Looking Forward

It's that time of year when every economist, pundit and college bowl junkie starts making predictions for the new year, or at the very least figuring the over and under. I spent the week swirling saucers of soggy tea leaves so I could get a glimpse into the future and report back to you what's in store for investors next year. After the decade we've had everyone is anxious about what to expect. Should we pull the bed cover over our head when the clock strikes midnight or jump up and greet the new year like an old friend from the 90s we've sorely missed?

First let's look at employment. Everyone is making a big deal about how the government counts people that are out of work and accuses the politicians of making numbers look better than they really are. The government gives us one number and talking heads another. The NY Times reported that unemployment is not a tad over 10% as officially reported but more in line with 17%.

Employment is the last thing that recovers in any depression. The worst is over. If you have a job today you'll probably have a job next December too. If you don't have a job but are looking you may get a job by the end of 2010. This depression like half the marriages in America is not going to last forever and neither is the double digit unemployment numbers. Better numbers in 10 but nothing to get truly excited about.

Manufacturing - this sector had already swept out most of the excesses. A lot of people didn't think the government should have bailed out the auto industry but since approximately one out of every ten jobs is somewhat related to making cars they really had to. Things are and will be different. In the Detroit area I don't think anyone believes the car companies are dumb enough to go back to the old ways of doing business and building cars simply to keep plants open and people working. Those days are gone. Manufacturers should see the beginning of profitability starting late in 2010. One car company has already brought back some economic benefits for it white collar workers such as a 401k match. More and more rust-belters will be smiling in 2010.

Hyper inflation. The way the wonks talk on cable you'd think we were on the brink of becoming the twin of post WW ll Germany trundling wheelbarrows of Deautsche marks to buy a loaf of bread. Hyper inflation is defined as prices increasing at 10-50% per month. We are a far cry from hyper inflation. In fact in 2010 we may not experience a huge run-up in prices at all. After a decade of very little inflation you can expect a slight increase in 2010 starting in the second half, but more coming in 2011.

Unfortunately government spending will continue. Nothing stops our elected officials from standing at the urinal of public waste. It's not their money, they don't care, get used to it.

Real estate - new home building should see a very modest increase, which is good news and existing home values may have a slight pop before the summer break when folks start serious shopping. At worst we're looking at stabilization. Some areas of the country have already experienced increases for their markets. More residential real estate will be bought as consumers will finally figure out that prices are as good as they will get. Commercial real estate, on the other hand, has lots of excesses and there are serious issues in this sector.

Interest rates, according to the new Time Magazine Man of The Year, will hold firm for an extended period of time. I say until midway 2010 and then rates will start their systematic increases. When rates start moving up hang on because it will be a bumpy ride. Lock in your fixed rates now and eliminate all your variable rate credit cards asap.

The dollar could strengthen or just muddle along until a firm economic policy on dealing with how much money we've printed and shoveled in the world's economies is handled. The one thing to remember is that in a global crisis everyone loves the dollar. A weak dollar is still good for most of the S&P 500 companies as they do business here, there and everywhere. It's not so good for retirees shuffling for one last hurrah around the Piazza San Marco and slurping pasta e faioli, washing it down with Kaopectate shooters while on a fixed income.

The biggest thing that will happen in 2010 is the one thing that no one has yet thought about or prepared for. Most everything we do think, worry to death and prepare for never happens. The markets should do well into mid-year and then take a break, consolidate and resume for a decent 2010. If you're out of the market you should start to move back in. This depression was a global event seen only once every hundred years. We should not retrace to previous market lows, if that gives you some comfort. If you're invested you should review and bring your portfolio up to date. Too many investors stick with an allocation that they established when they were in their 40s and 5os and conveniently forget that they need to upgrade to reflect their current age and risk level.

Hopefully my insights will help you sleep a bit better. Nothing ever is as bad as it seems unless it happens to you. Wishing you all, dear readers, a wonderful New Year.

Racing To Win

Some money management firms view investing the same way they would a horse race. You read and hear their advertisements and they brag that their mutual funds outperformed their indexed averages over one, three and ten years, as if it were something that would make their product more attractive to investors. Yet, those same ads contain the warning that past history is no guarantee of future results. Confused? Me, too.

Matching fund to index is not an apples to apples comparison even though some would have you believe. Results are slightly different when comparing the S&P 500 index against mutual funds that invest in the same stocks for that index. A few of the indices have performed so poorly over the past one, three and ten years that a grade school investment club could beat them so let's not get giddy about beating indices.

Then there is the 'star' rating. Ever since independent analytical investment firm Morningstar emerged with its star rating system for mutual funds, stocks and now exchange traded funds investors buy only those four and five star rated investments. Morningstar has consistently written that the star rating is not something that an investor should base their entire due diligence on. Management, risk, history, total return and expenses are the other basics that investors should concentrate on.

Still fund companies advertise that many of their mutual funds have achieved star quality, much like a well-earned Michelin award. The problem is that the star is fleeting like the Michelin, and can be downgraded or upgraded by Morningstar at any time. But, many investors believe it is a star etched in stone like a Hollywood Walk of Fame hand print.

Do your fund company managers eat their own cooking? Nothing is more disconcerting to sit down at your local family restaurant, look out the window and see your chef enjoying his lunch at a competitor across the street. The same is true with investments. It has been proven that money managers who have their own savings and retirement assets invested in the funds they manage have a better investment track record than those that don't.

So maybe the fund companies would be better off advertising that more of their money managers have more of their money invested in their funds than any other fund company. Now that would impress me.

Buy & Hold Dead?

You've heard this and probably wondered if it was true since a lot of so-called financial experts have been saying it, buy and hold is no longer a valid investment strategy.

Buying and holding any investment for an exceptional length of time is certainly not a wise strategy except in certain instances such as art, rare coins, stamps, vintage autos, rare books and those painted 'collectible' dinner plates of dead Presidents advertised on late night cable. Okay, I'm kidding about those china dinner plates; but buy and hold being dead for mutual funds, stocks and exchange traded funds, which is what the new age market soothsayers are talking about, is something of a misdirection.

The hidden issue is not that buy and hold is dead it is that the so-called experts want you to sell your mutual funds, move all your assets to their side of the fence and buy ETF and index funds while they charge you a fee for this service.

In order to do that they need to convince and scare people to move money around. If this wasn't so sad it would be funny. They are telling investors to cash out active managed mutual funds to buy index funds. The fact is that the plain vanilla mutual fund that the self-crowned experts are telling you to sell is an active managed investment vehicle while the majority of ETFs and all index funds that they are telling you to buy are static. How can you confirm this? Simply check a Morningstar report by either going on-line, visit your local library or calling your fund company for a report and check the 'turnover' percentage. You'll be stunned to discover that some active mutual funds have a 100% turnover, meaning the total assets of the fund are bought and sold over the course of a year's time. You have to ask yourself how anyone of reason label active managed mutual funds with a turnover like that a buy and hold investment? The answer is to scare the uneducated.

The index and ETF funds change holding very little over the course of a year or two. These are the true buy and hold vehicles. They will only vary as some stocks are added and others deleted by definition of the index or sector but these are small modifications and do not make these active managed funds.

Buying and holding individual stocks for 10-20 years or a lifetime can be a smart move or financial suicide depending on what you bought, what you paid and why you bought it. Let's say you bought an automotive company stock and over the years the stock rewarded you with dividends and splits and you made a very tidy paper profit. At some point the stock either starts to stagnate or drops in value, perhaps the company even stops paying a dividend. Holding this stock and watching your gains go swirling down the drain is not a smart option. Why lose all your gains? Depending on where you hold the stock (price paid) and what account either retirement or individual, the time may be ripe to take some if not all of your profits, Buy and hold for some individual stocks for a lifetime may never make sense.

Let's put things in perspective. There is nothing wrong owning ETFs, index funds and mutual funds along with individual stocks. There is no rule that says you shouldn't. You'll get active management on one side plus indexing in specific sectors to round off your portfolio. Not taking advantage of all the tools to grow and keep your savings is just silly.

The next time someone in the investment business tells you that buy and hold is dead ask to see their portfolio and what they own. You may be surprised that what they own is exactly what they're telling you to sell.