John Wasik

CHICAGO (Reuters) – The worst advice on emerging markets is to go out and buy the best-performing funds or countries of last year. In most cases, the hot money has come and gone and you can’t buy yesterday’s gains. But you can invest in a wide basket of developing countries to build a more robust portfolio foundation.

That’s not to say that emerging markets aren’t worthwhile. For global investors in the past decade, it’s been accepted wisdom that investing in the BRIC countries of Brazil, Russia, India and China is the basis of a strong strategy. While that’s still somewhat true, it’s not monolithic. Russia has had its setbacks and India is slowing down. China’s economy has increasingly raised the concern of international analysts.

But what’s left? Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the BRIC acronym a decade ago, suggests expanding your horizons to include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.

Global wealth seems to be moving to locales that have not been traditionally seen as bastions. While London and New York are still holding their own, high-net-worth individuals are investing in off-the-beaten track cities like Nairobi, Jakarta, Vancouver, Tel Aviv, Kiev and Cape Town. That’s according to a recent Wealth Report prepared by Knight Frank and Citi, which tracked global residential and commercial property hotspots (link.reuters.com/jav87s).

Countries that have benefited from money moving from first-tier developed nations into emerging economies include Thailand, Colombia, Indonesia, Malaysia and Singapore. According to an analysis by Lipper, a Thomson Reuters company, exchange-traded funds that invested in those countries easily trounced the BRIC strategy over the past three years through April 20.

CHICAGO, APRIL 30 (Reuters) – The worst advice on emerging
markets is to go out and buy the best-performing funds or
countries of last year. In most cases, the hot money has come
and gone and you can’t buy yesterday’s gains. But you can invest
in a wide basket of developing countries to build a more robust
portfolio foundation.

That’s not to say that emerging markets aren’t worthwhile.
For global investors in the past decade, it’s been accepted
wisdom that investing in the BRIC countries of Brazil, Russia,
India and China is the basis of a strong strategy. While that’s
still somewhat true, it’s not monolithic. Russia has had its
setbacks and India is slowing down. China’s economy has
increasingly raised the concern of international analysts.

But what’s left? Jim O’Neill, the chairman of Goldman Sachs
Asset Management who coined the BRIC acronym a decade ago,
suggests expanding your horizons to include Bangladesh, Egypt,
Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines,
South Korea, Turkey and Vietnam.

CHICAGO, April 27 (Reuters) – Ugly duckling stocks are
surprises in small packages that turn into great performing
swans later on down the road. Nearly every large company started
out as a “small cap,” which generally refers to a stock with
under $1 billion in market capitalization. Most small companies
do unsexy things such as make pumps or generic drugs. You’ll
rarely hear them touted by big-name analysts or firms.

When business and economic cycles favor them, though, small
caps soar relative to big-cap stocks, especially because they
are usually priced at a bargain. Over the past three years
through April 25, for example, the Vanguard S&P 500 Fund
rose 19.4 percent. In contrast, the DFA US Small Cap
Value fund climbed 22.7 percent ().
Note: The DFA fund, representing an index of small companies,
is only available through investment advisers.

Long-term, exhibiting what investment analysts call “the
small company effect,” these pint-sized stocks produced a
compound annual growth rate of almost 12 percent from 1925
through 2011, according to Ibbotson Associates’ 2012 Classic
Yearbook (). That compares to
about 10 percent for the S&P 500 index of large stocks,
typically over $2 billion, and about 6 percent for long-term
government bonds. Small caps are generally stocks from $300
million to $2 billion in market capitalization; mid-caps from $2
billion to $10 billion; and large caps from $10 billion on up.
Much of the small-company/value effect has been documented by
academics Kenneth French, Eugene Fama and Rolf Banz
().

CHICAGO (Reuters) – As Apple announces its 2012 second fiscal quarter earnings on Tuesday, some analysts think the stock price could hit $1,000 and the company reach $1 trillion in market capitalization. I have no idea where Apple’s price is going or what’s in its secretive product pipeline, but I suspect that even with strong recent earnings, it will eventually fall from the tree it’s on now.

What troubles me most are stunning similarities to other Wall Street darlings of the past and the ignorance of risk that owning a single stock carries. All former stars have tumbled once they fell out of investor favor – often when their profits were still robust. Here are five cautions worth considering:

1. THE MIGHTY FALL

The trajectory usually looks like this: A company with a stellar “story” is declared magnificent and graces the covers of business magazines. Expectations build, and share prices climb to lofty levels. Then the bottom drops out. This happened to any number of companies in the past decade or so – Intel (INTC.O: Quote, Profile, Research), Cisco (CSCO.O: Quote, Profile, Research), Microsoft (MSFT.O: Quote, Profile, Research), etc. Although some analysts still believe Apple is undervalued and could rise higher, that observation doesn’t always translate into a linear ascent, nor does it eliminate other risk factors.

CHICAGO (Reuters) – As Apple announces its 2012 second fiscal quarter earnings on Tuesday, some analysts think the stock price could hit $1,000 and the company reach $1 trillion in market capitalization. I have no idea where Apple’s price is going or what’s in its secretive product pipeline, but I suspect that even with strong recent earnings, it will eventually fall from the tree it’s on now.

What troubles me most are stunning similarities to other Wall Street darlings of the past and the ignorance of risk that owning a single stock carries. All former stars have tumbled once they fell out of investor favor – often when their profits were still robust. Here are five cautions worth considering:

1. THE MIGHTY FALL

The trajectory usually looks like this: A company with a stellar “story” is declared magnificent and graces the covers of business magazines. Expectations build, and share prices climb to lofty levels. Then the bottom drops out. This happened to any number of companies in the past decade or so – Intel, Cisco, Microsoft, etc. Although some analysts still believe Apple is undervalued and could rise higher, that observation doesn’t always translate into a linear ascent, nor does it eliminate other risk factors.

CHICAGO, April 20 (Reuters) – By now you’re probably seasick
of hearing about the 100th anniversary of the Titanic tragedy
and the myriad analyses of why it sunk and what it means. Yet
for some of us who felt compelled to see the James Cameron movie
again – and got suckered into paying for a disappointing 3D -
we’re still looking for metaphors and analogies.

Few Titanic buffs look at how J.P. Morgan, the principal
investor in the Titanic, fared after the disaster in 1912.
Morgan was a financial emperor at the time, controlling the
Titanic’s parent company, White Star Line, as part of an attempt
to monopolize North Atlantic shipping through a trust of other
shippers he owned.

Morgan set up the White Star Line as a British-crewed
company to side-step U.S. antitrust laws. The banker, who had
canceled his trip aboard the Titanic, died in 1913. (It was said
that the ship was doomed by the ghosts of the eight Irish men
who died building it, according to my wife, who grew up a few
blocks away from where the ship was built in Belfast).

CHICAGO, April 16 (Reuters) – Got travel or mountain
climbing on your bucket list? How about taking up the guitar? If
you really want to live life to the fullest in your remaining
days, then what you should also add to those goals is a list of
your investment priorities and adjusting your risk accordingly.

This idea doesn’t come from a cheesy Hollywood movie, but
rather from the study of behavioral portfolio theory put forward
by Nobel Prize-winner Harry Markowitz and leading behavioral
economics expert and finance professor and author Meir Statman
(). They theorize that if investors
divide their portfolios into mental account layers measured by
risk, they can counter nervous investment errors.

This is how it works: let’s say you have a $1 million
portfolio. You can divide it up into different-sized buckets
with goals for items like college savings and retirement. For
example:

CHICAGO, April 13 (Reuters) – The rain in Spain will only
cause you pain. So goes the latest worry about Spain’s current
financial woes for international investors. Yet that may not be
the case if you’re truly a global investor and look at the
larger picture in the United States and abroad.

I’m not discounting that Spain’s banks and bonds won’t be
pummeled more as the country limps through the aftermath of a
housing bust and deleveraging. It’s still a good idea to stay
away from big Spanish banks such as Santander or BBVA
and funds that hold Spanish-based and other
beleaguered euro zone companies and bonds.

Spain once looked like the toreador of Europe with robust
housing, financial and export growth. When I was last there in
2007, cranes dominated the skyline of Madrid, the heart of the
old city was being spruced up and a new high-speed rail system
linked major cities. The country appeared confident and buoyant.

CHICAGO (Reuters) – During the financial market turbulence of recent years, fund marketers have launched a number of stock funds that boasted exceptionally low volatility. They were the equivalent of sea-sickness pills for those who still wanted to go on stock-market cruises.

Yet these exchange-traded funds (ETFs) make less sense when the stock market is bullish. You may sacrifice returns and could dampen volatility more effectively with other strategies. In a sustained bull market – if you want to be invested in stocks at all – you would be much better off in a broad-based, all-in index fund than a low-volatility ETF.

To be sure, as risk-reduction vehicles, low-volatility ETFs play it safer by investing in mature companies with steady cash flows and solid dividends. They are less likely to be sold off in a market rout such as the one experienced last year.

CHICAGO, April 9 (Reuters) – During the financial market
turbulence of recent years, fund marketers have launched a
number of stock funds that boasted exceptionally low volatility.
They were the equivalent of sea-sickness pills for those who
still wanted to go on stock-market cruises.

Yet these exchange-traded funds (ETFs) make less sense when
the stock market is bullish. You may sacrifice returns and could
dampen volatility more effectively with other strategies. In a
sustained bull market – if you want to be invested in stocks at
all – you would be much better off in a broad-based, all-in
index fund than a low-volatility ETF.

To be sure, as risk-reduction vehicles, low-volatility ETFs
play it safer by investing in mature companies with steady cash
flows and solid dividends. They are less likely to be sold off
in a market rout such as the one experienced last year.