Dear Mr. Berko:
I’m 47, and my $313,000 portfolio has been 85 percent invested in Standard & Poor’s 500 index issues since June 2008. My new broker, like other professionals, including many financial magazine articles, thinks the stock market is going to crash soon because the Federal Reserve will unexpectedly raise rates. He wants me to cash out, lock in my gains and put the money in the Lord Abbett Short Duration Income Fund. This fund raises its rates as the Fed raises rates, and it currently pays 3.7 percent. Then when rates stop rising and the market turns up, he says I should sell the Lord Abbett and go back into stocks. This sounds smart and riskless; I can’t find fault with the advice. But as the market crashes, how will I know when to sell Lord Abbett and get back into stocks? What do you think of this short-term bond fund? Do you approve of this idea?
I’m also considering a gamble to buy 50 shares of Rolls-Royce at $92 a share. I heard from a Lexus salesman that Rolls-Royce is going to make a small high-end sports car to sell between $70,000 and $90,000. It will be faster than the Corvette. So with Rolls-Royce styling and the Rolls quality interior, the stock should fly. Is this a good bet?
— DF, Indianapolis
Dear DF:
This guy sounds like a new broker. I don’t have a problem with the Lord Abbett Short Duration Income Fund (LALDX-$4.52), but I do have a problem with the 2.25 percent commission the brokster would earn on $313,000. Stay the course and don’t sell a single share.
You may be surprised to know that Rolls-Royce (RYCEY), now $65, primarily makes engines for civilian and military planes and defense aerospace markets. It makes marine propulsion systems for the naval and civilian marine markets and power systems for the oil and gas industries. RYCEY also makes the gears, wheels, controls, bearings, seals, and other attendant parts. And a close acquaintance of mine who owns four Rolls-Royces and a helicopter store in Miami says Rolls makes the finest helicopter engines in the world but doesn’t make a passenger car. He says Bayerische Motoren Werke AG (BMW.DE-$82) in Munich makes the Rolls-Royce passenger car. And he hasn’t heard a word about a Rolls-Royce sports car. So stay away.
Your broker is a meathead, and so are you if you follow his advice. The Fed has been gradually preparing investors for rising rates. Last July, when the Federal Reserve Bank of St. Louis suggested it would raise rates by the end of the first quarter of 2015, the Dow Jones industrial average tanked 500 points but quickly recovered. The Fed knows it must carefully walk investors through this because if rates rose abruptly, the Dow could fall by 25 to 30 percent. Since then-Chairman Ben Bernanke’s announcement early last summer that the Fed would cut back on quantitative easing, investors have expected that rates will rise gradually. The Fed will do everything in its power to avoid spooking the market — and “avoid spooking the market” is the Fed’s new mantra.
Still, the Dow will have some terribly scary and frightening implosions, and this volatility will cause lots of us to have severe laundry problems. But my 50 years in this business has taught me that significantly more money has been lost by investors trying to anticipate corrections than has been lost in the corrections themselves. The Dow has had some very scary drops in the past 30 years but has always rallied higher. And the risk of missing a rally while avoiding a market drop can be injurious to your wealth. According to Putnam Investments, those who missed the market’s 10 best days over the past 15 years would have had annualized gains of 2.1 percent, versus about 6.5 percent for portfolios that remained fully invested. Warren Buffett agrees. He recommends investing 10 percent of your money in short-term government bonds and 90 percent in a low-cost S&P 500 index fund and never selling, even when the news is bad. Great advice for investors but bad advice for stockbrokers, 98 percent of whom (my estimate) would apply for food stamps.
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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.
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