Stocks were severely punished in 2008, but perhaps more surprising was the hit that corporate bonds took. Yet late in the year, bonds started to show some life, and there are some strong arguments why returns may continue their upward trends in the New Year.
The
iShares GS $InvesTop Corp Bond (NYSE: LQD) is an option for investors who seek the safety of corporate bonds and are willing to take on the risk/return potential of a substantial stake in financial holdings. Like many investments, the fund was down for most of 2008, but almost managed to eke out a positive return near the end of the year.
The bigger they are, the harder they fall.
Legg Mason's (NYSE: LM) Bill Miller used to be on top of the world. Now the weight of the mutual fund universe is squarely on his shoulders.
Morningstar (Nasdaq: MORN) is out with its 2008 mutual fund rankings, and Miller's Legg Mason Opportunity Trust is the worst-performing non-leveraged domestic stock fund with at least $100 million in assets. The fund tanked a whopping 65.5% last year.
Last year was certainly rough for most investors, but not that rough. A fund shedding nearly two-thirds of its value is brutal: It means the fund would have to almost triple its value to make up the ground it lost. Can Miller do it?
For many -- if not most -- of us, the money we've socked away in our employer-sponsored retirement plan represents the biggest portion of our nest eggs. Trouble is, too few of us take maximum advantage of our plans. And even those who do take advantage of them might not be putting money to work in other investment vehicles that also provide tax-favored earnings growth.Some folks, however -- perhaps even the coworker stationed in the next cube -- know exactly what it takes to get the job done.
Take the money and run
If your company matches retirement-plan contributions up to a certain level, make sure to kick in at least as much as they'll match. Even if your company's plan isn't the greatest in the world, it's hard to beat doubling your money while reducing your taxable income. And, of course, the deal is sweet indeed if you're among those lucky workers whose plan offers a cream-of-the-crop lineup of mutual funds. But what, exactly, constitutes one of those? Good question. Cheap price tags and seasoned management are key, as is intelligent diversification.
This is your red-letter day, dear reader. If you hadn't happened upon this article, your life might have unraveled in a most unfortunate way. You might have -- gasp! -- invested in mutual funds! As Shakespeare might say, "Heaven forfend!"
I'm here to steer you away from dastardly mutual funds and toward more sensible investments. Such as ... well, I'll think of some soon. In the meantime, let me list the countless drawbacks of mutual funds.
As investors, we're interested in uncovering stocks that Mr. Market, for whatever reason, has mispriced. Hey, we're opportunists, right? There's some skill involved, too. After all, ferreting out value before the "smart" money does is the name of the game if you want to beat the market.
Dirt-cheap buys The trouble is that, these days, seemingly cheap stocks are plentiful. A quick screen based on Friday's closing prices finds more than 6,800 companies trading at levels 50% or more below their 52-week highs, a group that includes
Apple (Nasdaq: AAPL),
Apache (NYSE: APA),
UnitedHealth (NYSE: UNH), and
Caterpillar (NYSE: CAT). Filter that lineup again, this time seeking companies trading at least 60% below their yearly highs, and you're still left with more than 5,700 names.
Citigroup (NYSE: C) and
Marathon Oil (NYSE: MRO) make that unkind cut, for example, as does
eBay (Nasdaq: EBAY).
So, should you head to your favorite discount brokerage and start placing orders ASAP?
Exchange-traded funds (ETFs) have been one of the fastest-growing investment products in recent years. Their trading flexibility and low expenses have attracted millions of investors to their doors. But as more and more of these funds are being rushed to market, expenses on some ETFs have begun to creep upward. In fact, some ETFs now charge more than many actively managed mutual funds. Why are some of these funds so expensive?
Forecast: rising expenses
According to Morningstar data, 33 ETFs currently clock in with an expense ratio of 0.95% or higher, summarized below:
Stock jockeys aren't the only ones salivating at securities prices these days. High-yielding corporate debt has traded down to tempting levels as well. I've never dabbled in debt, but I'm beginning to sniff around the space.
Various products allow you to invest in debt -- either an individual issue or a cross-section of them -- just as you would a share of common stock. For below-investment grade -- aka "junk" -- bonds, there's the
iShares iBoxx $High Yield Corporate Bond (NYSE: HYG) ETF and the
SPDR Lehman High Yield Bond (NYSE: JNK) ETF. Here's more on the former fund.
The "Rule of 72" is a great way to calculate compounding interest in your head. To find the number of years it would take a figure to double, simply divide the number 72 by the assumed growth rate. For example, if you think your stock will grow at a rate of 7.2% per year, it will take roughly 10 years for it to double (72 / 7.2 = 10).
If that 7.2% long-term equity growth rate seems too slow, consider that the
Vanguard Total Bond Market Index (VBMFX) returned about 5.1% per year on average over the past 10 years, while the S&P 500 has had an annualized return of
negative 1% over that same time period.
U.S. markets close up Thursday
May 9, 2008 - 0 comments
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