Gems of Wisdom for a Portfolio That Shines
Nearly two dozen top mutual fund managers gathered in Chicago earlier this month at a conference sponsored by Morningstar Inc., the fund-rating organization.
They talked about their favorite stocks, their favorite bonds, market conditions and all sorts of indicators, statistics, ratios and other financial flotsam and jetsam that may or may not ultimately lead to investment success.
But in addition to all the analyses, forecasts and numbers, several managers also articulated some simple gems of investment wisdom that fund buyers would be wise to heed.
Here’s a taste of what they said:
* “The easiest way to lose money is not to know what you’re getting into.”
This comment was made by Brian Posner, manager of the Fidelity Equity-Income II Fund. It came in response to a question about why he does not own many foreign stocks. But it could equally apply to investors moving into risky stock or bond mutual funds without understanding what they are buying.
The fact that pros like Posner admit to gaps in their financial knowledge and invest accordingly is something for part-time investors to think about.
* “To be successful, you need to have some core beliefs.”
Dick Weiss, co-manager of two equity portfolios for Strong Funds of Milwaukee, emphasized the need for people to think for themselves. Those who do not could get swept up by the market’s current emotional wave or the latest financial fad.
* “Avoid funds where the portfolio manager makes significant changes after long periods of under-performance.”
This comment was made by William Dutton of Chicago-based Skyline Special Equities, who was named Morningstar’s 1992 fund manager of the year.
The point here is that managers should have enough conviction to stick with a chosen approach through good times and bad. Those who chart a consistent course will be positioned for the rallies that invariably follow the declines.
* “Buy funds that trade as infrequently as possible.”
This idea, advanced by Robert Sanborn of the Oakmark Fund in Chicago, relates to a fund’s transaction-oriented expenses. In short, heavy buying and selling of stocks or bonds will tend to boost the portfolio’s costs and could point to considerable indecision on the manager’s part.
High turnover does not necessarily go hand in hand with poor performance, but it is something for investors to watch.
* “You can’t expect to forecast interest rates very well.”
It’s exceedingly difficult even for professionals to do this consistently. So conservative individuals might as well favor bond funds--with their higher yields--over safer but less generous money market instruments, argued Daniel J. Fuss, manager of the Boston-based Loomis Sayles Bond Fund. “Bonds will outperform cash over time,” he said.
Rising interest rates would lead to lower bond fund prices, of course, but sharp rate movements are not that common.
Expressed another way, you could accept roughly a one-percentage-point rise in interest rates with bond funds and still break even compared to holding a money market fund, said Randy Merk, co-manager of the Benham GNMA Income Fund of San Mateo, Calif.
* “Reinvested dividends are the catalyst that makes the machine run.”
This comment was offered by Harry W. Miller of the USAA Mutual Income Stock Fund in San Antonio. It alludes to the higher returns you can earn by reinvesting dividends and capital-gains distributions into additional fund shares.
How much extra punch will this deliver?
According to Miller, a $1,000 investment in stocks mirroring the Standard & Poor’s 500 at the start of 1963 would have grown to $6,900 by 1992 if you immediately spent all dividends and distributions. But with full and automatic reinvestment, the same stake would have swelled to $22,000.
* “Risk is just a matter of time.”
William Berger of the Denver-based Berger 100 Fund made this statement to explain the virtues of long-term investing. His point: Giving a stock mutual fund more time to perform reduces your danger of loss.
When Berger entered the business in 1950, the Dow Jones industrial average had just pushed above 200. Now it stands closer to 3,500--having survived numerous bumps, bruises and apocalyptic forecasts along the way.
Berger said he does not worry about the market’s direction because stocks will eventually follow their earnings to higher ground.
“What tiny blips (past bear markets) are now.”
Risk: A Matter of Time The longer you hold on to a stock mutual fund, the greater your chances of making money, as portfolio manager William Berger noted during a recent conference.
Based on historical annual returns for large and small stocks dating to the mid-1920s, here’s the likelihood of suffering losses in any given one-, five- or 10-year period. One-Year Period
30% chance of loss for large stocks.
31% chance of loss for small stocks. Five-Year Period
8% chance of loss for large stocks.
14% chance of loss for small stocks. 10-Year Period
3% chance of loss for large stocks.
3% chance of loss for small stocks. Source: Ibbotson Associates, Chicago.
