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Steve's
Recommendations
Primer for Beginner Investors
Last
update 10/20/05
by Steve Toh
Hey,
It seems like the primary goal is how to financially diversify
correctly away
from an impending dollar crisis / US recession. From the
Economist:
"WHEN policymakers and pundits debate America's
current-account deficit, the
phrase “hard landing” is never far from their
minds. It sums up what might
happen if foreigners tired of financing the gap, now over
6% of GDP: a
sinking dollar, soaring interest rates, tumbling asset
prices—all dragging
America's economy into recession."
Optimists, including Alan Greenspan, chairman of the Federal
Reserve, think
that all this is pretty unlikely. It is far more probable,
they say, that
America's imbalances will come right gradually, via a
(gently) weakening
dollar and slower demand growth at home. More pessimistic
observers fear that
the risk of a hard landing is rising. Some of these point
to the financial
crises that hit several emerging markets in the 1990s,
in which currencies
collapsed and interest rates climbed as foreign investors
fled. The same
could happen in America, they worry, once foreigners sour
on Uncle Sam."
9/8/05 'Hard-landing heresy'
There are multiple views on this, but lets look into how
to diversify in
practice. I think the easiest way is to use Vanguard and
their index funds.
For those who want an all-in-one solution. "Life-cycle"
funds are the way to
go. For instance, the Target Retirement 2035 fund, ticker
VTTHX, holds 23%
in a US total bond market index, 60% in the US total stock
market index, and
16% in the total international (ex-US) market. You can
buy this fund for 3k
as an initial investment, and every subsequent investment
has to be at least
$100.
For those who want more control over their allocations,
they can use ETFs.
These trade like stocks and can be purchased through whatever
broker you use
(scottrade, etrade, interactive brokers, etc) Vanguard
and iShares sponsor a
lot of great ETFs such as the total US stock fund [VTI],
Pacific index [VPL],
Euro index [VGK], emerging index [VWO]. iShares trades
a total bond index
[AGG], and even a gold trust [IAU]. An ETF fund is coming
down the pipe that
will also be based on a commodities index. There are also
country and
industry ETFs. You can buy them for China, South Korea,
Germany,
Switzerland, etc. And you can also invest in sectors like
consumer services
and energy. Through ETFs, you can allocate in many different
ways and many
of them are very low cost, usually .5% expense ratio or
less.
Another way to invest in more "obscure" ways
is to use closed-end funds.
These also trade like stocks but are also funds. They
often have
tracking-error, which means they can trade for a premium
or discount to NAV,
or net-asset-value. A good place to find out about these
is
www.etfconnect.com. This sight will list hundreds of closed-end
funds (and
etfs) and provide their tracking error. Most people will
use closed end muni
funds so they can collect dividends tax free. For instance
you can purchase
NZH which is the Nuveen California Dividend Advantage
Municipal Fund 3, which
has a dividend yield of 6.26%, a discount to NAV of -7.01%,
and a taxable
equivalent yield of 9.56%. Another closed end fund that's
interesting is the
India fund (IIF or IFN). Often time closed end funds provide
you with a way
to invest in a region that ETFs haven't touched yet, such
as India and
Russia. The reason for this is that ETFs entail a lot
of institutional
buying ie, tons of money. So they would really move and
shake smaller
markets like India and Russia.
Lastly, you can go through a brokerage like scottrade
to buy mutual funds as
well. There are thousands of mutual funds that do even
more obscure things
such as buy emerging market debt (bonds) and invest in
smaller companies in
the international market. The trick with these is to check
for expenses,
sometimes these run as high as 3%! Also make sure that
these are no-load
funds too! www.morningstar.com is a great place to check
before purchasing
any "actively-managed" funds.
As for my own personal portfolio. I've stuck mainly with
index funds, and a
couple actively managed funds that have 5-star ratings
from morningstar. I'm
about 50% US, split among small, mid, and large caps.
about 25%
international, split between Euro, Pacific, and emerging
markets. And the
rest I hold in the REIT index and the US bond index. I'd
also recommend "The
Lazy Person's Guide to Investing: A Book for Procrastinators,
the Financially
Challenged, and Everyone Who Worries About Dealing With
Their Money" a
surprisingly great practical book to investing.
"By periodically investing in an index fund, for
example, the know-nothing
investor can actually out-perform most investment professionals.
Paradoxically, when 'dumb' money acknowledges its limitations,
it ceases to
be dumb." - Warren Buffet
That's my brain-spew for now.
-steve
Steve's Recommended Reading:
Unconventional
Success : A Fundamental Approach to Personal Investment
by David F. Swensen
The
Lazy Person's Guide to Investing by Paul
B. Farell
One
Up On Wall Street : How To Use What You Already Know To
Make Money In The Market by Peter Lynch
A
Random Walk Down Wall Street by Burton G.
Malkiel
[Lorenzo's Note: "I tend to believe Random Walk theory
is bunk. Read Mandelbrot's The (Mis)behavior of
Markets and make up your own mind. It's not a
simple debate. This book is a point of contention between
me and Steve hehe]
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