Making Money Alert
Nearing Critical Mass
04/04/2007
We are at a point of critical mass in the market right now.
The strong uptrend that took shape in fourth quarter 2006 spilled over into first quarter 2007. But the 416-point drubbing in the Dow Jones Industrial Average on Feb. 27 put an end to what until then seemed to be unabated upside.
Let's take a look at a one-year chart of the S&P 500. Here we see evidence of the dramatic selling that took place at the end of February, as well as the heavy volatility we experienced throughout March.
After correcting about 6% off its highs to begin the month, we now have witnessed a rally to nearly 1440 on the index. In recent days, the market seems to be trying to break out above its previous highs.
I think that if we can push through to the upside and move firmly above the pre-Feb. 27 highs, it will be a very positive sign for the continued health of this bull market. If, however, the market falls from here -- and especially if we see a decline on heavy-selling volume -- it very likely will slip toward its March lows.
One factor affecting the market, especially during the past week, has been oil prices. The brouhaha between Iran and the United Kingdom over the Royal Marine hostages has made energy traders very nervous. Since the incident broke, we've witnessed a sharp spike in the price of crude oil. In the chart below, United States Oil Fund LP (USO) shows that trend.
Crude oil prices slipped back down to $64 a barrel today, after Iranian President Mahmoud Ahmadinejad announced that he would release the 15 British sailors that his government has been holding captive. But the whole incident demonstrates both how volatile and how susceptible energy prices can be to geopolitical forces.
One way to take advantage of this volatile sector is to own the stocks that benefit from higher oil and gasoline prices. The stocks that I am talking about here are the big oil companies. And, those big oil company stocks can be found in one easy-to-own exchange-traded fund (ETF) that contains a "basket" of the best energy suppliers out there.
Right now, my Successful Investing advisory service is profiting from an allocation to this ETF. If you would like to find out more about how to take advantage of the volatile energy sector, click here.
HOW DID YOUR FUND DO LAST QUARTER?
Last Friday marked the end of the first quarter and most of the major financial publications and web sites are replete with the usual end-of-quarter mutual fund wrap-ups.
The basic theme that I kept seeing was that 90% of stock funds rose (no big surprise here, given the market's 1Q spike). The average equity mutual fund was up about 2%. While this is great news for mutual fund owners, you have to go a little deeper into the results of the funds you own if you want to see what's really happening.
It is one thing to think in general terms, but it's an entirely different matter when you are assessing the performance of your own fund or funds. Often, the funds many people have aren't performing as well as their benchmarks, which should be the true measure of a mutual fund's efficacy. To get a read on how your funds are doing, all you have to do is answer a few simple questions.
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What type of fund do I own?
Do you own large-cap growth, small-cap value, international or other fund categories? If so, you need to know what the benchmark index is for each, if you are going to complete an apples-to-apples comparison. - How is my fund doing?
How has your fund done in the past quarter? Sure, it may be higher, but has it outperformed its benchmark? What has been its performance during the past year? How has it done during the past three and five years?
In the table below, we see the performance of one widely held mutual fund, the Fidelity Magellan fund (FMAGX). This fund uses the S&P 500 index as its benchmark. As you can see, save for the past month, Magellan has woefully underperformed its benchmark.
TRAILING RETURNS (%) VS. BENCHMARK | |||
RETURN | FMAGX | S&P 500 | DIFF |
| 1-Month | -1.65 | -1.96 | 0.31 |
| 3-Month | 0.65 | 0.92 | -0.3 |
| 1-Year | 5.1 | 11.97 | -6.9 |
| 3-Year | 6.5 | 9.1 | -2.6 |
| 5-Year | 4.43 | 6.82 | -2.4 |
You would have been much better off with the SPDRs (SPY), an ETF which mirrors the performance of the S&P 500. Plus, SPY's expense ratio of 0.10% saves you a lot of money, since Fidelity Magellan carries an expense ratio of 0.56%.
- What would be a comparable ETF?
Knowing the ETF alternative of your fund or funds is critical to maximizing gains in your portfolio. Because ETFs carry far lower expense ratios than most mutual funds, you can be sure that the performance you are getting is going to come at a very attractive price. Plus, because ETFs are objectively managed, you won't have to worry about paying for underperformance. With ETFs, you basically get the performance of the market -- all at a very low cost to you. Since most fund managers generally fail to beat their benchmarks, it just makes more sense for you to invest in the appropriate ETF alternatives.
To find out how your fund performed last quarter, or to determine your fund's benchmark index, go to the Mutual Fund Center.
ARE YOU RELYING ON REAL ESTATE?
In last week's Alert, we discussed how the worst-case scenario in the housing market could affect your wealth. I outlined the 10 points you should be aware of as we begin to weather the subprime lending/housing storm.
As a follow up to those points, I want to add a word of caution for those Alert readers who are relying on their real estate holdings to fund their retirement. Many people I've spoken with in the past several weeks are counting on their real estate holdings to provide them with an income stream when they finally hang up their work boots. There is nothing wrong with this plan, as long as you are aware of what could happen if things go south in the real estate market.
One thing I think many people approaching retirement aren't considering properly is tax status. Many people are under the impression that they will fall under a lower tax bracket once they stop getting income. Unfortunately, if you are getting substantial income from real estate, your tax bracket may not change much. The lower taxes you probably were counting on paying may not be in effect.
I bring these tax bracket considerations up because it is just one of the many complicated considerations you need to be aware of when relying on real estate for your retirement income stream.
If this information is new and/or confusing to you, it really needn't be. I recently conducted a workshop with Making Money Real Estate Expert Josh Lewis, who can answer questions about how to get the most out of your real estate in retirement. This seminar is available online, free of charge.
I invite all of you who are even remotely interested in how to properly plan for retirement to check out this seminar. Hey, it's free, and it's just a mouse click away.
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WISDOM FROM THE COACH
"Most men, when they think they are thinking, are merely rearranging their prejudices."
—Knute Rockne
When it comes to your money, one of the worst things you can do is to rearrange your prejudices to justify your action -- or in many cases, inaction. If you currently are holding on to a big losing position, often the best medicine is to sell and take your lumps. You then can rotate your money into better opportunities. Those new opportunities hopefully will allow you to recover from your losses and then some. Remember, rearranging prejudices is not thinking. And, not thinking when it comes to your money can really harm your wealth.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.