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from Global Investing:

Three snapshots for Friday

The correlation between individual country equity indices is rising again:

U.S. consumer spending jumps in February but income growth tepid.

Apple vs. RIM market value:

from Global Investing:

A scar on Bahrain’s financial marketplace

Bahrain's civil unrest -- which had a one-year anniversary this week -- has taken a toll on the local economy and left a deep scar on the Gulf state's aspiration to become an international financial hub.

A new paper from the Sovereign Wealth Fund Initiative, a research programme at Center for Emerging Market Enterprises (CEME) at the Fletcher School at Tufts University, examines how the political instability of 2011 is threatening Bahrain's efforts in the past 30 years to diversify its economy and develop the financial centre.

Asim Ali from University of Western Ontario and Shatha Al-Aswad, assistant vice president at State Street, argue in the paper that even before the revolt, Bahrain lagged in building the foundations of a truly international hub in the face of competition from Dubai and Qatar.

Unlike DIFC (Dubai International Financial  Centre) and QFC (Qatar Financial Centre), Bahrain insists upon local labor; currently 70% of employees in its banking and financial services industry are Bahrainis.  Bahrain’s reluctance to hire non-resident  talent  has made  Dubai...an alternative for those investors looking for a centre with more flexible labor practices such as DIFC provide...  The constraints  – a lack of formalized institutional and regulatory structure, along with an ad hoc business environment, underdeveloped infrastructure, and under-supplied skilled workforce – have negatively affected its growth and  potential to become the financial gateway in the Middle East.

Then came the crackdown of protesters.

Its ruling Al-Khalifa family unleashed  a ferocious extra-judicial crackdown against the opposition. It appeared the standard axiom of Gulf ruling families – securing legitimacy and counter-acting political opposition through redistribution of oil wealth – was sorely insufficient to address  citizens’ grievances.  These led not only to international opprobrium of  the  Bahrain government but also made foreign businesses reconsider Bahrain as a financial center – with many foreign business shifting  workers and operations to Dubai... Indeed, confidence in Bahrain as a financial hub took a major blow along with its image as a stable, tolerant and liberal state.

It remains to be seen what impact last year’s pro-democracy uprising will have on the state of Bahrain and its  ambition as a regional financial gateway– especially at a time when Dubai (DIFC) and Qatar (QFC) remain serious contenders to become dominant financial centers in the Middle East.

Bahrain had shown perseverance and strength in building its financial center, but democracy efforts and human right violations were able to  threaten the hard work of more than 30 years.

Bahrain's sovereign wealth fund Mumtalakat, which is leading the country's efforts to diversify its economy away from the hydrocarbon sector, suffered a series of ratings downgrades last year as a result of sovereign downgrades. Mumtalakat is rated triple-B.

from Reuters Money:

Beaten down by market turmoil? The case for hedged mutual funds

The following is a guest post by Juliette Fairley. A frequent contributor to USA Today, Investor's Business Daily, Bloomberg Wealth Manager and The New York Times, she is also the author of three personal finance and investing books. The opinions expressed are her own.

With the markets so volatile, financial advisers are screaming “diversify” from the rooftops. One small corner of the market that might attract attention in down times: hedged mutual funds.

Before the latest downturn, the hedged equity mutual fund category, which is comprised of only about 100 funds, was up 1.72 percent year-to-date. That’s less than the average equity mutual fund, of which there are about 10,000, which up 4.97 percent.

But in the tumult since the debt deal, the ratio turned to a 5.69 percent loss for hedged funds compared to a 7.83 percent loss for non-hedged funds, according to data from Lipper, a Thomson Reuters company, through Aug. 10, 2011.

That kind of split is why the hedged equity mutual fund remains a small specialty instrument in the toolbox of many financial advisers. Advisers like hedged mutual funds because they keep clients’ portfolios afloat in a down market, despite lower returns over the long-term.

“Hedged mutual funds act as a diversifier and can both reduce losses or make money. They are designed to return a small amount in any market. In balance, they are good by adding choice and selection to the client’s menu,” says John Longo, a registered investment adviser in Morristown, New Jersey.

Another advantage to hedged funds: lower fees. Traditional hedge funds, such as Paulson & Co. or Avenue Capital, charge two percent of the top 20 percent of any profit.

from Reuters Money:

Kids and money: Why saving young matters

If retirement saving is a 100-yard dash, take a look down the track. Ionnie McNeill already has you beat.

Though she’s just 22 and a senior at Howard University, McNeill has been investing in stocks for more than a decade. She purchased her first shares (Citrix Systems) at age nine, and opened her own Roth IRA at 15. Now, at an age when most college kids are perfecting their beer pong and playing clumsy guitar in their dorm rooms, McNeill has assembled a powerful $50,000 portfolio.

Feel inadequate yet?

“I liked the idea of walking into a McDonald’s and being a part-owner,” says McNeill, who first got the bug by tagging along with her mom to investing workshops. “Of getting annual reports from the company that was making my breakfast cereal. Of buying Nike stock instead of Nike shoes.”

Indeed, in her youthful enthusiasm for P/E ratios and earnings-per-share, McNeill stumbled onto probably the most critical investing principle: The value of time. Take this bracing example from mutual-fund giant Vanguard: Dawn starts saving at age 25 and contributes $2,000 a year until she’s 35, then never adds another dime. Dave waits until age 35 and then chips in $2,000 a year all the way to age 65.

By age 65, Dawn has almost $315,000, if we plug in eight percent annual returns. Dave finishes at a shade under $245,000, even though he contributed far more. In fact he invests three times as much, but still loses to Dawn by 22 percent. That’s the sheer power of time.

Now back-date those numbers all the way to age nine, like Ionnie McNeill, and you get why she calls starting so early a “guaranteed ticket” to wealth. “When I was growing up in Miami, older people in my neighborhood would always say ‘If only I started when I was your age’,” she remembers. “Time after time. That really stuck in my head.”

from Reuters Money:

Glassman’s redemption: Find an investment safety net

It's hard to climb out of an abyss in which you've predicted that the Dow Jones Industrial Average would hit 36,000 -- only to see it crash twice and get pinned to the mat for years. James Glassman was one of the many bubbly U.S. stock cheerleaders who recommended stocks for the long term at the wrong time.

As most any stock investor will tell you, the last decade for U.S. stocks has been pretty dismal with the dot-com bust, 9/11 and the 2008 meltdown buffeting investors at every turn.

Yet Glassman has made an effort to redeem himself with his latest book Safety Net: The Strategy for De-Risking Your Investments in a Time of Turbulence.

Co-authored with Kevin Hassett of Dow 36,000 at the height of the tech-lemming era, I would have thought that Glassman would have laid low in a bunker with gold, U.S. Treasury Bonds and canned goods for while. It seems that Glassman has seen the light, though, and is preaching some sound advice for a more tumultuous time.

"Yes, stocks bounced up and down," Glassman writes of his former views on stocks, "but your job as an investor was to hang on and collect your reward for perseverance at the end. I advocated the same strategy of heavy and diversified U.S. equity holdings that most sensible advisors espoused -- but with an extra dollop of optimism. And I was wrong."

So what happened to U.S. stocks for the long run? Not a good idea in the wake of the worst 10-year period of the stock market when accounting for inflation (through 2009), Glassman notes. Now it's time for a "margin of safety."

While this strategy would have been great advice more than a decade ago, Glassman's new religion is asset protection (mine, too, although for me it's an old faith). Ironically enough, Glassman had to reach back to legendary value investor Ben Graham (and mentor of Warren Buffett) to arrive at his new safety mantra.

from Reuters Money:

Diversification defiance: All your eggs in one basket?

Tom Hoebbel is driving everybody around him crazy. And he’s kind of enjoying it.

For his unconventional investing style, the 46-year-old professional photographer from Ithaca, New York, has taken flack from his former financial adviser at Edward Jones, from his own brother -- who’s a financial planner -- and even from his brokerage site, TD Ameritrade, whose portfolio tools constantly remind him that his investments are way out of whack.

Hoebbel has one word for all the doubters: Apple. He bought it when the market was tanking near the end of 2008, and Apple was priced down in the 90s.

“Since then it’s gone up over 300 percent, and now it’s over half of my portfolio,” he says. “I’ve heard all the advice about diversification, and how I should have a balanced portfolio. But for me, returns are better than some generic formula.”

And lest you think he’s totally undiversified, Hoebbel also bought another little stock at the market bottom: Google.

That kind of brilliant market timing makes him look like Ithaca’s version of John Paulson. But for financial planners, investors like Hoebbel are enough to make them tear their hair out. Planners take pains to point out that a well-diversified portfolio – incorporating a broad mix of equities, paired with fixed-income investments and cash – boosts long-term returns while paring down volatility.

“Sure, Apple stock has been on a tear,” says Robert Schmansky, president of Clear Financial Advisors in Detroit. “But now (co-founder and chief executive) Steve Jobs has had to step away, and who knows what’s next? As an adviser, my job is to point out potential dangers. And investing in just a few stocks is similar to gambling, because there’s a possibility of total loss.”

from Funds Hub:

Steer clear of the free lunch, says Noster

Diversification is meant to be the only free lunch in investing.

But according to hedge fund Noster Capital, with most markets looking toppy and with problems ahead, it's not necessarily one that investors would be wise to tuck into.

"This is not the time to be invested in broad ETFs or in very diversified funds, because the indexes will likely not do much in aggregate," it says in its end of year letter.

"We feel that most asset classes are currently approaching untenable levels, and while they could certainly grow dearer for some time to come, in most cases we have long passed the level where investors are being adequately remunerated for the risks they are taking."

Markets are likely to be range-bound for the next 3-5 years, meaning that just buying and holding stocks might not be the best approach, says Noster.

"The likely way to succeed in the years ahead is to be very selective and tactical about what one owns, to be ready to sell if assets approach fair value and, most importantly of all, to be protected and retain liquidity so that one can take advantage of opportunities that will transpire when any of the myriad things that could (and will) go wrong, do."

from Reuters Money:

Investors say advisers can’t beat S&P 500

Here is more proof that investors are lowering the bar when it comes investment performance.

New research from Wealthfront finds that only 6 percent of all U.S. adults, and only 3 percent of those who work with a financial adviser, “strongly agree” that their financial advisers know how to consistently outperform the market. The August 2010 study was conducted by telephone by Harris Interactive.

Another recent study commissioned by Fidelity Investments found that 55 percent of investors say any kind of positive gain in their portfolios in these volatile markets qualifies as a “success.” And another 23 percent say break-even investment returns can be considered an achievement.

That’s precisely why Wealthfront sees such investor malaise as a business opportunity. If you haven’t heard of Wealthfront before it’s because it is the newly branded version KaChing, a site whose name was catchy with investors but didn’t resonate with the money managers.

Wealthfront hooks up mass affluent investors ($100,000 to $1.5 million) with investment managers who typically cater to ultra-wealthy investors. For a minimum of $10,000, investors get access to 25 money managers which span from Forward Funds (the only mutual fund family on the list) to Tradewinds Investment (an emerging markets hedge fund).

Andy Rachleff, Wealthfront's president and CEO, says Wealthfront's primary mission is to help investors beat the market. Wealthfront’s 10 investment managers collectively outperformed the S&P 500 by more than 6 percentage points, net of fees, he says. And they did so with "full portfolio transparency," he notes. (The firm now works with 25 managers.)

from Funds Hub:

A painful lesson in diversification

As if RAB Special Situations' woes weren't enough already (investing in Northern Rock before its collapse, putting a high percentage into illiquid assets, 70 percent loss in 2008, locking up investors), the company told me yesterday of more bad news.

Explorer Falkland Oil and Gas, whose shares more than halved on July 12 when it revealed it hadn't found any oil at the part-owned Toroa well, accounted for an amazing 24 percent of Special Situations' portfolio before the fall (and presumably rather less now).

Of course, concentrated bets are great if they work (and would go some way to making back the losses suffered during the credit crisis).

But, as RAB is probably painfully aware, supposedly the only free lunch in economics is diversification. It will be interesting to see how Special Situations' portfolio looks 6 months from now, and whether caution over further losses has outweighed the temptation to keep on big bets in the hope of big returns.

from Global Investing:

How do rich people get rich?

An upcoming book by Kaye Thomas explains in plain English the secret of succesful investing:  Turning money into more money.

 While everyone goes through good times and bad times, the 1980 Harvard Law School graduate suggests sticking to four main rules for success:

1) Create and maintain a regular programme of saving, in an amount that makes sense relative to your income level and financial goals.

2) Create and maintain an appropriate division of your money between bonds and stocks, in a ratio that makes sensein relation to your time horizon and risk tolerance.

3) Within each division, create and maintain good diversification.

4) Keep investment expenses to a minimum.

"Every investment has two sides. A great deal for one side is a lousy deal for the other, and no one wants a lousy deal. When investment looks amazingly good, ask yourself why would offer to enrich you at his expense. Ask yourself why isn't everyone buying this investment if it's so great. The better an investment looks, the more likely there's a hidden catch," Thomas writes.