LIPPER SENIOR RESEARCH ANALYST DON CASSIDY ON KTLK AM-760
Thursday, Oct. 4
Q. Well, Don, a lot of people are saying the 3 months ended Sept 30 was "aquarter to forget" -- as soon as possible!A. I can understand that sinking feeling, but I think there actually aresome things people should try to REMEMBER.
Q. You old contrarian! Such as...
A. Sports coaches tell us athletes gain and learn a lot more from mistakesand losses than from winning easily. I think that can be applied on WallStreet as well. And the biggest lesson to remember is diversification.Investors who stuck to a discipline were spared a lot of pain. Any kind ofreasonable discipline would have told someone to lighten up on stocks latein 1999 or around the top in early 2000, and ESPECIALLY to reduce theirweightings in technology funds and stocks. It would not have seemed likefun at that time, but smart moves never do!
Q. Is there any sort of rule of thumb for creating a discipline like youare describing?
A. Sure. A good one is the "Rule of 110." Subtract your age (in years)from 110. The resulting number is the percentage of your assets you shouldhave in equities. The rest should be in bonds and money market funds. Soa person age 40 would want 70% in stocks and stock funds. A super highmarket like last year's would have pushed that person to maybe 90% or morein stocks, and the rule said they should have cut back. Those investorsMOST exposed to technology funds and stocks would have been furthest abovetheir target, and would have cut back the most. See how it works?
Q. And NOW...?
A. Quite possibly the depth of the recent market drop has taken a lot ofpeople down to where they are now UNDER the line -- holding LESS instocks/stock funds than they should. A discipline such as I describedwould tell them they need to BUY stock funds with any new money, and toshift assets AWAY from (!) safer-feeling bond funds and money markets.
Q. But that is exactly the OPPOSITE of what people have been doing in themarket lately, Don!
A. Totally accurate. But most people, meaning the crowd, notoriously buyhigh and sell low and fail to buy near bottoms when things look scary.What feels comfortable emotionally works badly for long-term financialsuccess and comfort. Comfort 18 months ago was being fully invested in thehottest areas. Comfort at the lowest point for stocks is being in cash.
Q. Right now a number of listeners are calling and asking about goldfunds; your thoughts?
A. Not surprising. We are getting the same from the media at Lipper. Goldhas heated up because people are afraid. It does that in time of war,inflation, and extremely weak stocks. For the past 12 months, gold fundshave been THE hottest type (except for the few SHORT funds), gaining 21.1%.But if you look long term, the returns are pretty sad. INCLUDING therecent 21% rise, gold funds are down almost 53% over the past 5 years. Forthe past 15 years they are still down 22.5% after this latest recovery, andthat period includes TWO war scares! Short of a doomsday scenario orrampant inflation, I believe buying gold funds right now will prove badlytimed. They jump in short spurts and then fade lower for long periods.You don't make money doing what looks obvious, or chasing strength.
Q. What about those short funds? The Grizzly Short fund is up 50%!
A. True. But long term, stocks return about 10-11% a year, by RISING.Short of a very negative longer-term economic picture, how far FURTHER downcan the stock market go? Again, this represents doing what now seems soeasy and obvious, following the latest established trend, and history tellsus that that means the idea is late. Stocks will be down again for 2001,making it 2 years in a row. Only twice in the whole 20th CENTURY didstocks drop more than 2 years running!
Q. So you are basically saying buy rather than sell... but buy WHAT?
A. Unfortunately I can't make a good case for technology stocks or funds.They are not cheap yet, and there is little earnings visibility going intoa likely recession. For those who want to be aggressive, think aboutbiotechnology funds, maybe even leisure sector funds once the travel scarepasses. Do you really think smart terrorists are going to try anotherairplane thing? I doubt that.
Q. What about people who are a little more cautious?
A. I should of course say that all these are personal ideas, not Lipperrecommendations, since Lipper does not give investment advice....but lookat Balanced funds if you are cautious. Roughly half bond and half stock.Likewise, similar idea: look at convertible securities funds. They giveupside potential but with some downside protection from the yields. BuyVALUE funds rather than growth style. And probably there is stillsomething to be said for Real Estate funds, which have a good yield toprotect the underlying stocks' prices.
Q. Anything you'd AVOID, Don?
A. Definitely high yield bond funds. They always seem to have surfaceappeal, but in a recession you can expect heavy defaults, and that destroysprincipal and also reduces income below what first sold you on buying them.Wrong time in the economic cycle for those!
Q. Back to the 3rd quarter: how bad WAS it in comparison to past swoons?
A. Just about as tough as it gets! Average stock fund lost 18% in 3months. In Q4/1987, including the crash, that was 22%. In the war-prepquarter of summer 1990, it was 20%. So we're well out there in the curve.As of last Wednesday, before this rally started, over 97% of stock fundswere down for the year to date. That indicator hit 99% in November 1987,and that was a great time to buy, although it sure felt scary. Only ONEtype of stock fund out of 42 we track has been up in either of the last 2quarters: Gold Oriented funds. Year to date, only Gold Oriented and RealEstate funds are up. Those kinds of extremes don't last for long. At thetop 18 months ago, every kind of stock funds was UP. Do you see a patternthere? Extremes don't last.
