Opinion

John Wasik

Unsinkable ways to avoid a Titanic portfolio

Apr 20, 2012 15:21 UTC

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).

What later submerged Morgan’s shipping trust was that it was
over leveraged as it tried to control an already volatile
business that took a huge hit when World War One started in
1914. Ultimately, Morgan’s monopoly attempt failed, and his
International Mercantile Marine Co went into receivership a few
years after the Titanic sank. Like most other attempts to corner
a commodity or industry, it was an “all in” bet that
over-concentrated risk. It was the equivalent of borrowing money
to invest your entire portfolio in dot-com stocks in 1999.

Managers of the reorganized International Mercantile, which
became United States Lines during World War Two, though,
apparently hadn’t learned the lesson of spending big on mammoth
ships or outdated technologies. The company built and launched
the SS United States in 1952, the largest passenger ship built
in the United States at the time, just before the airline
industry was starting its long run to dominate long-distance
travel.

What’s on your investing bucket list?

Apr 16, 2012 18:05 UTC

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:

Don’t do the portfolio tango on Spanish concerns

Apr 13, 2012 15:04 UTC

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.

When safe stock funds cost you money

Apr 9, 2012 17:10 UTC

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.

COLUMN: When safe stock funds cost you money

Apr 9, 2012 17:02 UTC

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.

Do some spring rebalancing to reduce risk

Apr 5, 2012 20:20 UTC

CHICAGO (Reuters) – To some, spring means cleaning, renewal and yard work. For nervous Nellies like me who still see the ghost rider of 2008 in my rear-view mirror despite the market being up sharply so far in 2012, it means rebalancing my portfolio.

There’s nothing sexy about rebalancing. You simply plod through your account statements and reorient your nest egg toward your objectives while lowering risk. The crux is that if you do it right, you are purchasing less-favored assets and selling higher-valued securities. In other words, you are buying low and selling high, which is what most investors consistently fail to do. Far too many folks buy on the way up and hope that good times will continue indefinitely, thus ignoring the downside risk.

If you don’t rebalance, your portfolio gradually becomes dominated by higher-risk and potentially over-valued assets. When the eventual correction or crash comes along, the resulting fall is much steeper – if you haven’t rebalanced.

COLUMN: Do some spring rebalancing to reduce risk

Apr 5, 2012 20:12 UTC

CHICAGO, April 5 (Reuters) – To some, spring means cleaning,
renewal and yard work. For nervous Nellies like me who still see
the ghost rider of 2008 in my rear-view mirror despite the
market being up sharply so far in 2012, it means rebalancing my
portfolio.

There’s nothing sexy about rebalancing. You simply plod
through your account statements and reorient your nest egg
toward your objectives while lowering risk. The crux is that if
you do it right, you are purchasing less-favored assets and
selling higher-valued securities. In other words, you are buying
low and selling high, which is what most investors consistently
fail to do. Far too many folks buy on the way up and hope that
good times will continue indefinitely, thus ignoring the
downside risk.

If you don’t rebalance, your portfolio gradually becomes
dominated by higher-risk and potentially over-valued assets.
When the eventual correction or crash comes along, the resulting
fall is much steeper – if you haven’t rebalanced.

Green investing good for world, maybe not for you

Apr 2, 2012 18:59 UTC

CHICAGO (Reuters) – Want to vote with your dollars when it comes to environmental concerns? One way is to invest in environmentally focused mutual and exchange-traded funds, although you may be trading your green conscience for increased portfolio risk.

People who are concerned about energy prices and climate change have put more than $3 trillion into the hands of managers who target positive environmental, social and corporate governance practices, encompassing more than 250 investment funds, according to the Forum for Sustainable and Responsible Investment’s 2010 report on socially responsible investing.

Like any sector, environmental stocks are volatile. One year ethanol producers are hot, then sold off. Solar-panel manufacturers sizzle – and then fade.

COLUMN: Green investing good for world, but maybe not for you

Apr 2, 2012 16:27 UTC

CHICAGO, April 2 (Reuters) – Want to vote with your dollars
when it comes to environmental concerns? One way is to invest in
environmentally focused mutual and exchange-traded funds,
although you may be trading your green conscience for increased
portfolio risk.

People who are concerned about energy prices and climate
change have put more than $3 trillion into the hands of managers
who target positive environmental, social and corporate
governance practices, encompassing more than 250 investment
funds, according to the Forum for Sustainable and Responsible
Investment’s 2010 report on socially responsible investing.

Like any sector, environmental stocks are volatile. One year
ethanol producers are hot, then sold off. Solar-panel
manufacturers sizzle – and then fade.

In times of trouble, investors can build a bridge

Mar 26, 2012 13:20 UTC

CHICAGO (Reuters) – Having been a stock market investor during the worst downturns over the past quarter century, I’m naturally cautious about national economic shocks like recessions, inflation, bubbles and wars.

None of those threats have disappeared from my radar screen. But being a squeamish investor, as I’m watching the steady ascent of the U.S. stock market this year, I have one question: What should you be most afraid of?

I share the caution espoused by former Treasury Secretary Robert Rubin, whom I heard speak at the Chicago Council on Global Affairs on Thursday. “I’m an investor – a troubled investor – with a very deep concern,” Rubin said. “If we (the U.S.) don’t get on a sound fiscal trajectory, there will be a severe crisis in the bond and currency markets.”

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