold. By contrast, on days when a fund's NAV is too low and there were net purchases of the fund, the subsidy goes to those who bought. The researchers were unable to measure the exact extent of the subsidy because they had access to the necessary data for only a small number of funds. Based on their sample, they estimate that for equity funds alone, T+1 accounting leads to an annual total of $104 million that is unwittingly transferred among various fund shareholders. But even that is likely to underestimate the true cost of T+1 accounting. Professor Tufano and his colleagues found from interviews with fund traders that they sometimes alter their trading activities because of this accounting practice. To minimize the inadvertent wealth transfer that T+1 can sometimes cause, fund managements occasionally urge traders to execute all trades as near as possible to that day's close. Because those traders might otherwise be able to execute their trades at more favorable prices, T+1 can cause a fund's longer-term performance to suffer. Why do funds use T+1 accounting? The researchers speculate that the reason "is a holdout from earlier days, when fund managers could not reliably collect information about their portfolio by 4 p.m. nor transmit this information in a timely manner to fund administrators who calculate NAV's." Professor Tufano and his co-authors acknowledge that funds would incur a cost in shifting from T+1 to more accurate methods. But at least in many cases, the benefits would outweigh the costs, in their view. In any event, they say, all funds should tell shareholders how they calculate share values. Until funds change their accounting practices, you may want to avoid funds that do not restrict frequent trading, because you otherwise run the risk of buying or selling at unfavorable prices. And when particular funds alter their methods to remove this potential mispricing, you may want to favor them over funds that don't.
There is a rhythm to the introduction of many consumer products. The year-end holiday buying spree, when about 40% of all consumer products are purchased, sets that rhythm. New cars, electronics and most other items have to be in stores and ready to go by September. Few products don't follow the pattern. Large kitchen appliances have an abbreviated peak selling period just before the Thanksgiving feast. Air-conditioners and refrigerators too tend to break in the heat. But for most consumer electronics, the majority of new products hit retailers in March and April. So it used to be that you'd pick up bargains after Christmas. But merchants have now extended the season well past New Year's Day. Gift cards have moved the season out a few weeks more. And the Super Bowl moves it out some more for big-screen televisions. And there are some Valentine's Day promotions for TVs. Bob Scaglione, Sharp's senior vice president for marketing, says as the prices of televisions drop, people increasingly think of them as gifts. "Products that were a considered purchase are now take-away products," Mr. Scaglione said. And how did he get that idea? The company was advertising TV's in kitchens for Mother's Day and sales surged. "Why not Valentine's Day?" he asked. The selling season does finally screech to a halt near the end of February. About 75% of new electronic products are introduced in March and April, because, Panasonic's vice president for entertainment products, Reid Sullivan, said, it gave retailers and manufacturers time to "launch, adjust and maximize." The big retailers Wal-Mart, Costco, BestBuy and Circuit City, where Americans now buy the bulk of their gear rarely get stuck with much unwanted merchandise, so there's no need for a big sale. The inventory has been carefully tracked with supply-chain management software. This software has has been good news for most consumers. While there are fewer year end bargains, but now all customers are getting a good price instead of a few customers getting a great price. Wal-Mart, the first big retailer to get a handle on its inventory, hired economists at Global Insight to estimate how much it had saved consumers. The answer they came up with was $20 billion a year. Best Buy estimated that it was saving $10 million a year just on freight expenses because it ships to stores only what it needs to ship. It has also cut factory-to-store delivery to 4 weeks from 20 weeks, which removes risk of holding too much inventory and allows Best Buy to lower prices. Mr. Sullivan of Panasonic said that retailing had changed markedly in the last five years because of the amount of data that is available and shared. "The whole goal is to drive out costs and that is a win for consumers," he said. "As new products come out, consumers tend to get a better deal on the new products because they are getting more technology at a better price," Mr. Scaglione said. The exception is in the kitchen. Prices have been going up each year partly because of the rising price of stainless steel, the preferred finish for appliances. While it might make more economic sense for merchants to maximize profits by holding prices firm during the buying season, Steven Baker, who analyzes the consumer electronics industry for NPD, said the opposite was true. "In an era of lean inventory and tight supply chains, the retailer is better off driving sales when consumers are willing to buy." A result, said Mr. Waynick of Sony: "It's all on sale all the time. The sale has lost some of its impact with consumers because everything is on sale sometime someplace." Indeed, a recent survey by Forrester Research showed that price was overwhelmingly the factor that influenced where, when and which consumer electronic product was bought. The one exception is a new desktop computer, which was purchased when the old one needed to be replaced. So is there still a way to game the system? Yes, but it takes a little more diligence. You have to avoid impulse buying, but still be ready to pounce quickly. Web sites like Engadget.com and Gizmodo.com are places to gather information on product releases. NexTag.com, Shopping.com, Froogle.com and other price-comparison sites allow you to study which reputable dealer is also aggressive on price. NexTag has a number of useful features to help you track price cuts. NexTag also displays price history charts. You can divine a little from those as well. A constantly downward sloping line suggests that the manufacturer has control of inventory and prices are dropping at a natural "electronics just get cheaper" pace. That means there's not much you can do. Anything you buy will be cheaper a month from now. But a flat line that also shows some abrupt drops, however small, suggests a struggling product.
There may be all sorts of reasons for this sluggish behavior. One is that constant changes in the IRA program have rendered it so complicated that few have any idea how it's supposed to work. I dare any reader to describe out loud all of the IRA options without consulting a reference book. What is the maximum annual contribution? [Its $4,000, and it's already higher for people 50 and older] Whats the difference between the standard IRA [contributions may be tax-deductible, the withdrawals not] and the Roth IRA [qualified distributions tax-free, contributions not]. What seperates these from rollover IRAs, SIMPLE IRAs, SEP IRAs and SARSEP IRAs? Excess contributions to a Roth IRA might incur a 6% excise tax, so who qualifies for a Roth and what ar the contribution limits? What to do when a designated IRA beneficiary dies? Can confusion by itself be driving people away from IRAs? From all appearances, it looks as though significant numbers of people are waiting for the design and building of the retirement system to be completed before they get involved. Social Security is front and center here. Why do a lot of one's own retirement planning in mutual funds before one knows whether and how Social Security will be "reformed"? More broadly, if our leaders can't agree on how society at large should plan for its future old people, how are those same people supposed to proceed? This is the wrong message. However far in the future any individual's old age may be, the important time to get serious about preparing for it is now -- with or without a coherent society-wide system in which to do it.
Most of us like the notion of being bold and decisive. Yet, when investing, humility and trepidation are far better attributes. None of us knows what the future holds, so it's prudent to spread our investment bets widely. With that in mind, take your short-term-bond fund and surround it with more exotic bond-market sectors. This broad diversification is especially important if bonds account for a hefty portion of your portfolio. Begin by adding a significant position in inflation-indexed Treasury bonds. With conventional bonds, the biggest threat is rapid inflation, which can destroy the spending power of the interest you get. By contrast, inflation-indexed Treasurys are a great hedge against escalating consumer prices, because their principal value is stepped up along with inflation. Next, mix in smaller stakes in high-yield "junk" bonds, developed-foreign-market bonds and emerging-market debt. Not only will the junk bonds give you a fat yield, but also you may profit from a strengthening economy, which would ease the risk of junk-bond defaults. Meanwhile, the foreign bonds provide a hedge against any decline in the dollar's foreign-exchange value -- plus the chance to pocket the rich yields available on emerging-market debt. You don't necessarily have to buy separate mutual funds to tap into each of these sectors. Instead, you might opt for funds like Fidelity Strategic Income and T. Rowe Price Spectrum Income, which include a mix of high-quality bonds, junk, foreign bonds and emerging-market debt. I keep talking about mutual funds. But what about individual bonds? Don't they offer more certainty? I hear that argument all the time -- and I'm not biting. Sure, if you hold an individual bond to maturity, you know precisely how much interest you will receive and precisely how much you will get back when the bonds mature. By contrast, there's more uncertainty with bond funds. But there isn't that much uncertainty. Over 10 years, there will be precious little difference between the performance of, say, a low-cost short-term-bond fund and the results you would get by buying two-year bonds, holding them to maturity and then rolling the proceeds into a new two-year security. The fund, however, will be less risky, thanks to its broad diversification. You might also clock higher returns. True, the fund's annual expenses will eat into returns. But you will benefit from the fund's institutional buying power. While individuals often pay big markups when buying bonds in the resale market, funds have the muscle to demand better pricing. Fund investors can also automatically reinvest their interest payments, thus immediately putting this money to work earning additional interest. My preference for funds assumes you buy no-load, low-expense bond funds. Holding down such costs is critical, especially in today's low-yield environment. I would aim to buy bond funds with annual expenses below 0.5%, though you may have to pay higher costs when investing in more-exotic sectors. Also pay careful attention to the other big cost: taxes. If you are in the 25% income-tax bracket, you stand to lose a quarter of your bond interest to Uncle Sam. Faced with that tax bite, many folks load up on tax-free municipal bonds. But you will likely score superior long-run returns by buying taxable bonds in your retirement account. That way, your bonds will grow tax-deferred and you will collect the higher yield paid by taxable bonds. Meanwhile, if you have money to invest in your taxable account, stick with stocks. These stocks will benefit from the low long-term capital-gains and dividend tax rates, currently set at a maximum 15%.
That has been a problem for many cautiously optimistic stock investors during the last year. On Wall Street, the normal "correction," or periodic decline of 10% to 15% in major market indexes, has been a no-show. The S&P500 index had two pullbacks last year that were little more than blips. The worst was a drop of 7.2% between March 7 and April 20. In fact, the S&P 500 hasn't suffered a decline of 10% or more in nearly three years. That's about as long as the current bull market has been going on. Over the last year, sell-offs also have been muted in indexes that usually experience far more volatility than the S&P 500, including the Nasdaq composite, the Russell 2,000 small-stock index and some gauges of foreign stocks. Merrill Lynch's emerging-market strategist, Michael Hartnett, on Jan. 30 sent clients a report listing 10 good reasons that stock prices in countries such as Russia, Brazil and Turkey were due for a 10% haircut after their phenomenal gains of recent months. We're still waiting: The Fidelity Emerging Markets fund has slipped just 2.7% since reaching a record high Feb. 1. And from the looks of the cash pouring into emerging-market shares in general, investors don't care to wait for more of a discount. A total of $3.3 billion flowed into U.S. funds that invest in those markets in the week ended Wednesday, the most in at least a decade, according to data tracker Emerging Portfolio Fund Research. All of this is frustrating for long-term investors who want to put more money into stocks, but would prefer to do so at somewhat cheaper prices. In most bull markets, corrections come standard. Consider that during the roaring market advance of 1995-1999 there were five pullbacks of 10% or greater in the S&P index: one each in 1996, 1998 and 1999, and two in 1997, according to research by Michael Panzner, a veteran stock trader at Rabo Securities. Of course, once a decline begins, it's only apparent in retrospect whether it is a correction in a continuing bull market or the start of something much worse. Buying the dips in technology stocks in 2000 was a disastrous strategy; few investors could have imagined that the Nasdaq index was on its way to losing 78% of its value by October 2002. The bullish view of the recent lack of broad market hiccups is that it's a sign of the underlying strength of the advance. Plenty of individual stocks have had wide swings in the last year on good or bad news specific to them. But the absence of classic corrections in the market overall suggests that few investors are bolting for the exits on general bad news say, the London terrorist bombings last July, or September's hurricanes and that it doesn't take much of a drop in share prices to entice buyers to come in. Those explanations hold some water, but they aren't the whole story, many Wall Street pros say. One force that is keeping broad indexes like the S&P 500 levitated is sector rotation, meaning that money is moving out of some stock industry groups and into others. As major drug stocks in the S&P declined in 2004 and 2005, for example, energy stocks in the index took up the slack, and then some. The net result of sector rotation within the S&P has been a fairly dull showing for the index itself, despite plenty of action underneath. Rotation eventually happens in all bull markets, but this time there is a twist: the boom in ETFs stock portfolios that offer an easy, cheap and effective way to quickly get into or out of individual market sectors. ETF assets now total $300 billion, up from $100 billion at the end of 2002, according to ICI. There are more than 200 individual ETFs, tracking every major industry group and foreign market. Marc Pado, U.S. strategist for brokerage firm Cantor Fitzgerald, suggests that the popularity of sector ETFs has meant less pressure on the broad market, up or down. Instead of buying or selling an S&P 500 index fund, investors can play just the sectors they want, he says. That may be helping some stock sectors, and emerging markets, avoid big corrections, at least so far. Mexico's bull market, for example, has gotten an assist from the iShares Mexico Index ETF, a U.S.-based fund that has 13.7 million shares outstanding, up from 3.8 million at the end of 2003. The fund now holds $500 million of Mexican stocks, compared with $65 million at the end of '03. For U.S. blue-chip stocks, another volatility-damping force is the surging use of put and call option contracts, says Bernie Schaeffer, head of Schaeffer's Investment Research and an expert on options. Options provide a low-cost way for investors to make bets on individual stocks and market indexes or to hedge against declines. The contracts have never been more popular. Option trading on the Chicago Board Options Exchange, the world's largest options market, hit a record 53.9 million contracts in January. That was up 54% from a year earlier and up 144% from January 2003. Options are heavily used in trading strategies involving big-name stocks. Over the last year, that has helped to assure that any rallies or sell-offs in the S&P 500 haven't had legs, Schaeffer says: Soon after a broad buying wave begins, it dims because of selling fueled by option-related strategies designed to capture a quick profit, he says. Selling waves likewise dissipate quickly. "You get these hurry-up-and-wait rallies and hurry-up-and-wait declines, and neither results in anything much," Schaeffer says. Some investors might figure this market is exactly what the doctor ordered after the wrenching decline of 2000-02. What's wrong with a slow-moving advance in the S&P 500? Would-be buyers might like a 10% to 15% drop to make stocks cheaper, but the index's unwillingness to accommodate them could just be a sign that share prices aren't overvalued at these levels. Still, it would be silly to believe that market corrections have gone the way of the dinosaurs. At some point, Schaeffer says, something will happen that will "punch holes in the notion that this low-volatility environment is going to continue forever." If that something is bad news, the question is whether we then get a standard correction, or whether stocks head directly into a new bear market, meaning a drop of 20% or more in indexes such as the S&P 500. In the meantime, caution isn't a bad thing in the fourth year of a bull market, Schaeffer says. He recommends holding as much as 25% of your portfolio in cash, waiting for better share prices particularly in smaller stocks and foreign issues. The key is to make sure that, if you're waiting for a pullback to put money to work, you do exactly that when prices finally go your way, assuming that the stocks you want haven't lost their long-term appeal.
Every fund's performance can be split into two parts. First, there's the return that a fund should get simply because it is invested in the market. A fund's sensitivity to market movements is captured by a statistical measure known as "beta." Second, there's the performance that can't be explained by the fund's market exposure. This "unexplained" return, which reflects the manager's luck or skill, is often dubbed "alpha" by academics and Wall Street experts. When you buy actively managed stock funds, you are buying both alpha and beta. You get the underlying market's annual performance, plus or minus a few percentage points, depending on whether the manager picks well or picks badly. Unfortunately, even if a manager picks reasonably well, the stocks selected often aren't good enough to overcome the drag from the fund's fees. Those fees can be hefty. Suppose you have $300,000 spread among stock funds that charge 1.5% of assets each year. That works out to $4,500 annually for active management -- and we haven't even figured in the funds' trading costs. Sound steep? Imagine, instead, that you stashed $240,000, or 80% of your stock portfolio, in a mix of U.S. and foreign-stock index funds that charge 0.25% a year. Result: You have locked in the stock market's return with 80% of your portfolio -- at a cost of just $600 a year. "The idea is not to overpay for beta," says Greg Ehret, co-head of SSgA's Advisor Strategies group, a unit of Boston's State Street Corp. "For your market exposure, you might as well use the most efficient vehicles possible," such as exchange-traded index funds or regular index-mutual funds. What should you do with your portfolio's other 20%? This is your chance to earn alpha -- and you might want to take a few cues from institutional investors. Based on data from Pensions & Investments, the biweekly newspaper, over the past decade, pension funds have favored two extremes, buying both humdrum index funds and also alternative investments like private equity, venture capital, real estate and hedge funds. The idea of separating alpha and beta might seem similar to the strategy of "core and explore." With core and explore, however, investors will often purchase the S&P500 index and then buy actively managed funds for smaller companies and foreign stocks. By contrast, when splitting alpha and beta, you really want to index both U.S. and foreign markets, and then tack on bets that have the potential to deliver a lot of alpha. For instance, you might overweight attractive sectors or purchase a handful of your favorite stocks. Even if you get it wrong, you won't do too much damage to your wealth, because you're only playing with a small portion of your portfolio. Alternatively, you could buy funds that focus on a concentrated portfolio of some 20 to 40 stocks, such as CGM Focus, Fairholme and ICAP Select Equity, or purchase mutual funds that use hedge-fund-type strategies, like James Market Neutral and Laudus Rosenberg Value Long/Short. "If you're buying a satellite investment, buy something with a lot of alpha in it," says Donald Mulvihill, a managing director with Goldman Sachs. "Don't buy a small amount of alpha with a lot of beta," which is what you're getting with the typical stock fund. Keep three things in mind. First, your alpha bets could generate big tax bills, so keep them in your retirement account. Second, while a straight stock bet will give you both alpha and beta, hedge-fund-type mutual funds often aim to eliminate basic stock-market exposure. They do this by taking offsetting bets, both buying promising shares and simultaneously "shorting" unattractive stocks, in a bet they will fall in value. As a result, their performance isn't driven by broad stock-market swings. Thus, you should arguably substitute these funds for part of your bond portfolio. Finally, keep close tabs on how your alpha bets perform. Not doing especially well? Maybe you should give up the pursuit of alpha -- and stick exclusively with low-cost index funds.
Another giant fund snapping up foreign stocks is American Funds' $128 billion Growth Fund of America. A more American-sounding fund is hard to imagine, yet its foreign exposure is now almost 18% of assets, up from 8.4% five years ago. Dodge & Cox Stock Fund is at almost 18%, up from 6.3% five years ago. The $3 billion Janus Contrarian Fund has 43% overseas, including a big stake in Indian stocks; five years ago, the figure was 6%. The $3.6 billion T. Rowe Price Value Fund foreign exposure has increased to 9.2% from 2.5% five years ago. The average foreign exposure of all U.S. diversified mutual funds, while still relatively small at 3.6% of assets, has doubled in the past five years, according to researcher Morningstar. Fund managers say part of the reason they are buying overseas is that foreign stocks are cheaper. Many investors expect the dollar to come under pressure. A falling dollar would boost returns on foreign investments. So far in 2006, the MSCI EAFE Index ("Europe, Australasia and the Far East") is up 4.7%. In the U.S., after a 1% decline last week, the Dow is up just 0.7% this year. In the face of a rapidly globalizing economy, some managers are now starting to take a sector-based approach to investing rather than a geographic one. After all, in an economy where Swiss drug firm Novartis generates a higher proportion of its sales in the U.S. than does McDonald's or Coca-Cola, the place where a company has headquarters is becoming less important. "I don't know if it's so much our conscious move as the fact that the world is changing," says Dodge & Cox CEO John Gunn, referring to the shift of Stock Funds towards foreign companies. "There are more very high-quality multinationals based outside the U.S., and that has expanded our universe. What you're charting is the integration of the global economy." Mr. Gunn notes that many of the U.S.-based companies in Dodge & Cox Stock Fund's portfolio generate at least a quarter of their revenue outside the U.S., so even a manager who sticks to U.S. stocks would have a large exposure to foreign markets. Ron Sloan, lead portfolio manager at AIM Charter Fund, another fund that has bumped up its foreign holdings lately, concurs that investing has taken on a more global flavor. "We're on a global stage and so if you're managing a large fund, you're owning companies that have a large global exposure whether they're based in the U.S. or not," he says. "To be analyzing brewers and to only look at Budweiser and Coors while ignoring Heineken or [SABMiller] is just silly." There are a couple of implications for individual investors. First, your foreign exposure may be very different than you think. Many investors try to design their fund portfolios with neat little buckets of, say, 60% domestic stocks and 40% foreign stocks. But the fast-growing foreign holdings of some U.S.-stock funds may mean that your allocations have gotten seriously out of whack. You can check a fund's exposure by looking at a recent shareholder report or the fund Web site. One way to gauge the foreign exposure in your overall portfolio is to run your holdings through a simple, free Web-based analyzer like the one at www.morningstar.com. But another implication is that, if the world is indeed changing, much of the old advice about allocating your money among geographical buckets is becoming less relevant. A recent research report found that the correlation between the performance of U.S. and European stocks has increased from less than 50% in the 1970s to almost 90% today. In other words, one traditional argument for including foreign stocks in your portfolio -- that they will zig when U.S. stocks zag -- no longer applies. The author of the research was Brett Gallagher, co-head of global equity at Julius Baer Investment Management. His conclusion: It's now more important to diversify among industries and among different types of investments. More than 100 mutual funds classified as U.S. stock funds now have more than 20% of their portfolios in non-U.S. securities, according to Morningstar. Dozens raised their overseas holdings by double-digit amounts in the past two years. But for investors, such moves complicate portfolio planning. A good-size change in a fund's portfolio can throw off an investor's strategy for allocating money among different classes of funds. In some cases, a move abroad from U.S. stocks may be in keeping with a manager's history. For example, Third Avenue Value Fund manager Martin Whitman has long run that portfolio as a go-anywhere fund. Late last year, Third Avenue Value, categorized as a U.S. fund by rating companies, had 53% in the U.S., down from 68% a year earlier. That fund is also just 72% in stocks, in keeping with Mr. Whitman's wide-ranging approach. And some managers do go out of their way to draw attention to overseas investments. The managers of Wasatch Micro Cap Value Fund, which has 70% in U.S. stocks, down from 86% two years ago, highlighted international holdings. Other fund companies have provided some numbers but haven't highlighted the change or given an explanation. Confusing matters, fund companies provide one statistic that can end up being misleading. Funds are required to compare their performance against a market index, such as the S&P500-stock index. That can put fund companies in a bind when the types of holdings in the portfolio change. When the manager of Columbia Young Investor Fund began putting more non-U.S. stocks into the fund, officials at Columbia Funds debated providing investors with a custom benchmark that combined U.S. and non-U.S. markets. "But then people ... would complain that was an artificial benchmark," says Colin Moore, who oversees actively managed stock funds at Columbia Funds. The fund continues to use a U.S. benchmark. Portfolio managers say there are several trends leading them overseas. For the better part of a decade, returns on international stocks lagged behind U.S. returns. Then last year, overseas markets shot ahead. In 2005, the Morgan Stanley Capital International EAFE Index [Europe, Australia and Far East] gained 29% with dividends reinvested, while the S&P 500 gained just 4.9%. Converted into dollar terms, factoring out the foreign-currency impact, the EAFE was up 13.6%. "There is some performance-chasing going on," says Dan McNeela, associate director of fund analysis at Morningstar. Some U.S. funds that have substantially boosted international holdings, such as John Hancock Large Cap Equity Fund, have had a big improvement in performance. The $541 million Hancock fund has gone from being ranked in the bottom 5% of funds in its class, according to Morningstar, to the top 5% as its U.S. stockholdings went to 71% from 97%. The Hancock fund provides a percentage breakdown between U.S. and foreign securities. In March, the fund raised its official limit on overseas holdings to 35% and sent a letter to shareholders notifying them of the change. Fund managers say they are finding better bargains abroad than in the U.S., and, in an increasingly global economy, it is becoming harder to define U.S. versus non-U.S. firms. Morningstar based its analysis solely on where a company has headquarters, not where it does business. Expect the trend to continue. "You're going to see a lot more mutual funds owning international securities," says David Rose, manager of American Century Heritage Fund. Mr. McNeela cautions that investors shouldn't rush to the exits simply because their U.S. fund has a bigger overseas stake. "I'd be hesitant to stick with too-rigid rules," he says, noting that Morningstar has often criticized fund managers for trying to do no more than copy the holdings of their benchmark -- a practice referred to as closet-indexing. Bottom line: Each fund's mix should be taken into account when periodically rebalancing a portfolio.
The USA TODAY Internet 50 index, a broad measure of 50 of the most important Internet stocks, gained just 1.0% in 2005. That trailed the 3.0% gain in the broad S&P500 and the 1.4% gain in the Nasdaq composite index, the barometer of tech stocks a whole. So far this year the Internet 50 is up 1.8%, still trailing the Nasdaq's 4.8% gain. And it's not for a lack of profits. Forty-eight of the current members of the Internet 50 that were public in 2000 have seen their profits as a group quadruple since then. Google and Salesforce.com were private in 2000, so that doesn't even include Google's massive profit contribution. In fact, Google is a big reason Internet stocks as a group don't look even worse. Without Google's 115% gain last year, the USA TODAY Internet 50 would have lost 8.2%. There have been only 31 Internet IPOs in the five years since 2000 ended, says Thomson Financial. That's 393 fewer, or a drop of more than 90%, from the IPOs in just 1999 and 2000, according to IPO data from Jay Ritter, professor of finance at the University of Florida. There are only a handful of Internet IPOs in the pipeline, according to Renaissance Capital.
The Bush administration instead opted to support the development of a domestic industry for cellulosic ethanol, which would use plant fiber now discarded as waste to produce a transportation fuel. The technology is promising but not thought to be commercially viable until the next decade. In the meantime, the government continues to support traditional ethanol made from corn, a process that consumes large quantities of expensive natural gas. Filling up on ethanol isn't new. Henry Ford's Model Ts ran on it. What's changing is the cost of distilling ethanol and the advantages it brings over rival fuels. Ethanol fuel in the form of E85, a mix of 85% grain alcohol and 15% gasoline is immediately available. E85, using ethanol made in the USA from corn, is sold now, and 5 million vehicles already are on the road with the systems needed to burn it. The drawbacks: It contains less energy than gasoline, so you'd have to fill your tank more often. Ethanol contains about two-thirds as much energy as gasoline. The higher the concentration of alcohol in fuel, the more fuel you have to use to go the same distance. A vehicle would burn 1.4 times as much E85 as straight gasoline, the U.S. Department of Energy says. And you'd almost certainly have to buy a new car or truck to use it. Refiners are required to blend 7.5 billion gallons of it with gasoline. And the government provides a tax credit up to $30,000 for gas stations that convert pumps to E85 and similar alternative fuels. Still, only 500 fuel stations [out of 170,000] sell E85 and most of those are in the lightly populated Midwest. Brazil - Where Cheap Sugar Cane Met Flex-Fuel Cars Brazil is the poster child for ethanol fuel. The Brazilian standard is E25, 25% ethanol, but fuels range up to E100, which is all ethanol. Ethanol there is made from sugar cane, which requires less work and fertilizer to grow than corn. In Brazil, there's a much cheaper cost of labor, and much looser environmental regulations. During the first oil shock in 1973, the price of oil quadrupled and few places were hit harder than Brazil, which imported 80% of its fuel at the time. Within months, Brazil's economy slid into recession. About 40% of its foreign-exchange income was used to import oil. Military and civilian leaders laid the groundwork by mandating ethanol use and dictating production levels. They bankrolled technology projects costing billions of dollars, despite criticism they were wasting money. To help the nascent industry, the government gave sugar companies cut-rate loans to build ethanol plants and guaranteed prices for their product, which aided the development of an alcohol distribution network [29,000 gas stations] that spans a country nearly the size of the continental United States. Brazil spent at least $16 billion in 2005 dollars from 1979 to the mid-1990s on loans to sugar companies and price supports. In 1975, Brazil's military leader, Gen. Ernesto Geisel, ordered that the country's gasoline supply be mixed with 10% ethanol, a level Brazil steadily raised to 25% over the next five years. That meant the same amount of gasoline would last longer. It also allowed Brazil to pay for fuel with local currency, in the form of payments to farmers. The state also required state-run oil giant Petrobras to make the fuel available at filling stations. Government price supports made the fuel 35% cheaper than gasoline at the pump. Ethanol also helps acceleration, an advantage in a country where Formula One racing is a national passion. By 1983, nine out of every 10 new cars sold in Brazil ran on ethanol alone. Millions of Brazilians switched to the alcohol-only cars in the 1980s. In 1985 and 1986, more than 75% of all motor vehicles produced in Brazil - and more than 90% of cars - were designed for alcohol consumption. But then it all went wrong. A combination of factors turned the tide against ethanol for more than a decade: Under newly-restored civilian rule, governments were less concerned about promoting the fuel for national security reasons. Sugar prices rose, making the ethanol subsidy too costly for the state. Oil prices had fallen. State oil company Petrobras had discovered new offshore oilfields, making Brazil more self-sufficient in oil. By 1997, just 1,075 motor vehicles built to run on alcohol rolled off the country's production lines - a mere 0.06% of the total output. In 2003, sales of alcohol-only cars represented only 3.5% of new vehicle sales. In 1986, after civilians replaced generals in Brazilian politics, the world price of oil plunged. In 1989, President Jose Sarney started cutting ethanol price supports. In 1990 there was a sugar-cane shortage, when ethanol-car owners found themselves, well, out of gas. Sales of ethanol cars plummeted and some Brazilians felt the entire experiment had been a waste. But Sugar companies continued to make the fuel and learned how to cut costs, encouraged by a state requirement that all gasoline be mixed with ethanol. Gas stations still offered the fuel, which is taxed at just nine cents a liter compared with about 42 cents a liter for gasoline. While other countries were busy mapping the human genome, Brazilian scientists were decoding the DNA of sugar cane. That helped them select varieties that were more resistant to drought and pests and yielded more sugar content. Over the past 20 years, Brazil has developed some 140 varieties of sugar, which has helped lower growing costs by more than 1% a year. In 1975, Brazil squeezed 2,000 liters, or about 520 gallons, of ethanol from a hectare, or nearly 2.5 acres, of sugar cane. Today, it's nearly 6,000 liters. As gasoline prices soared in recent years, ethanol rebounded. By 2002, its price was again competitive with gasoline and old ethanol-only cars started recovering their prestige. One last step remained. Some consumers were leery of buying ethanol cars because they weren't convinced the fuel would remain cheaper than gasoline. A new generation of alcohol-powered cars entered production in Brazil in 2003, after the government decided that cars capable of burning ethanol should be taxed at 14%, instead of 16% for their exclusively petrol-powered counterparts. The introduction three years ago of new engines that let drivers switch between ethanol and gasoline has transformed what was once an economic niche into the planet's leading example of renewable fuels. Ford exhibited the first prototype of what came to be known as a flex-fuel engine in 2002; soon VW marketed a flex-fuel car. "Flexible fuel" cars running ethanol, gasoline or a mixture of both, have become a hit. Car buyers no longer have to worry about fluctuating prices for either fuel because flex-fuel cars allow them to hedge their bets at the pump. Flex-fuel cars come outfitted with a tiny gas-only tank under the hood smaller than a windshield wiper fluid reservoir. Its used to start the car on cold days just for a moment before automatically switching back to alcohol or whatever is in the main tank. In 2004, the first full year that "flex-fuel" cars were on sale, they accounted for more than 17% of the Brazilian market. Consumers loved flex-fuel because it meant not having to choose between ethanol and gas models. With Brazilian ethanol selling for 45% less per liter than gasoline in 2003 and 2004, flex-fuel cars caught on like iPods. Last year, they scored an even bigger success, overtaking petrol-driven models for the first time since the 1980s and taking 53.6% of the market for new cars. Currently, seven out of every 10 new cars sold in Brazil are flex-fuel. Ethanol's rise has had far-reaching effects on the Braxilian economy. Not only does Brazil no longer have to import oil but an estimated $69 billion that would have gone to the Middle East or elsewhere has stayed in the country and is revitalizing once-depressed rural areas. More than 250 mills have sprouted in southeastern Brazil, and another 50 are under construction, at a cost of about $100 million each. Brazil's sugarcane industry produces about 160,000 barrels of oil-equivalent a day. Japan and China have plans to import Brazilian ethanol. The Bush administration has retained a 54 cent tariff on every gallon of imported ethanol. At current prices, Brazil can make ethanol for about $1 a gallon, according to the World Bank. That compares with the international price of gasoline of about $1.50 a gallon. Even though ethanol gets less mileage than gasoline, in Brazil it's still cheaper per mile driven. As a result, ethanol now accounts for as much as 20% of Brazil's transport fuel market. The use of alternative fuels in the rest of the world is a scant 1%. U.S. ethanol, which is made from corn, costs at least 30% more than Brazil's product, in part because the starch in corn must be first turned into sugar before being distilled into alcohol. It may take the U.S. a few more decades to bring the cost of ethanol down to 80 cents a gallon -- equivalent to Brazil's most efficient producers -- according to the U.S. Department of Energy. Brazil produced 4 billion gallons of ethanol in 2004, some 37% of the world total, while the U.S. churned out 3.4billion gallons, 31% of the world's share. Brazil also exported 634 million gallons - 112 million of that to the U.S. - and its government is pushing to clear more land for production. Experts say it will take years - if not decades - for true flex-fuel cars to be sold outside Brazil. The problem with these flex-fuel vehicles is they need to meet with an established infrastructure. In the case of Brazil, the fuel was there first. Back in the USSA After doubling in size, then doubling again the past few years, the U.S. ethanol industry consists of 95 U.S. plants that produced 4 billion gallons in 2005. That's only enough to replace 3% of the 140 billion gallons of gasoline the USA burned last year. To refine enough ethanol to replace the gas we burn would require thousands of biorefineries and hundreds of billions of dollars. An additional 32 ethanol plants are under construction, and nine are being expanded. That will add about 1.8 billion more gallons annually, but still leaves ethanol a bit player in the fuel game. All modern U.S. vehicles can burn another widely sold fuel, 'gasohol', that's 10% ethanol and 90% gasoline. But only specially outfitted cars and trucks called flexible-fuel vehicles [or FFVs] can use E85. They are designed to burn straight gasoline, E85 or any gas/ethanol blend in between. Though they cost at least an extra $150 to $200 each to manufacture. GM pledged to build more than 400,000 FFVs annually starting this year and Ford pledged to boost production 25% this year, to 250,000. There are already five-million-plus ethanol-ready cars and trucks on the road. ADM created the corn-ethanol industry when Jimmy Carter asked it to in 1978. ADM now pumps out more than a billion gallons of ethanol per year. While the fuel accounts for just 5% of the company's $36 billion in annual sales, analysts estimate that it generates 23% of ADM's operating profit. From ADM is ignoring E85 and cellulosic ethanol in favor of keeping pace with demand that is already booming. Corn ethanol's main use is as an additive that helps gasoline burn more efficiently. ADM sells nearly its entire output to oil companies, which use ethanol as a substitute for MTBE. In September, ADM announced a nearly 50% expansion project, or 500 million new gallons of annual production capacity. Archrival Cargill is belatedly ramping up ethanol production, and new entrants are using private capital to build ethanol plants. The only publicly traded pure-play ethanol maker, Pacific Ethanol of Fresno, plans to build five plants in California and has raised a total of $111 million, including $84 million from Bill Gates. All told, the planned projects represent a nearly $2.6 billion investment and will increase U.S. ethanol capacity by 40%. Corn ethanol will never generate enough fuel to run America's cars, pickups, and SUVs. Already ethanol gobbles up 14% of the country's corn production. Because cellulosic ethanol comes from cornstalks, grasses, tree bark - fibrous stuff that humans can't digest - it doesn't threaten the food supply at all. Cellulose is the carbohydrate that makes up the walls of plant cells. Researchers have figured out how to unlock the energy in such biomass by devising enzymes that convert cellulose into simpler sugars. Cellulose is abundant; ethanol from it is clean and can power an engine as effectively as gasoline. Plus, you don't have to reinvent cars. Ratcheting up production of cellulosic ethanol, however, is a gnarly engineering problem. Canada's Iogen is the furthest along in commercialization; another hopeful is BC International, a company that's building a cellulosic ethanol plant in Louisiana. The onus now is on companies like Genencor, a Palo Alto biotech. Its biological enzymes are used to break down stains in Tide detergent and achieve just the right distressed look in blue jeans. But making underpants whiter and denim bluer is nothing compared with breaking America's longstanding addiction to gasoline. The best way to do this would be to bring down the cost of ethanol to the point where consumers clamor for it. There's still a role for government. The recently enacted energy bill mandates the use of 250 million gallons of cellulosic ethanol a year by 2013, but much more can be done. Easing the tariff of 54 cents per gallon on imports of ethanol from Brazil and other countries would certainly help. Because sugar cane generates far more ethanol per acre than corn, Brazil can produce ethanol more cheaply than the U.S. Not only would importing more of it broaden access to ethanol for U.S. buyers, but it would also make it cheaper for the ultimate consumers - us. That in turn would spur demand at the pump and encourage service station owners to offer ethanol more widely. What's also needed is for someone big - like Shell or BP, which tout themselves as green companies - to commit to cellulosic ethanol on a commercial scale. Shell's bet on Iogen is minuscule compared with the $20 billion it plans to spend on producing oil and gas off Russia's Sakhalin Island. Of course, the timing of when ethanol goes from dream to reality isn't just a matter of an investment here or a subsidy there. It took decades of ferment in Brazil before serendipity in the form of high gas prices and flex-fuel engines made ethanol an everyday choice for consumers. But the sooner we start, the greater our ability to shape a future that's not centered on increasingly expensive oil and gas. It's not as if gasoline demand is going to go down: As long as the Chinese and the Indians want our lifestyle, you can forget about oil at $10 or even $20 a barrel. Whatever the technological challenges, a world of abundant, clean ethanol is suddenly looking a lot more realistic than a return to the days of cheap, inexhaustible oil. Monthly Employment Stats
While the payrolls total failed to meet economists' expectations for an increase of around 250,000 jobs, Ian Shepherdson of High Frequency Economics wrote in a note to clients that "this report is much stronger than it first appears," citing improved hiring across business sectors. Indeed, the data showed employment growing in construction, manufacturing, professional and business services, education and health care, blunting reported losses in retailing and government positions. The manufacturing sector increased payrolls by 7,000 jobs, after dipping by 1,000 in December. Service-providing employment went up by 135,000. Economic growth stumbled in the final months of 2005, as the nation's GDP grew at a seasonally adjusted annual rate of just 1.1%, much slower than the 4.1% rate of expansion logged in the third quarter. But economists widely expect growth to regain some forward momentum in Q11-06 -- an outlook that would likely keep the Federal Reserve on course to continue raising interest rates. Signs of an improving employment picture could thus fuel expectations of more tightening in coming months. In a report Thursday, the Labor Department said the four-week moving average of new claims for unemployment benefits dropped to 284,250 -- the lowest since the week of June 10, 2000. Further, consumers had a robust view of the job market early this year, with more describing jobs as "plentiful," according to the Conference Board. "Although not as tight as during the late 1990's, this is as strong as labor markets have been for the past 4 years and will keep the [Fed] biased toward further tightening," Steven Wood of Insight Economics wrote in a note.
Just the Facts Check Your Credit Report Michelle Singletary, Washington Post 2-05 Under the Fair and Accurate Credit Transactions Act of 2003, you are entitled to a free credit report from each credit bureau. Under the law, you can obtain a free copy of your credit report once every 12 months upon request . There are several ways to get your free credit reports: · Online at https://www.annualcreditreport.com/ · By phone. Call 877-322-8228. You will go through a verification process over the phone. Your reports will be mailed to you. · By mail. You can request your credit report by mail by filling out a request form (which you can find online) and mailing it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, Ga. 30348-5281. Nation's Homeownership Rate Leveles Ruth Simon, WSJ 2-16 New data released late last month by the U.S. Census Bureau put the homeownership rate at 69% in the fourth quarter of 2005, down from 69.2% a year earlier. While the decline itself is too small to be considered statistically significant, it is the third quarter in a row that the rate hasn't posted a year-over-year gain -- and it's the first time since 1994 that the rate at year-end hasn't increased from the previous year. Some economists say that the new data could be a sign that declining affordability is finally taking its toll on first-time homebuyers. The median price for an existing single-family home was $213,000 in the fourth quarter, up 13.6% from a year earlier. In 25 of 143 metro areas nationwide, homes were so expensive in the fourth quarter that a family earning the median income couldn't afford the median-priced home, based on conventional lending standards. By comparison, 13 of 151 metro areas were considered unaffordable two years ago. Brokers Report Near-Record Trading Activity Kim & Opdyke, WSJ 2-23 Individual investors are moving into the stock market at a stronger clip than seen in years. The number of trades by individual investors has risen substantially at discount brokerage firms in recent months and jumped an estimated 30% to 40% in January from December. The discount firms also report that money flowing into stock mutual funds last month was at a near record level. Charles Schwab saw $4.5 billion flow into its stock mutual funds last month, the highest amount since February 2000, when net investments hit $4.7 billion. The Smith Barney Consulting Group division says investment flows into stocks so far this year are "substantially" higher than they were in 2005 and 2004. Edward Jones saw new account openings in January rise 11% from a year ago. At Fidelity Investments, net flows into stock mutual funds soared to $5.6 billion in January from $400 million a year ago. Fidelity says the investments represent new money coming in, as well as a reallocation of cash sitting in investors' brokerage accounts. International equity funds, a sector that represents only 15% of total assets among all stock mutual funds, captured about 80% of the inflows into stock funds so far this year, according to AMG Data Services. Quick Facts, Stats & Opinions Internet companies, locked in a fierce battle to get more people to use their search engines, are dangling rewards and cash prizes to attract customers to their sites. GoodSearch.com aims to lure repeat users by donating roughly a cent to a charity of the user's choice every time a search is conducted on its Yahoo-based search engine. Blingo.com, powered by Google, gives away prizes like iPods and movie tickets to lucky users who happen to search at random times. Amazon.com Inc. offers regular users of its A9 search engine a 1.57% discount on most Amazon.com purchases. In December, Google led the U.S. search industry with 49% of all Internet searches, according to Nielsen/NetRatings, up from 43% a year before. During that same period, Yahoo's and Microsoft's share of the search market declined to 21% and 11%, respectively. (Jessica Vascellaro, WSJ 2-23) It is a poplular notion that the all-clear signal will be sounded for stocks once the Fed stops raising interest rates. Almost everyone assumes this is gospel. In recent issues of his newsletter, James Stack, editor of InvesTech Research Market Analyst, showed that, over the months following the final hike in a series of Fed rate hikes, the stock market more often than not has declined. Specifically, Stack looked at all instances in the Fed's history in which it raised interest rates at least two times in succession. He then measured the S&P 500's gain or loss following the final rate hike in each of these instances. On average, the S&P 500 index was lower three months later, in six months, and a year later. Stack's results show that the stock market on average declines over the six months following the final hike and is only 1.8% higher a year later. (Matrk Hulbert, MarketWatch 2-21) Stable value funds held 16.9% of the average 401(k) participant's plan assets in 2004, according to an annual survey by consulting firm Hewitt Associates. Just two investment options held more money: sponsoring companies' own stock, at 26.5% of average assets, and U.S. blue-chip shares, at 19.2%, Hewitt's data show. Balanced Funds [which mix stocks and bonds] were next of 8.5%; Life-stage funds at 8.0%; US small-caps at 5.9%; Foreign stocks at 4.4%; Bond mutual funds at 4.1%; and money market funds at 2.6%. (Tom Petruno, LA Times 2-19) The average newly built home in 2005 had 2,412 square feet of space, according to the National Assn. of Home Builders. That's up 63 square feet from the year before. Since 1973, the average new home has increased in size by about 50%. The typical new home that year had 1,660 square feet, and a mere 12% had three or more baths. Today, about one-quarter of all homes have that many bathrooms. But the yard is shrinking. Now averaging 9,000 square feet, the American yard is expected to decline to 7,000 or 8,000 square feet in the next few years, said the builders group. (LA Times 2-05) Home Page Previous Factoid Top Sites
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