Opinion

John Wasik

Hedges for investing in a post-QE3 environment

Sep 14, 2012 16:17 UTC

CHICAGO, Sept 14 (Reuters) – The Federal Reserve’s new round
of quantitative easing may have sparked as much early enthusiasm
as the opening of a new fall fashion show. Yet as with other
ballyhooed events, the initial warm reception may prove
fleeting.

The Fed’s latest buying spree of Treasury and
mortgage-backed securities will keep U.S. interest rates low and
drop them incrementally lower. And Wall Street
initially cheered the Fed by propelling both the Dow Jones
industrial average and the S&P 500 Index to their
highest levels since 2007 on Thursday. The once-battered Nasdaq
Composite Index even climbed to its highest level since
November 2000.

On the employment, manufacturing and housing fronts, though,
there is only so much the Fed can do to revive those markets -
and it will do nothing to fix the euro zone – so don’t take
Thursday’s rally too seriously. By adopting a tandem strategy of
targeted hedging and global investing, you can still ride out
continuing anxieties in Washington and Europe. And there are
side effects to this stimulus, too. So if you are looking for
investing strategies, you might want to employ some of these
hedges:

1. Think inverse

Fed easing typically means the dollar’s value against other
currencies is likely to drop and commodities including precious
metals will gain. If you are concerned about further hits to the
buck, there is something you can do about it. There is an
“inverse” exchange-traded fund for the dollar, the PowerShares
DB US Dollar Index Bearish ETF, which uses futures
contracts to short the dollar. Gold also does well when the
greenback sinks. Consider the SPDR Gold Trust, which
holds gold bullion and tracks the price of the metal fairly
closely.

Note: these ETFs are complex and volatile vehicles that
should be used only if you need to protect your portfolio
against large currency swings. Currencies and metals are
notoriously difficult to predict; never think you have the
ability to successfully time this market.

Three investment strategies for QE3

Sep 10, 2012 15:52 UTC

CHICAGO (Reuters) – If there’s another round of stimulus from the Federal Reserve, as has been telegraphed by Ben Bernanke, it may end up sounding like an alarm clock that barely rings. It will be heard, but it may not be enough to rouse a drowsy U.S. economy.

The Fed’s previous bond-buying sprees – which pumped more than $2 trillion into the U.S. economy and kept interest rates near zero – put a fire under stocks as investors moved from poor-yielding bonds.

But will more bond buying morph into a fall rally? It depends on whether the economy responds. That would mean improvement in job growth, housing prices and general economic activity.

Can you still make money in the housing market?

Sep 7, 2012 15:07 UTC

CHICAGO (Reuters) – There is a nagging question to consider before you jump into home-buying after one of the worst housing slumps in American history. Will you ever make money? Based on how the market has performed in the past, there is no clear answer.

Not that there hasn’t been good news about home prices lately. Prices have rebounded in most of the largest U.S. cities over the last five months. The closely watched S&P Case-Shiller home-price index rose 0.9 percent in July on a seasonally adjusted basis.

Low interest rates provide an added bonus: With mortgage rates still at generational lows – 30-year loans still average well under 4 percent – it’s a good time to lock in a bargain.

How to find a new 401(k) strategy

Sep 6, 2012 15:41 UTC

CHICAGO, Sept 5 (Reuters) – Let’s say, after recent fee
disclosures from retirement funds, that you have discovered that
your 401(k) is a rusting beater of a plan. It’s expensive to
maintain, non-diversified and has performed poorly over the last
10 years.

You may have to do some internal lobbying to change your
plan. Yet if you can enlist the support of fellow employees,
managers and executives by explaining how poor returns eat into
their retirement lifestyles, you might gain some traction.
Changes are possible, even when employers are reluctant to do
anything.

Consider the idea of placing company stock in 401(k) plans,
an idea that became toxic after the Enron-WorldCom debacles. The
percentage of companies engaging in this practice has dropped to
under 10 percent, down from 11 percent in 2009, according to
BrightScope, a San Diego-based service that tracks retirement
plans.

Finding a haven from volatility isn’t easy

Aug 2, 2012 16:18 UTC

CHICAGO, August 2 (Reuters) – Most experienced long-term
investors know stocks are volatile and can deal with it. But
what if you want to stay in stocks and at the same time reduce
your downside risk and avoid a cyclonic year like 2008?

You might be tempted by funds that bill themselves in a “low
volatility” category, though “volatility” is a red herring. A
“low-beta” approach might be better.

Beta is a measure that portfolio managers use to determine a
portfolio’s sensitivity to a major index. A perfect match with
the index is 1.00, and stocks are measured in a percentage
against it. The lower the beta, the less a portfolio tracks a
market average, such as the S&P 500 index.

A dry-eyed view on investing in water resources

Jul 30, 2012 16:37 UTC

CHICAGO, July 30 (Reuters) – I have a pretty good idea of
what drought looks like after recently traveling more than 1,400
miles from Chicago to Utah: Vast patches of brown where there
should be green. Cornstalks that look like desiccated
scarecrows. Wilted soybeans. Forested Colorado canyons
devastated by wildfires and pine beetles.

Whether this is the brutal impact of climate change or a
short-term cycle, I can’t say. Regardless of your scientific or
political persuasion, though, what is certain is that water is
going to be an increasingly valuable commodity and a worthwhile
long-term investment.

The short-term nightmare is that the United States is
experiencing its hottest year on record. States from Ohio to
California — 53 percent of the contiguous United States — are
in drought, according to the National Weather Service. Many
breadbasket states that have traditionally been blessed with
summer rains in the Midwest are parched.

Five strategies for a mid-summer portfolio overhaul

Jul 27, 2012 15:36 UTC

CHICAGO (Reuters) – Do you have a lingering memory of motion sickness after last summer’s debt storm? I do.

Before another cyclone hits, it’s a good time to check your portfolio mix of stocks and bonds as a way of securing your financial ship.

A sensible portfolio review deals with your fears first.

What will be most harmful to your standard of living if your portfolio comes up short? Have you taken a look at how your portfolio performs in the worst markets?

REITs worth a look for yield boost

Jul 24, 2012 18:33 UTC

CHICAGO, July 24 (Reuters) – While there’s some debate over
whether the U.S. residential market is in recovery mode, there’s
a stronger case for a rebound in commercial properties.

Real Estate Investment Trusts (REITs), which invest in a
variety of income properties and mortgages and are listed on
stock exchanges, often serve as a bellwether of consumer and
commercial economic activity, as they will show earnings growth
in a general recovery.

Aside from the economic recovery narrative, REITs make sense
for investors who are hunting for yield. Although REITs often
march in lockstep with stocks during recessions, they can move
in different cycles, dictated by movements in commercial real
estate. REIT managers also are able to buy more properties when
interest rates are low.

Gold’s chameleon role in a portfolio

Jul 16, 2012 12:33 UTC

CHICAGO (Reuters) – I’ve always had mixed feelings about gold. Is it an alternative currency? A speculator’s refuge from political or fiscal instability? A reliable inflation indicator? Turns out it’s maybe all of the above.

What role should gold play in your portfolio? Certainly it’s no substitute for bonds, which held up well in 2008 and rarely lose money in low-inflation periods. As an inflation hedge, though, you may be better off holding dividend-paying stocks and inflation-protected securities (TIPS). Inflation will return eventually, which means you need to start protecting yourself now from bond-price declines.

Whatever view you take on gold, most financial savants suggest it should occupy no more than 10 percent of your portfolio; and don’t try to time its price movements. And while it can fulfill many roles imperfectly, its appeal changes with the moods of the market’s animal spirits. And here’s why:

Five questions to ask before handing money to a financial adviser

Jul 13, 2012 12:34 UTC

CHICAGO (Reuters) – A friend recently asked me to vet several financial advisers he was considering to manage his retirement portfolio. As one who hates to see people getting fleeced, I’m cautious of Madoff-like malefactors, the latest of which cropped up in the case of the PFGBest brokerage in Cedar Falls, Iowa. So I curbed his enthusiasm a bit about money managers who had impressed him with their initial pitch.

Despite two years under the Dodd-Frank financial reform law, millions of investors are still highly vulnerable when it comes to advisers. Buffeted by relentless lobbying by the financial services industry, the strongest pieces of Dodd-Frank have yet to be implemented. Here are key questions you need to ask a prospective financial adviser before you sign up:

1. How are you compensated?

I have no problem with paying advisers what they’re worth, but often they are overcompensated at your expense. Most of them can’t beat the market after fees and inflation in risk-adjusted terms. Generally, advisers who hold broker-dealer licenses are paid by commission. The more transactions or products they sell, the more money they make.

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