LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760
Thursday, Dec. 27
I thought it would be a good idea, this week, to talk about some new year'sresolutions for investors...Q. OK, where do we start?
A. I think the first rule should be for the younger or the beginninginvestors: AS NIKE SAYS, JUST DO IT!
Q. Of course, people who are young seem to have a hard time starting...
A. Right. We have a debt-addicted consumption ethic. If you do not payyourself FIRST, you will not be providing for later years. Part of everycheck has to go to the savings account or the fund company or the 401(k) /403(b) account, by automatic deposit.
Q. But it is so hard to get started...
A. Every time you get a raise, do not let yourself take it all home. Ifyou get a 4% raise, put one or 2% more into investments. It is painless.Over the years you will get to a high savings rate that way. Regular,automatic investments give you the benefits of dollar-cost averaging too.A lot of people get annual salary bumps in January, so this is a piece ofadvice they can put into action this week!
Q. OK, for the starting investor, what is the best kind of fund to buy?
A. Well, "the book" says for a young person, buy a growth fund. I wouldsay a VALUE-style growth fund, so you don't get too scared in down marketsand quit at the bottom. I would actually rather suggest a Balanced fund,since these give you 2 asset classes in one package (bonds and stocks) andare less volatile so you will be less likely to panic in a low market.
Q. OK. How about some rules for more experienced investors?
A. Many people want to forget the past 2 years, but I say just theopposite:YOU PAID SOME HEAVY TUITION, SO REMEMBER WHAT 1999-2000 TAUGHT US.
Q. And what would those lessons be?
A.
- DIVERSIFY
- SELL WHAT HAS GOTTEN JUST TOO GOOD TO BE TRUE
- SET SOME LIMITS ON LOSSES WHEN YOU BUY
Q. Let's go over those one at a time.
A. When you diversify, you reduce the volatility of your overall wealth.That protects you from getting too excited at the highs and too scared atthe lows and doing something dumb. Diversification means asset classes;bonds, stocks, money funds; value vs. growth, large-cap vs. small. Maybeeven a touch of overseas money in the mix. And diversifying ALSO meansmore than buying different BRANDS of funds: they need to be truly differentKINDS. People who had 6 different brand labels on 6 aggressive-growthfunds were NOT diversified, as they discovered.
Q. What about selling the good stuff? That seems counter-productive.
A. I don't mean trading short-term for small gains. I do mean havingrealistic expectations: if something goes up 40 or 50% in a year, that isnot likely to be sustainable. You will never get the exact top, so stopworrying about that. Take profits that are unreasonably pleasant. Wheneverybody loves the market, that's time to cut your exposure! Over thelong term, stocks and equity funds will return about 10-11% a year. Waybeyond that is too much to expect. Leadership rotates from one area toanother, so those 40%+ runs generally do not hold.
Q. And setting limits on losses?...
A. The best way to make money is not to lose much of it. Mutual funds donot let you put in stop-loss orders, as you can with stocks. So maybe youshould buy some ETFs, which trade on the exchange, so you CAN put in stoporders. I would say down about 15-20%, and keep moving the limit up as theprice rises. When you buy funds, make a note at what price you will get outif things go badly. Sometimes a small early loss is best. Ask your friendswho own dot-com stocks. As a loss grows, we have MORE trouble selling, sowe really DO need early discipline!
Q. OK, enough about selling. How about some buying rules?
A. I'd say the first one follows from my rule about selling what's veryhot... DO NOT BUY WHAT'S BEEN RED (or white!) HOT and EVERYONE IS BUZZINGABOUT. BUY THINGS ON THE BARGAIN COUNTER THAT NO ONE LOVES.
Q. That's hard to do, though....
A. Absolutely. I think of it in terms of crowds forming: that happensonly LATE in a price move, up or down. Buy what clearly DOES have adefinite long-term future, but is presently out of favor. Not what thecrowd loves.
Q. Any specific suggestions for 2002, Don?
A. Well, these are personal ideas and not Lipper recommendations...
- Europe Funds
- International Funds
- Inflation-Indexed Bond Funds
- Healthcare Funds
...none is in favor right now.Q. Any other rules for the road in 2002?
A. Yes, I would sum up much of what we've discussed with this: BE CAREFUL THAT YOU ARE NOT MOVING TOWARD COMFORT ZONES IN INVESTING
Q. Explain...
A. You need to be contrarian to buy low and sell higher. Whatever hasbeen happening for a long while already is more likely to reverse thancontinue. Comfort in the first quarter of 2000 was shoveling money intotechnology funds and buying stocks on margin. That proved to be a markethigh. Comfort last March and the week after September 11 was "get me outand into cash, it's too scary in stocks." That was a bottom. Doing whatis UNcomfortable emotionally will provide financial comfort later on. Whenmonthly net flows into or out of stock funds get extreme, take oppositeaction.
Q. How can people start looking for the specific funds they should bethinking about buying?
A. Well, I would think asset allocation first, to get the right KINDS offunds. Then I would GO TO WWW.LIPPERLEADERS.COM and look for funds with good consistencyand preservation ratings. That's definitely a good place to start.
Q. Sounds like some good new year's resolutions, Don.
A. My way, and Lipper's, of wishing all our friends a prosperous andhappier new year.
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Don Cassidy is a Senior Research Analyst at Lipper specializing in fund flows, exchange-traded funds, (ETFs), closed-end funds, equity fund performance, and author of Trading on Volume (McGraw-HIll).
To read more Don Cassidy Interviews, please visit the column archive.
