Baby Boomers Face Tough Decisions Read This

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
January 11, 2005

IN THIS ISSUE:

1.  Boomers Have Not Saved Enough For Retirement

2.  Go-Go Stock Market Years Are Now Behind Us

3.  Investment Media Abandoning “Buy-And–Hold”

4.  Latest Advice Won’t Work For Most Investors

5.  Hedge Funds Are The Rage, But Unavailable To Most

6.  Hedge Fund-Like Strategies For The Rest Of Us

Introduction

The Baby Boom generation (those born from 1945 to 1964), is facing a savings/retirement dilemma.  I would say “crisis” but arguably that overstates the problem.  Crisis or not, most Baby Boomers have not saved nearly enough for their retirement, they are too far in debt and most are scrambling to figure out how to retire in remotely the lifestyle they have hoped for (without regard to sweeping changes that lie ahead at some point for Social Security).

With the beginning of a new year, Boomers are trying to figure out how to save more and, more importantly, how and where they can invest their savings to maximize returns between now and retirement.  In stocks, Baby Boomers are coming to realize that the go-go years of the late 1990s, when 15-20% or better annual returns in stocks were common, are gone. 

The financial media is slowly coming to realize that the “buy-and-hold” mantra that they have preached for years is probably not going to work, at least for the next few years (or maybe longer).  More and more of the media pundits are now advocating more “active” strategies which, unfortunately, don’t work for most investors if recent history is any guide.   In this issue, we will look at some of these latest suggestions and how you need to interpret them.

Perhaps THE most popular investment trend in recent years is the explosion in “hedge funds.”  In general, these very popular, but hard to access, investment funds employ both long and short positions in equities with the potential to make money in up or down markets.  Unfortunately, hedge funds are usually only available to the ultra-rich, and minimum investments are typically $1 million to $5 million just to get in the door (if you can get in the door at all).

This week, I am going to introduce you to a way to access hedge fund-like strategies (long and short) in stock mutual funds.  Due to space limitations, I can only introduce you to the concept this week.  Then next week, I am going to introduce you formally to one of the most exciting money managers we have found in years.  I suggest you read this week’s E-Letter carefully and then be sure to tune in next week.

Baby Boomers Face Uncomfortable Decisions

Many of our 77 million Baby Boomers are in a pickle.  They have not saved nearly enough (and are not on track to save nearly enough) to fund their retirement – even with Social Security.  Increasingly, these Americans are waking up to the reality that they must increase savings and increase investment returns.   I won’t address how people can increase savings, because everyone’s situation is different, but I can speak to many of the options for increasing investment returns.

Every year at this time, I watch and listen to as many financial and market related programs as I can in an effort to discern some of the major trends in investment advice.  This year is somewhat unusual in that most of the talking heads have conceded that the years of red-hot returns in stocks and bonds are behind us, and specifically that stock and bond market returns are likely to be in the single digits for the next few years.

So what do the pundits recommend that Baby Boomers (and others) do to boost investment returns in such an environment?  Before going into some of the suggestions, there is an underlying theme that, while rarely spoken outwardly, is very clear: buy-and-hold won’t get the job done anymore.   Hmm… I've been saying that for several years now!

You Have To Become An “Active” Investor

After preaching buy-and-hold for the last 20 years, and criticizing “active” investment strategies, now the financial media is changing its tune.  With the outlook for equity returns to be muted, the media knows that the buy-and-hold strategy is likely to produce disappointing returns and, most importantly, disappointing ratings.  So now they are embracing investment strategies that they routinely attacked in years past.

At the risk of over-generalizing, here are some of the latest stock market strategies I have seen recommended by the various pundits over the last couple of weeks.

“Index” funds are out of favor.  Index funds are mutual funds that are designed to replicate the returns in one of several different market indices.  There are index funds based on the Dow, the S&P 500, the Russell 2000, the Nasdaq, etc.  An S&P 500 index fund, for example, buys the underlying stocks in the S&P 500 Index and should deliver a similar return, minus expenses. 

This is great when the markets are going up, but index funds also carry all the same risks associated with the markets.  For example, in the 2000-2002 bear market, the S&P 500 Index fell over 44% at the low; the Nasdaq Index fell over 70%.  Index funds that track these benchmarks plunged by a similar amount.  The point is, index funds provide no protection on the downside.

Despite that, the mantra in the investment world for many years was to buy index funds, hold them long-term and make whatever the market makes.  Now, however, with most forecasts calling for only single digit returns in equities, index funds are falling out of favor.

Buy ‘em low and sell ‘em high.  After arguing for years that investors should not try to time the market, now a number of leading financial talking heads are recommending that investors try to buy mutual funds that are undervalued and look to sell them when they recover or move into overvalued territory.  These people seem to think that many investors have the ability to evaluate mutual funds and make the determination as to when funds are undervalued or overvalued.

The truth is, few investors have the ability to do this.  In fact, most professionals can’t even do it consistently.  Over the last decade, we have found only a handful of professional managers (out of hundreds we’ve looked at) who have successful strategies for moving in and out of mutual funds profitably over time, and even they are far from perfect.  

Sector rotation.  Not completely different from the strategy noted just above, the sector rotation strategy seeks to move from market sector to sector as momentum changes occur.  It is true that certain sectors of the economy outperform others periodically.  As a result, at any given time, certain sectors will be the big winners while others will underperform or even lose value.

The goal of a sector rotation strategy is to identify the sectors that are likely to emerge as the next top performers and buy them either before they get hot or, more commonly, shortly after they begin to move ahead.  Then you look to sell those same funds when, or shortly after, they begin to run out of steam, and look for the next undervalued sectors.

Sector rotation is a great strategy if you know how to do it.  But like buying funds low and selling high, as discussed just above, most investors have little or no idea how to identify the next hot market sectors in advance.  Only a handful of professionals I know can do it successfully.

Become An Individual Stock Trader

I have been astounded over the last couple of weeks to hear some of the formerly buy-and-hold faithful suggest that investors need to learn how to pick individual stocks!  For years, some of these people steadfastly recommended that you avoid picking individual stocks, as it is just too difficult for most investors.  Instead, they recommended that you buy-and-hold mutual funds, and leave the individual stock selections to the “professionals” who manage the funds.

Yet here again, with the outlook for muted stock market returns, some of these formerly buy-and-hold devotees are advising investors that they must now learn how to pick individual stocks.

Perhaps you have seen the latest TD Waterhouse commercial that claims their tools can help you identify a good stock in “the time it takes to make coffee.”  Yeah, right.

Unfortunately, I would argue that most investors are less qualified to pick individual stocks than they are at picking mutual funds.  Certainly there is more readily available (and cheaper) information on mutual funds than on individual stocks.

Sounds Good But Who Can Do It Successfully?

I’m sure there are many of you reading this who do buy and sell mutual funds on a regular basis with some degree of success.  Some of you, no doubt, have developed your own “system” for doing so successfully.  Likewise, some readers have the knack (or a system) for picking individual stocks.  If you can do it, more power to you!  

But the fact is, most investors cannot “trade” mutual funds frequently or periodically and be successful.  They don’t know how to identify the undervalued funds, much less know when to sell them before they fall out of favor again.  Likewise, most investors do not know how to play the sector rotation strategy.   

To the contrary, studies have shown over the years (as I have written often) that many investors tend to buy mutual funds when they are already hot, typically near the end of a big run, and then sell them when they are down or out of favor.    

The result is that investors frequently don’t even make what the market indices make in terms of returns.  And most importantly, this was during a period of the greatest equity market in history.  Imagine what the results will be in the current environment.    

“Hedge Funds” Are The Latest Rage

In addition to the active strategies noted above, many now recommend that investors get into so-called “hedge funds.”  As you probably know, hedge funds have been all the rage over the last several years, especially since the end of the bull market in 2000.  It is reported that there is now over $1 trillion in hedge funds, which number well over 8,000 and growing.

The initial concept for hedge funds was that they would hold a combination of “long” positions in certain stocks and “short” positions in others.   The idea was that the short positions would cushion losses during market downturns, while the well-selected (supposedly) long positions would deliver above-market returns in the good times.

As this investment medium has mushroomed over the last decade, hedge funds have come to employ hundreds of different kinds of strategies including stocks, bonds, currencies, futures and other derivatives.  Some of the strategies employed are so exotic as to defy explanation.  As you might expect, there are some excellent hedge funds; there are plenty of mediocre ones; and of course, there are a lot of bad ones.

The problem is, almost all hedge funds are private offerings that are, by law, only available to super high net worth investors.  At the very least, investors must be “accredited,” meaning that they must be worth at least $1-$1.5 million and often much more (in some cases, $5 million or more). 

Even worse, the minimum investment required to get into many of these hedge funds (assuming you meet the net worth test) is often $1 million, $5 million, $10 million or even more.  While some newer hedge fund offerings allow a minimum initial investment of only $250,000-$500,000, these are typically funds with little or no track record.

For all these reasons and others, most investors are shut out of the hedge fund world, for better or worse. 

Hedge Fund Strategies For The Rest Of Us

For many years, we have looked far and wide for a mutual fund manager that employs hedge fund-like (long and short) strategies.  If you have looked at the money managers I recommend, you have found that they primarily trade on the long side of mutual funds.  During downward periods in the equity markets, they can either move partly or fully out of the markets, or they can hedge their long positions by using various mutual funds (bear funds) that move up when the market moves down.

These Advisors have been very successful as you can see on my website over the years.  Nevertheless, we have always looked for a mutual fund Advisor that goes both long and short with the potential to make money in a bull market or a bear market.

I am pleased to announce that in next week’s E-Letter, I will introduce you to one of the most exciting professional money managers we have ever found.  This Advisor has an outstanding record of making money in up markets, down markets and even sideways markets.  (Past results are not necessarily indicative of future results.)

Best of all, this Advisor has delivered these outstanding results by using mutual funds that are familiar to most of us.  It is not a hedge fund, and it does not require $1 million or more to participate.  In fact, you can invest with this Advisor for as little as $50,000 through my company.

If this type of long/short program sounds interesting to you, then be sure to read next week’s issue of Forecasts & Trends E-Letter.  I think you will like what you see!

Conclusions

Many in the financial media are slowly (or not so slowly) moving away from the mantra of “buy-and-hold” and toward “active” strategies for investing in stocks.  This is due to the fact that many believe equities are set to deliver only single-digit returns in the next few years.  Even though many of these same pundits have lambasted active management strategies in the past, they are slowly coming around to what I have recommended for several years.

Unfortunately, many of the strategies now being recommended are a recipe for disaster for many investors.  Most of us aren’t good at identifying undervalued mutual funds, much less knowing when to sell them at the right time.  Few of us are good at playing the sector rotation strategy.  And most investors don’t have $1 million (or in some cases much more) required to access the more successful hedge funds.

Next week, however, I will introduce you to a very successful professional manager that applies hedge fund-like strategies (long and short) to mutual funds.  This is the money manager we have been in search of for many years.  I think you are going to be very impressed!

Very best regards,

Gary D. Halbert

 

SPECIAL ARTICLES 

Some realities of Social Security.
http://www.pittsburghlive.com/x/tribune-review/opinion/columnists/guests/s_291727.html

Some encouraging news for Democrats.
http://www.opinionjournal.com/columnists/bminiter/?id=110006141

CBS firestorm, maybe a good thing in the long-term.
http://www.usatoday.com/news/opinion/editorials/2005-01-10-cbs_x.htm


Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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