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Briefly Noted

The Bull Turns Two Years Old

The bull market celebrated its second birthday on March 9, 2011. At press time, the S&P 500 was up by nearly 86% from its 2009 lows. Despite the strong rebound, the index had only risen to summer 2008 price levels. More importantly, portfolios for many investors have not fully participated in the rebound.

Does the bull have more room to run, or is it nearing the age where it will start looking like a tired bovine? The historical average suggests the rally may not yet be over. Sam Stovall, chief investment strategist at Standard & Poor’s Equity Research, calculates that the average bull market has lasted 45 months, based on data going back to 1932. This equates to a sell-by date of November 2012.

The big caveat to this date is that three bull markets since 1949 didn’t even make it to their third birthdays and three others lasted more than six years. In other words, the bull will keep running until it doesn’t, regardless of what other rallies have done.

Certain characteristics of the current bull market could change this year, however. Gains tend to be smaller in the third year, according to Stovall. He also observed a change in leadership, with large-cap stocks outpacing their smaller-cap brethren in the third year of past bull markets. (The S&P SmallCap 600 index returned 23.1% over the past 12 months, topping the S&P 500’s 16.7% rise.) Finally, Stovall found a preference for “later-cycle/early defensive sectors such as consumer staples, energy, health care and utilities.”

No two economic recoveries are alike, however, and the future is always unpredictable. Therefore, continue to diversify and thoroughly analyze each investment before buying.

Source: “Happy Birthday Bull,” Standard & Poor’s Global Equity Strategy: U.S. Sector Watch, March 4, 2011.

Doctors May Inquire About Your Finances

Your doctor or medical staff may ask about more than just your health at your next appointment. They may ask about your finances.

According to InvestmentNews, medical professionals in 23 states are being asked to monitor senior citizens for signs of financial fraud. The goal is to identify patients who appear vulnerable to investment fraud abuse. If help is needed, doctors and nurses have a list of referral resources.

The intent is not to interfere with your personal life, but rather to prevent financial abuse. An Investor Protection Trust IPT survey conducted last year estimated that one in five Americans over the age of 65 has been victimized by financial fraud.

The IPT’s brochure for medical practitioners suggests a few basic questions to ask. Among them are: who manages the patient’s money on a day-to-day basis, whether the patient regrets or worries about any recent financial decisions, whether the power of attorney has been given to another person and whether somebody has asked them to change their will.

An investor’s best defense against fraud, regardless of age, is to ask questions, research the suggested investment, do a background check on the advisor (see Chuck Jaffe’s article on page 27) and talk to family members about any big financial decisions. You should never feel pressured to invest in a new product or service. Most importantly, if you feel a sense of unease or regret about a decision, speak up. Don’t only talk with the advisor, but discuss it with family members, close friends and even your doctor.

Basic personal finance steps can help protect you as well. Check the beneficiaries on all of your accounts to make sure both the names and addresses are correct. (Make sure your doctors also have updated contact information for family members.) Check your credit reports once a year as well. Read all of your financial statements—including bank, brokerage and credit card—and immediately report anything that looks suspicious.

If you think you may have been the victim of fraud, report it to the police immediately. Additional resources are available through the National Center on Elder Abuse at 800-677-1116 or www.ncea.aoa.gov.

Sources: “Teaching Doctors to ID Vulnerable Seniors,” InvestmentNews, February 20, 2011; Investor Protection Trust.

Lack of Investor Knowledge an Obstacle for Emerging Markets

Affluent investors think international markets, particularly emerging markets, will show growth, but are not allocating investment dollars to them. An HSBC study found a gap between interest and actual portfolio allocation among investors aged 25 to 64 with investable assets of $250,000 or more.

Respondents believe international markets provide opportunities, with 81% citing Asia and 45% citing Central Europe/Russia as regions poised for investment growth. In fact, 71% thought it is becoming increasingly important to invest in global markets to optimize returns. Yet just 19% said they were planning to increase their global investments.

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A lack of understanding may be at the heart of the discrepancy, as 67% of respondents did not feel they had enough knowledge to allocate portfolio dollars to emerging markets. Furthermore, more than three-quarters of respondents said they never heard of BRIC countries. (BRIC is an acronym for the emerging markets Brazil, Russia, India and China.) This would explain why just 25% thought BRIC countries were likely to show growth, even though they were optimistic about Asia and Central Europe/Russia.

Emerging markets have historically helped diversify a portfolio. Though more volatile, they have historically not moved in lockstep with U.S. stocks. Thus, there are benefits to maintaining an allocation to emerging market stocks. AAII’s Asset Allocation Models (www.aaii.com/asset-allocation) suggest investors with an aggressive profile put 10% of their portfolios in emerging market stocks. Investors with a moderate profile should allocate 5%.

An effective way of gaining exposure to both international and emerging markets stocks is to use a fund. Matthews China MCHFX and T. Rowe Price Latin America PRLAX are among the best-performing mutual funds over the past five years (see “The Top Funds Over Five Years: Gold, Emerging Markets & Diversification Lead,” March 2011 AAII Journal). Exchange-traded funds ETFs such as iShares MSCI Emerging Markets EEM are another option.

There is no guarantee that emerging market stocks and funds will continue to do as well over the next five years as they have over the past five years. Nonetheless, their diversification benefits may make them worthy of consideration for those investors with moderate to high risk profiles.

Source: HSBC Mass Affluent Study, February 16, 2011.

From the Bookshelf

Janet Lowe applies the concepts of legendary value investor Benjamin Graham to the modern era in “The Triumph of Value Investing” (Penguin, 2010). Her book is a good introduction to value investing, while, at the same time, providing a nice refresher to experienced investors.

Lowe pulls directly from Graham’s writings, while also directly quoting from many of his followers, including Warren Buffett, Seth Klarman and many others. (We were surprised to see William O’Neil in the book.) The quotes are used strategically, often to reinforce points. We give Lowe credit for weaving in the statements without disrupting the flow of her text.

The author concludes her book with strategies for applying Graham’s concepts. Among these are avoiding companies with too much debt; looking for a margin of safety, such as over-2.0 current ratio (current assets dividend by current liabilities); and seeking stocks trading at low price-earnings ratios and low price-to-book-value ratios. She also advises investors to be skeptical of forecasts and to use volatility to seek potential bargains.

AAII members who incorporate technical analysis into their trading strategies may enjoy “Diary of a Professional Commodity Trader,” by Peter Brandt (John Wiley & Sons, 2011). Though the focus is on commodity trading, the chart patterns presented in the book are very applicable to stocks as well.

We want to be clear that this is a book intended for those interested in trading actively. It is not an introductory text to commodity futures or charting. What it does do, however, is show how chart patterns were applied to actual trades, both profitable and unprofitable. The charts are well-marked and the examples are clear.

While we disagree on the suitability of futures trading for individual investors, there are topics discussed by Brandt that we do agree with. The author emphasizes the importance of a disciplined approach. He encourages readers to review their performance and learn from their mistakes. He opines that “charting principles are not magic.”

Most important, he states there are no “black-box” trading systems that will guarantee profits. Rather, Brandt believes that a disciplined approach is key—a concept that applies to commodity traders and stock investors alike.


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