Expert: Paul Henneman - 1/26/2009

Question
QUESTION: Hello Sir - I'd like to first thank you for offering up your expertise.

My question involves personal investing and the adequacy of a current strategy.

A little background: I am in my mid 30s and self employed (no company sponsored accounts to partake in).  I began investing completely in mutual funds about six months before the recent economic turmoil began.  I have zeroed in on eleven no-load, low cost funds - basically holding the same amount of money in each.  These consist of large growth, large blend, mid cap value, mid cap blend, mid cap growth, small value, small growth, foreign large blend, intermediate term bond, specialty real estate and specialty natural resource.  

Over the last few months, I have attempted to add to each of these with the hopes of averaging down my losses.  And, of course, with the hopes we will soon hit a bottom.  

My questions are: Is this a smart strategy?  Is there something else I can or should be doing (other types of investments and or strategies)?    

Many Thanks,
MJ

ANSWER: MJ,
   Thank you for your question! Yes, you are think about this correctly I believe. Many investors make a terrible mistake: They ride a bear market all the way down, finally become so worried over their losses, that they sell their investments into cash, just as the markets rebound. The successful investor does their best to think about the market rationally, and NOT follow the herd to the slaughter.
   Yes, averaging out your losses with continued investments each month is a sound strategy. I do have to say that the current economic problems are not likely to be solved in the next year. It will take longer. How much further down the market has to go, or if it is at bottom, is always impossible to say. Just be aware that it is possible to see further declines.  
    You are in your mid 30's so you have decades of investing to look forward to before retirement. You could look at this as a buying opportunity. It will take time, but down the road this will all fade and investments will grow again. Perhaps it is good to keep some of your investments in very safe vehicles, such as CD's (certificate of deposits) during this time of uncertainty. Inflation is virtually flat these days, making CD's a more attractive option even at just the few percent in return they offer. The benefit is that they are perfectly safe. Be sure that the institution where you purchase the CD's is FDIC insured.
   The only other suggestion I have for you is to consider ETF's (exchange traded funds). These are often a great way to invest. In some ways they are similar to mutual funds, but often have lower fees. For example, if you want to invest in something that tracks the S&P500 index, the ETF with the ticker symbol SPY is a great way to do it. Here is a link that gives the details on what ETF's are:

http://en.wikipedia.org/wiki/Exchange-traded_fund

    I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service, and I wish you the best!

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com



---------- FOLLOW-UP ----------

QUESTION: Paul - I appreciate you response (and the reinforcement of my current strategy) (although I do understand that nobody, unfortunately, has a crystal ball).  

So you mentioned CD's (which is something I've considered) - but from what I've seen, most CD's are offering less than 3 percent....and require the money to be tied up for a period of time (6 months, 1 year, 3 years, etc.).  I understand these are safe - but what makes these more attractive than an online bank savings account that offers slightly above 3 percent with no minimum and no fees (and immediate access to the funds if needed)?  Am I missing something?

Thanks also for the ETF tip - I'll give them a look.  So you think it's a good idea to begin funding one of these...along with my other mutual funds?  That would put me at 12 separate funds.  Too many?  

Regards,
MJ

ANSWER: Thank you MJ for the follow up!
  Yes, a savings account with good interest payments should be fine for a safer investment. You are probably referring to a money market type account? These can offer close to CD rates, and can function almost exactly like a savings account. I just checked CD rates, and they are very low. A few months ago this would have been a better option, usually CD rates are a few percentage points better than a savings (or money market) account. You are right, that does not appear to currently be the case.
   The number of investments you have is up to you, yes 12 is alot is alot to manage and track. It depends a bit on how much you have to invest. I like ETF's because they have no minimum investment, are easy to trade (trade like a stock interday), and there are so many available now you are certain to find ETF's that fit your needs. They do trade interday like a stock, as opposed to mutual funds that price at the end of the day. This is not a big deal unless you trade daily, just thought I would mention it.  You may want to compare the expenses of ETF's with mutual funds, they usually are better.  You could also sell off one or more of your mutual funds and fund a similar ETF instead, if you find some that fit the same need. For example, if you are in any index mutual funds that track an overall index, there will be ETF's that do the same thing.
  The main thing is don't make any quick decisions, do your research and take your time. You clearly have a well thought out approach, and the markets will continue to be very volatile for some time to come (a year or more). Always keep your long term goals in mind, unless you put a huge amount of time into your investments trying to trade for the short term will hurt performance.

I hope that this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com


---------- FOLLOW-UP ----------

QUESTION: Hello Paul - Thanks again for your assistance - and I actually have one other item that I was hoping you could shine some light on.  As I mentioned, I am self employed and hoping to ensure a safe retirement without the assistance of a 401 or any other business related benefit (at this point, focusing on mutual funds) -
So...do you have any input on how one should be structured in order to maximize positions with respect to taxes?  If you don't mind - I'd be very interested to hear your thoughts on two different examples:
1) I am hoping to get the most bang for my buck over the next few years in order to have a partial (or full) retirement in, lets say, five to ten years(and maybe continue to work part time).
2) I am planning to work until the usual retirement age.

I do understand there are many (many) variables that come into play (standard of living, current amount saved/invested, etc.) - but I hope you still might be able to provide some of you expertise.

Very Much Appreciated -

Answer
Thank you for the follow up question!

The big issue here is if you are holding as much as possible of your investments in an IRA or ROTH IRA account. These are tax deferred accounts. I would be happy to discuss these in more detail if you are interested, there are huge tax advantages to investing through these types of accounts. You may be doing this already, but if not please follow up with me and I will reply with some general information to get you started thinking about this type of account.
The other thing that you could consider are annuities. These can be structured to be conservative or aggressive, and can also grow tax deferred like an IRA or ROTH IRA account. There are many different ways to set up an annuity or variable annuity, it will require some research for you to make sure you are doing what is in your best interest. Far more information is needed than I can provide here, but the basics are that an annuity is an investment medium that you put money into, you can choose from a variety of investments ranging from conservative to aggressive, and the funds typically grow tax free until you withdraw after retirement. You do pay some taxes when you withdraw, and there are penalties if you withdraw before retirement age. There are fees for this type of account that go to the insurance company, and at some point you 'annuitize' the account, where you begin monthly withdrawls, If set up correctly, it can provide monthly income after retirement.  Most insurance companies offer annuities.  I am not an expert in this, but I do suggest you read up on this form of investing, and possible speak with a few agents at different insurance firms to see what they have to offer.  Also, here is a link to get the basics, so that you can at least begin to form the right questions to ask an insurance agent:
http://invest-faq.com/articles/ins-annuities.html

As I mention above, if you are not using any type of IRA account currently, please follow up with me!

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com