How should you invest in 1988?
The Times asked six leading financial experts to decide how they would invest $10,000 for 1988, in both conservative and risky portfolios. While specific recommendations varied widely, one sentiment emerged: This year's investment climate demands basic investments that stress liquidity, safety and diversification.
Why? The economy is in flux. No one really knows for sure whether interest rates, the dollar, inflation or other key indicators will go up or down. Experts are sharply divided on whether there will be a recession soon and whether stocks, bonds, gold and other investments will shine.
Lacking a foolproof crystal ball, all experts advise keeping at least some money in safe and liquid investments such as money market funds, Treasury bills or bank accounts, where it can be tapped for an emergency or used as a war chest to take advantage of investment trends that emerge. These cash equivalents also serve as good hedges against recession, deflation or other hard times.
For diversification, experts generally agree that investors should keep at least some money in stocks or stock mutual funds, positioned for a possible rally. Some also like inflation hedges such as real estate investment trusts or gold bullion coins.
Here are the experts' picks:
Siebert, chairman of a New York discount brokerage bearing her name, in 1967 became the first woman to purchase a seat on the New York Stock Exchange. Her advice: Play it safe this year with your initial monies, but also position some funds to profit from a rebound in the stock market.
For a conservative $10,000, Siebert recommends putting $5,000 into a six-month certificate of deposit or money market fund. "Everybody needs $5,000 in the bank where you can get at it fast," Siebert advises, although she did not recommend a specific bank or fund. The national average yield on six-month CDs is about 7.25%, while money market funds are yielding an average of 6.69%.
Her other $5,000 in the conservative portfolio goes into a no-load mutual fund investing in mortgage certificates backed by the Government National Mortgage Assn. (Ginnie Mae). These funds, now yielding anywhere between 8% and 12%, are a good source of steady income, although there is risk that the yields and share prices won't hold up. She did not recommend specific Ginnie Mae funds, but most major fund companies offer them.
For her risk-oriented $10,000, Siebert likes $5,000 in a mutual fund investing in high-technology growth stocks. The other $5,000 should go into a mutual fund investing in general growth stocks. Both of these types of mutual funds performed poorly in 1987 but have the potential to profit nicely if the stock market rallies, Siebert says. Again, she did not recommend specific funds in either category, but many major fund companies offer them.
Martin E. Zweig
Zweig, one of several market gurus who was decidedly bearish before the crash, is publisher of Zweig Forecast, a New York-based newsletter that is rated tops in performance since 1980 by Hulbert Financial Digest, a leading newsletter ranking service. His stance: Be bullish, at least for now, on stocks and long-term bonds because interest rates will fall early in 1988 as the economy slows down. But be flexible if conditions change. "I'm liable to turn bearish and sell something this year," he says.
For a conservative $10,000, Zweig advises one-third in a cash equivalent such as Treasury bills (although individual T-bills are usually sold at a minimum of $10,000 face value). The other two-thirds, he says, should be in Treasury bonds with maturities of 20 to 30 years. They now yield around 9%, "a big premium over the inflation rate," although they could fall in price, as they did last year, if interest rates rise.
For his risky $10,000, Zweig likes $4,000 in a cash equivalent such as Treasury bills, with the remaining $6,000 split evenly among three stocks: Walt Disney Co. (NYSE, current price $59.25); Northwestern National Life Insurance Co. (OTC, $22.875), and Baxter Travenol Laboratories (NYSE, $22.75). He likes these stocks based on their higher earnings potential. "They will do OK if the market does OK, but not if the market goes down."
William G. Brennan
As editor of Brennan Reports, a Valley Forge, Pa., tax and investment newsletter, Brennan is a leading expert on tax-oriented investing and limited partnerships. His view: Position yourself with quality investments that can capitalize on any scenario, because who really knows whether inflation and the economy will move up or down?
For a conservative $10,000, Brennan suggests $4,000 in Treasury bonds maturing in August, 1994, currently yielding 8.61%. He puts another $4,000 in Treasury notes maturing in June, 1991, now yielding 8.17%. Both have little risk of losing value if interest rates should rise. Another $1,000 goes into American Eagle gold coins (now about $512 for a one-ounce piece) as an inflation hedge. The last $1,000 goes into Vanguard Money Market Trust-Federal Portfolio (800-662-7447), a money market fund investing only in government-backed securities. Its current yield: 6.85%.
Brennan spreads his risky $10,000 into a combination of real estate investments and stock mutual funds. Specifically, he likes $1,500 in EQK Green Acres, a master limited partnership traded on the NYSE (current price $10.875). It invests in a Long Island shopping mall and currently yields about 10.5%. Another $1,500 goes into Health Care Properties, a real estate investment trust traded on the Big Board ($27.50). It invests in nursing homes and yields about 8.9%.
Another $2,000 goes into VMS Strategic Land Fund, a new REIT traded over the counter ($9) investing in mortgages on land. He expects it to yield about 12% in its first year or two. Brennan places the next $2,000 in Angeles Finance Partners, a master limited partnership traded on the American Stock Exchange ($14.875). It invests in short-term mortgages on commercial and residential properties and yields about 13%.
Brennan splits his last $2,000 evenly between two closed-end stock mutual funds traded on the NYSE. Closed-end mutual funds don't issue new shares like conventional mutual funds; investors profit when share prices rise. The first, Zweig Fund, is trading at $9, about 10% less than its net asset value. The second, Gabelli Equity, is trading at $7.625, about 19% under its net asset value.
William E. Donoghue
As publisher of Donoghue's Money Fund Report and Donoghue's Moneyletter in Holliston, Mass., Donoghue is a leading guru on money market funds and other mutual funds. His outlook: Play a mix of mutual funds in domestic and foreign stocks and foreign bonds, because stocks represent good values now and the dollar will continue to fall.
For his conservative $10,000, he puts $8,000 into Vanguard Money Market Trust-Prime Portfolio (800-662-7447), a money market fund with a current yield of 7.31%. His next $1,000 goes into T. Rowe Price New Era Fund (800-638-5660), which invests in stocks of natural resource companies that will benefit from higher inflation. The fund gained 15.89% in 1987 through Dec. 23.
His last $1,000 in the conservative portfolio goes into T. Rowe Price International Bond Fund (800-638-5660), which invests in foreign and U.S. bonds and is poised to capitalize on further declines in the dollar. The fund gained 22.82% in 1987 through Dec. 23.
Donoghue splits his risky $10,000 into three equal parts, one third into T. Rowe Price International Bond Fund and one third into T. Rowe Price New Era Fund. He bets the last $3,333 on T. Rowe Price International Stock Fund (800-638-5660), which invests in foreign stocks and gained 7.82% in 1987 through Dec. 23, thanks to the falling dollar.
Edward A. Taber III
Taber is head of T. Rowe Price's taxable-bond division and portfolio manager of its International Bond Fund, the top performing bond-oriented fund in 1987, with a 22.82% gain through Dec. 23, according to Lipper Analytical Services. His prescription: Go heavy into foreign bonds, since the dollar could fall another 10% to 15% in 1988, boosting values of overseas securities.
For a conservative $10,000, Taber suggests a diversified mix of high-quality, short- to intermediate-term foreign bonds. Specifically, he likes $5,000 in one- to two-year Japanese governments, yielding about 4%; $3,000 in five- to 10-year West German governments, yielding about 6.5%, and $2,000 in two- to five-year British governments (also called gilts), yielding about 9.5% to 10%.
However, Taber notes that few U.S. brokerages are equipped to sell these bonds to retail customers, so he suggests that investors buy international bond mutual funds. Most of these types of funds, including his own, carry these bonds in their portfolios.
Taber puts all of his risky $10,000 into T. Rowe Price New Horizon Fund (800-638-5660), which invests in stocks of emerging small-capitalization growth companies. These stocks, he said, "haven't been this undervalued since 1973-74," and thus are poised to benefit from a market rally.
Robert K. Heady
As publisher of Bank Rate Monitor, a newsletter in North Palm Beach, Fla., Heady is a leading expert on bank rates and trends. His strategy: Stick with high-yielding, federally insured savings accounts, which pay handsomely with no risk. "With the shock waves of Black Monday, you should stress safety," he says.
Heady suggests investing both the conservative and risky $10,000 into a high-yielding, federally insured bank money market deposit account. One bank, First Deposit National Bank of Tilton, N.H., (800-821-9049) is paying an annual yield of 9% on the account, available for a minimum deposit of $5,000. That promotional yield is likely to fall on Jan. 31 but should still be in the 7%-8% range, making it still among the top-paying banks nationwide for that account.
The beauty of such accounts is that funds can be withdrawn at any time without penalty, perhaps moved to another federally insured bank paying a higher rate. "Why take a chance on losing anything (in stocks or bonds) if you can earn that much?" Heady asks, noting that deposits of up to $100,000 are insured by the U.S. government.
Those who can afford to tie up their money for a short while might instead put their $10,000 into a high-yielding six-month CD to lock in a high rate, Heady suggests. A six-month CD at Peoples Savings & Loan in Llano, Tex., (800-362-9175) yields 8.59%, with a minimum deposit of $1,000.