Some Gold Fund Managers Wary of Buying Gold
Looks like some gold fund managers are as pessimistic as we are about the yellow metal. Many are hording much of the cash that performance chasing investors threw at them after gold fund's hot run of the last few years.
With gold headed back toward its highest level in decades, why are so many gold fund managers holding so much cash?
Take Frank Holmes, chief investment officer at U.S. Global Investors in San Antonio. His $250 million Gold Shares (USERX) held 16.4% in cash as of Dec. 31, while the $1 billion World Precious Minerals (UNWPX) had 14.5% of its assets in cash at year's end.
While it might seem like a fund with that much money on the sidelines would have missed out on gold's rally of 20% from its low of around $560 an ounce last October, Holmes says it has provided much needed flexibility.
"What happens is that when the stocks really get clobbered, I have the money to buy them," the fund manager says.
Another reason for big cash sake is that hot money fund investors are just as quick to turn tail when gold loses some luster. The manager of a fund inundated with hot money typically has to keep cash around to meet fast liquidations – otherwise the manager would have to sell fund investments which increases fund turnover and trading commissions and other costs. US Global Investors World Precious Minerals (UNWPX) fund currently has a hot money of 5 (the worst).
This needed cash cushion is one reason funds with high hot money ratings tend to under-perform going forward. Hot money in these funds in general is the main reason why our current category rating for precious metals funds is just 25 out of 100 (poor).
Our Favorite precious metals funds:
Ask MAX: Gold or Silver
Wendell from Florida Asks:
I hear a lot about buying gold, but what about silver? Is it a better buy and will it appreciate more quickly?
Gold gets most of the precious metals investing attention because gold bugs and other crazed anti-central bank fanatics think that gold is money, not a mere commodity like silver or platinum. Get these quacks going on about the good ole’ days and they will wax poetic about how unstable the world has become since we got off the gold standard — ignoring the 13-fold increase in stock prices and explosive growth in the economy that has happened since Nixon put the gold standard to rest for life (we hope). Meanwhile, gold and silver are still cheaper than they were over twenty years ago. ...read the rest of this article»
Think Outside the 401(k)
One thing we've learned while reviewing client's 401(k) plans for our MAXadvisor 401(k) Planner service: a lot of 401(k) plans are really lousy. Some offer only expensive or otherwise poor mutual fund options. Other plans lack variety, making it tough to build a well diversified portfolio. What do you do if you need small-cap exposure, but the small-cap choices in your 401(k) are either terrible or non-existent?
A common mistake people make is to balance their 401(k) and to make certain it's diversified among various asset classes," says Gary Schatsky, an attorney, CPA and former chairman of the National Association of Personal Financial Advisors. "It does not need to be balanced. Your investments do."
That means if you have some money to invest outside your 401(k), you can put it to work in the foreign stock fund of your choice and use the money inside your 401(k) plan to get exposure to other asset classes.
Ideally, you can purchase the investments that aren't available in your 401(k) through another kind of tax-deferred account, such as an individual retirement account, to maximize the effect of compounding returns."
And if you decide you need to look outside your 401(k) to build a properly diversified portfolio, a little forethought can save you a bundle in taxes:
One thing to keep in mind when you're looking at your total portfolio is that different kinds of investment returns are taxed at different rates. Interest and short-term capital gains are taxed at rates as high as 35%, depending on an investor's income. But most investors pay 15% on qualified dividends and on long-term capital gains, or the appreciation on an investment held for more than a year.
So it makes sense to put investments that generate the biggest tax bills, such as taxable bond funds or funds that turn over their stock holdings frequently, in tax-deferred accounts.
Ask MAX: Should I Invest in a Loaded 401(k)?
Yousef from Idaho asks:
I recently started my first job that has offered a 401(k) plan, and I was very excited to begin investing. The problem is, the funds in the plan are load funds, and after being a fan of your site I know that load funds should be avoided at all costs. Should I invest in my company's loaded 401(k) plan?"
We've reviewed hundreds of 401(k) plans for our Private Management clients and for investors who have used our MAXadvisor 401(k) Planner service. While many of those plans offer funds that normally charge a sales load to investors outside of tax-deferred accounts, the vast majority of those plans waive the regular load charge to people who invest through a 401(k) plan. We've often seen Templeton funds offered without a load charge through company-sponsored retirement plans that would cost investors 5.75% if they bought it at Etrade outside of their 401(k).
There are, however, some very lousy 401(k) plans out there that do, inexplicably, force participants to pay load charges. The dubious rationale behind paying load charges is that some investors need help choosing the funds that are best for them from the ten-thousand plus funds available. How this rationale holds up in a 401(k) plan in which investors have limited choices is beyond us. ...read the rest of this article»
Fidelity is Having A Bad Year
A tough year at Fidelity has Kiplinger.com's Steven Goldberg wondering if the overhaul of stockpicking operations that the mutual fund giant undertook a year and a half ago might need some serious tweaking.
I don't think the wheels are falling off at Fidelity. But plainly some mid-course corrections are in order for the huge revamping of the stockpicking operation that Fidelity launched 18 months ago. Someone high up at Fidelity may -- or may not -- agree. Stephen Jonas, who headed that restructuring, retired at the end of January. Bob Reynolds, Fidelity's chief operating officer, says Jonas, 53, wanted to spend more time with his family and that he and Jonas "came to a mutual agreement that this was a good jumping off point. Performance had nothing to do with it." Maybe so.
Longer-term performance at Fidelity hasn't been awful, but those of us old enough to remember when Peter Lynch turned Fidelity Magellan into the most famous fund in the land do long for the good old days. Over the past three, five and ten years, Fidelity's average U.S. diversified fund ranks above average -- in the 40th to 42nd percentile over each period. The trend at Fidelity's foreign funds has been disturbing. Over the past ten years, they're in the top 32% of diversified overseas funds. Over the past five years, they're in the top 40%. But over the past three years, they rank in the 73rd percentile (or the bottom 27%)."
Despite the rough patch, we still include several Fidelity funds in our MAXadvisor Powerfund Portfolios' Our Favorite Funds report. Fidelity Small Cap Growth (FCPGX) makes the cut in the small cap growth category. Fidelity Europe Capital (FECAX), Fidelity Southeast Asia (FSEAX), Fidelity Global Balanced (FGBLX), and Fidelity Spartan International (FSIIX) also get gold stars. ...read the rest of this article»
Diversify, Don't Di-worsify
Good advice from Dan Hallett at Morningstar Canada:
To some extent, holding two or more similarly managed funds holding like but not identical stocks (i.e. large cap Canadian) could be considered simply as an exercise in diversification, but it doesn't take long before portfolio dilution (or "di-worsification") kicks in. This is where the portfolio risks becoming more index-like but with active management fees. That will doom any portfolio to long-term underperformance.
The industry's bloated line-up of products is to blame. If we look at the entire fund industry as one gigantic portfolio, Canadians are holding hundreds and hundreds of unique funds just to invest in Canadian stocks. I would never recommend that any investor spread money among hundreds of funds -- particularly in such a small asset class. And I have opined in the past that at least 90% of funds are probably not worthy of investors' dollars. Accordingly, investors in aggregate are bound to underperform.
Diversification is a critical component of sound portfolio construction. Investors must strike the delicate balance of having sufficient diversification (to reduce reliance on any one stock) with the need to stay focused enough to make active management worth paying for. Dilution (or excessive diversification) can result in an expensive, index-like portfolio. Too focused a portfolio can incur too much risk (making success more uncertain)."
See also:
Ask MAX: Should I Listen to my Neighbor?
Robin from Vermont asks:
'My neighbor's son is going into his second year of college. She told me that the best way they saved up for tuition [was] by concentrating on a single stock or sector. Do you think that's the right way to go? Or should I build a diverse portfolio with a stock/bond mix?'
Your neighbor is dispensing some pretty lousy advice. If you had a neighbor who didn't save for their son's college tuition, but had a very lucky weekend in Las Vegas (where they parlayed $1,000 into room and board for a four-year private college), would you listen to them if they said the best way to save up for college was to get lucky at gambling?
While you have a shot at bigger winnings the more concentrated your investment — one stock being at the far extreme of concentrated portfolios — you have an equally good shot of having no money at all for school.
While Warren Buffet, the great investor, pokes fun at diversification, the drag of diversification also leads to more predictable returns. ...read the rest of this article»
Let’s Hear it for the Good Old IRA!
Tom Sullivan reminds us that in a world where 401(k)s are getting all the press, we shouldn't forget about the grand old man of retirement vehicles, the individual retirement account.
Survey after survey shows a heavy majority of people say they will not have enough to live on when they retire. Yet less than half of them say they are putting money into an IRA. Why not? The clock is ticking, and the day of reckoning is coming.
You do not have to contribute money in one lump sum, nor do you have to contribute the maximum amount allowed.
You can put in as little as you want, a tiny amount, if that is all you can afford. You just cannot exceed the annual maximum, which is now $4,000 (or $5,000 for people 50 or older). You can budget it to make a monthly contribution, if that makes it easier on your checkbook.
Don't let the rules on tax deductions sway you against contributing. Many people won't contribute because they don't qualify for a tax deduction. They may already be in another qualified retirement plan, their income is above the deduction threshold or they chose a Roth IRA.
(The Roth IRA, you may recall, is not tax deductible, but all earnings are completely tax-free.)
A tax deduction should not be the main reason you consider putting money into an IRA. You are saving money, and it grows without any current tax liability. The idea is to build a nest egg for the future.
People often ask me whether they can contribute to both an IRA and a 401(k). Yes, you can put money into both."
Actively Managed ETFs
The ETF craze may kick into overdrive now that the SEC is seriously considering allowing actively managed exchange traded funds - to heck with the front running issues.
While ETFs bring in a good chunk of all the new money going into funds these days, ETFs have been based on an index or basket of underlying. Most ordinary mutual funds are actively managed, meaning that fund managers decide which stocks to buy rather than simply investing in whatever is in, say, the S&P500 Index. That could soon change.
Many industry observers have predicted 2007 would be the year the ETF marketplace sees its first truly actively managed products. The earliest ETFs tracked recognizable, plain-vanilla indexes such as the S&P 500.
However, more firms entering the ETF business are launching products on increasingly complex indexes that, arguably, already incorporate elements of active portfolio management. "
One thing is for sure, we'll see ETFs with higher fees once "expert" management comes into play.
What Not To Do
Marshall Loeb provides the list of five big mistakes mutual fund investors make. We provide the commentary.
LINK
You can check a fund's performance history, expense ratio, turnover ratio, and whether or not it is a load fund or a no-load fund, by entering its ticker into the Fund-o-Matic.
(MAXfunds.com is also the only place where you can instantly compare a fund’s expenses to similar funds INCLUDING an adjustment for hidden portfolio-level expenses resulting from trading. Check each fund's MAXrating: Expenses for the complete expense picture.)
See also: MAXuniversity Part III - MAXfunds.com's Seven Rules of Mutual Fund Investing.