In past editions of this series, I have discussed:
- Solutions to protect against inflation, even in bond portfolios
- The use of investment vehicles other than stocks and bonds as part of any substantial portfolio
- How to bridge the difference between value investing and growth investing
- Why 40l(k) plans can benefit from having mutual funds which invest in all capitalizations and that do not readily fall into the value and growth styles
- That in selecting an investment counselor, one should emphasize proven judgment and a person who will be responsible to you.
The reader has also received a timely warning that the measures used to stimulate the economy posed a threat to the length of the economic upturn, and that the risk of rising interest rates had to change fixed income strategy. In this, the final article of the series, I will revisit these issues.
So how do I see the next five years?
The current economic upturn should prove more short-lived than normal. Domestic consumption will likely suffer much more in the next downturn than it did in the last recession. Lower consumer spending is both necessary and helpful.
The U.S. trade deficit now exceeds 5 percent of gross domestic product, and no country has ever reached that level without a significant adjustment taking place. If we are to avoid the financial crisis and devaluation that often results from this, our consumption must decline or the government deficit must be rapidly closed. I am confident that in the next five years, we will see a major reaction to the ever-widening trade deficit.
Turning to the investment world, I am more tentative. While the U.S. stock market will continue to be the home of many of the largest, most profitable companies in the world, its return may lag behind those of many countries when measured in U.S. dollar terms. The Japanese and British markets may rank among the best in the industrialized world.
For those managing their own portfolio, it will be important to ignore the zigs and zags of the market and remain with those companies that can maintain their profitability. For those who let others manage their money, stick with proven, dedicated investment people. The firms that cover a wide spectrum and are exclusively focused on money management will do best.
The first generation of a firm is often the best.
Test the business knowledge of the person managing your money. Stay away from those who claim they have discovered a short-cut formula. And avoid those who charge more than they are worth — especially when considering hedge fund managers.
As I write in late August, the median return for hedge funds so far this year is about zero. Yet the hedge fund industry, now widely promoted, has seen record inflows, which have lifted its size to $870 billion. The hedge fund manager still charges a normal fee and gets expenses paid. When they do better than break even, the hedge fund manager typically gets 20 percent of the profits. No wonder the number of hedge funds is soaring. There are quite a few hedge fund managers among the lists of the very wealthy, but I know of no wealthy person who attributes his wealth to an investment in a hedge fund.
The challenge of managing funds for others is a great privilege. It requires a strong sense of responsibility and depends on your ability to learn constantly about the world. In the end, investing is a field that requires an ability to understand our environment. For that reason, it is a wonderful occupation.
Marc Heilweil ([email protected]) is president and CEO of Spectrum Advisory Services Inc. The firm manages approximately $282 million in assets, including the Marathon Value Portfolio mutual fund. Reach him at (770) 393-8725.
