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Investor's Corner NewsletterBy Will W. Woodard, III, CFP® "A tax expert is anyone who can read five pages of tax law without crying, or ten pages without laughing." Today's column date loosely coincides with the one-year anniversary of a global stock market rally that has put smiles back on a lot of beleaguered investors' faces. Ignoring the cries of "Well, it's about time!" raining down from the peanut gallery, market tone over the past several quarters has been undeniably positive. We'll kick the tires of the rally in item one, below. "Reader Mail" deals with a question about mutual funds, coming on the heels of recent disclosures of market abuse by some big fund families. Finally, notable quotes and worthwhile links round out this month's column. In this issue of Investor's Corner:
1. Commentary/charts: Rally mode-After enduring three tough years comprised of (among other notable events) the collapse of the Internet Bubble, 9-11, two wars and a recession, equity investors have reason to cheer, for equity investments have had a very good twelve months.
I group the category of equity investments into four subgroups based on the work of Roger Gibson in his landmark analysis of investment portfolio diversification, "Asset Allocation". The subgroups are US Stocks, as measured by the Standard and Poors 500; International Stocks, as measured by the EAFE (Europe, Australia, and Far East) Index; Real Estate, as measured by the NAREIT Equity 50 Real Estate Investment Trust Index; and commodities, as measured by the Dow Jones AIG Commodity Index. Over the past twelve month period, performance for the four equity subgroups is as follows:
Debt investors are also in the positive for the twelve-month period, but have not fared as well. The Lehman Brothers Aggregate Bond index, a broad brush composite of investment-grade debt including government, corporate, asset backed and mortgage backed securities, had returned 5.41% for the twelve month period ending September 30. Why the rally? General consensus is that corporations have cut their expenses to the bone, learned how to use all the productivity-enhancing technology they bought in the late 1990's, and pre-announced all the bad news they can possible imagine occurring in the foreseeable future…making the process of outperforming in their quarterly earnings reports much more achievable. And, indeed, third quarter earnings news has been largely positive, while negative announcements and pre-announcements have declined steadily. Economic data continues to show improvement, too, lending evidence to the bulls' case. US GDP (Gross Domestic Product) growth for the 3rd quarter 2003 is now pegged at 4-5%, with the bulls considering the possibility of GDP for the 4th quarter of 2003 coming in at 5% or above. Inflation as measured by the Consumer and Producer Price Indices (CPI and PPI) has remained in check, and consumer sentiment has been good if not great. Unemployment claims have been the lagging data point, finally starting to trend down in October. This has led the financial media to describe the current state of affairs as a "jobless recovery." The rally has covered a lot of ground, too--2600 points in the Dow Jones Average, 290 points in the S&P 500, and over 800 points in the Nasdaq. The market has even rallied in the historically challenging months of September and October. Indeed, the rising tide seems to be lifting almost all boats. With greed starting to overtake fear as the primary market emotion, though, a bit of caution may be in order. The Dow is at strong resistance at 9800 and then 10,000, with overhead resistance for the S&P 500 at 1150. More troubling to me is the issue of all the low quality companies whose stocks are going up right along with (or in excess of) the high quality companies' stocks. All well and good until the bull market music pauses-or stops! I can't help but wonder how the low quality issues will hold up then?
Although I am by nature an optimist and am undeniably a long-term bull, I am keeping what boating folks refer to as a "weather eye" on the proceedings. As such, I especially caution investors to pay very close attention to the quality of the companies that they purchase. I definitely DO NOT recommend chasing the speculative edge of the rally by putting investment capital into companies with no earnings, sub par management, and dubious prospects simply because the stocks are going up in price. In the oft-quoted words of George Santanaya, "Those who do not learn from history are doomed to repeat it." Instead, I propose that investors "play good defense" by determining their individual risk tolerances and investing goals, by investing in different equity asset classes and sectors, by looking at the financials, management, and prospects of the companies (or funds) that they own, and by not chasing the latest hot story stock or fund. Investors following this game plan will surely miss out on a few meteors, but- perhaps more importantly-will also stand a better chance of avoiding the inevitable craters. 2. Reader mail: Dear Will, Why don't you talk about mutual funds more often? I have always been told that they were the best way for an individual investor to participate in the stock market. However, a history of underperformance by my funds, combined with the recent investor-unfriendly allegations in the news has me reevaluating my decision. Guidance appreciated! Signed, Audrey Dear Audrey-thanks for your note. Mutual funds can offer individual investors some important plusses-diversification, professional management, liquidity and convenience. Unfortunately, they can also offer important minuses-"Loads" or levied sales charges, excessive and hard-to-track expenses, and loss of investment control being some of the major shortcomings. Add to the above "soft money" paid to some financial advisors for pushing certain funds regardless of their track record and appropriateness in an investor's portfolio. Then add revelations of some major fund families allowing market timing and after hours trades in their funds by hedge funds-- with no regard for individual investors' interests-and at the end of the day I am EXTREMELY selective about which (if any) mutual funds I employ in client accounts. Here are a few things to look for in a good mutual fund: 1. Low expenses and no commissions-Look for no-load funds with annual expense ratios in the range of 1% or less for large cap or value funds-Small cap, growth, and international funds may have a somewhat higher ratio-say 1.25% to 1.5%. 2. Manager tenure-Look for a track record of solid, predictable performance by the same managers going back at least five years and hopefully longer. Manager departure may be a very good reason to consider selling a fund. 3. Performance-Don't focus entirely on the current year. Instead, look at the fund's performance over the past 3, 5, and 10 years if the data is available. Be wary of absolute returns, too- instead compare the fund's return to its benchmark over the time period. Many highly touted funds underperform their benchmark indices over a longer-term period, indicating that they may not be all that great an investment. 4. Portfolio turnover-Look for funds that manage their capital gains exposure in an intelligent fashion. One of my angriest days as an investor was the day I received correspondence from a mutual fund that I owned telling me that even though the fund had sustained a very large loss for the year, I owed capital gains due to the trade-happy "managers". I did my best Governor-elect Arnold imitation-"Hasta la vista, baby!" Another investing lesson learned-- Screen for tax efficiency and portfolio turnover! Hope these guidelines help, Audrey. Readers with questions for "Reader Mail" can call or email me with their questions and I will do my best to answer them in an upcoming newsletter. 3. Notable Quotes: "Growth is really more about letting go than it is about adding on." Psychiatrist Carl Hammerschlag "Dreams command higher multiples than reality." Internet entrepreneur Chris Kitze "When you have a process to understand clearly what your prospects want from life, and you offer them an elegant way to help them get it, there aren't any objections to overcome." Business coach Steve Moeller 4. Worthwhile links: CERTIFIED FINANCIAL PLANNER™ Board of Standards- http://www.cfp.net/default.asp NAPFA, the National Association of Personal Financial Advisors-http://www.napfa.org/ The FPA's Hampton Roads chapter-http://www.fpahamptonroads.com/about.htm Dare Capital Management & Advisory home page-http://www.darecapital.com/ Well, that's enough for this time. Feel free to call or write with questions or comments, or to inquire about my firm's services as they relate to your individual situation. And please say thank you a couple of times! Good investing, Will Woodard is president of Dare Capital Management & Advisory, a Registered Investment Advisor and fee-only financial planning firm based in Kill Devil Hills. Dare Capital is committed to providing independent, objective, and professional financial advice. Mr. Woodard, his firm, or his clients may own the investments mentioned herein. Contact Will at (252) 480-0156 or e-mail Will@darecapital.com The fine print: This newsletter can be reprinted or forwarded--however, it is requested that reprints of any material in this newsletter include credit to Dare Capital Management and Advisory (252)480-0156 and an email link to will@darecapital.com. Thanks for spreading the word! All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Will W. Woodard, III and Dare Capital Management and Advisory, and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. Mr. Woodard, his firm, or his clients may own the investments discussed in this newsletter. Past performance is no guarantee of future returns. The information presented herein and the company's web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future results may vary for many reasons. Copyright 2003 Dare Capital Management and Advisory-all rights reserved. |
