John Wasik

Five investment lessons from the Lehman Brothers blow-up

Sep 17, 2013 12:00 UTC

CHICAGO, Sept 17 (Reuters) – Five years ago I was watching
the world financial system implode after the failure of Lehman
Brothers in real time. Since I’m largely a buy-and-hold
investor, I grimaced while my retirement savings took a
pummeling in 2008-2009.

What have we learned since that calamitous year? There were
certainly a few gut-wrenching surprises as well as some enduring
truths that still hold in personal investing for the future.

1. Gravity is stronger than diversification

For years, we adherents to the Modern Portfolio Theory of
diversification have practiced the fine art of blending our
portfolios with assets that don’t typically move together. In
2008, many, including me, were surprised when commodities funds,
which were supposed to move in the opposite direction of stocks,
followed stocks into the abyss. When nearly everything declines
in a global meltdown, there are few safe havens.

In late 2008, worldwide demand for commodities also
plummeted. An exchange-traded fund like the PowerShares DB
Commodity Index Tracking Fund holds a variety of
commodities contracts from crude oil to zinc. The fund dropped
nearly 32 percent that year, nearly matching the 37-percent loss
of the S&P 500 stock index.

The fund remained a poor investment over the past five years
as global commodity demand is relatively sluggish and China and
India slowed down. It has fallen almost 5 percent annually, on
average, during that period through Sept. 13.

Why dividend-growing stocks are beating bonds

Sep 9, 2013 19:08 UTC

CHICAGO, Sept 9 (Reuters) – With all the angst in the market
lately about rising rates bruising bond prices, where can you
find reasonable income with less sensitivity to interest-rate

The answer, surprisingly enough, is dividend-growing stocks.
These cash-rich companies not only have the ability to raise
payouts but their returns are still competitive with bonds in a
low-rate environment.

Dividend growers can offer better performance than bonds
because total return rises as the dividend yield is increased.
(Total return is a stock’s appreciation plus reinvestment of
dividends and capital gains before taxes.)

Use convertibles to straddle stock and bond markets

Sep 3, 2013 16:25 UTC

CHICAGO, Sept 3 (Reuters) – As bonds that can be converted
into stocks, convertibles are securities that long-term
investors can learn to love.

Just like regular bonds, convertible bonds have a maturity
date, coupon payment and face value. As an enticement to
investors, though, they can be converted into common stocks at a
later date. While their yields are not as high as conventional
bonds, the conversion feature offers you a potential stock play
at lower risk.

With anxiety mounting over the Federal Reserve’s next Open
Market Committee meeting – and whether it will back off its
bond-buying program – convertibles may represent a little-known
sweet spot between pure income investing and the stock market.

Another key factor for stock investors to watch

Aug 27, 2013 16:32 UTC

CHICAGO (Reuters) – It’s well known that small-company stocks have outperformed large-company stocks in terms of average annualized return since the 1920s, and bargain-priced stocks tend to outperform growth stocks.

Now there’s another factor worth watching: direct profitability.

Recent research by money management firm Dimensional Fund Advisors (DFA) shows a significant premium over time for investing in companies with high direct profitability – and you can adjust your portfolio accordingly to reap those outsized gains.

DFA’s definition of direct profitability is a bit technical: operating income before depreciation and amortization minus interest expense. In non-accounting terms, companies with high direct profitability are expected to have better returns than those with lower direct profitability.

Preferred stocks still make sense for yield

Aug 20, 2013 12:01 UTC

CHICAGO (Reuters) – Frustrated yield seekers have been drawn to preferred stocks because they offer a several-point yield advantage over most U.S. investment grade bonds, including Treasuries, corporates and municipal bonds.

But these quasi-stock, quasi-bond investments act like bonds when interest rates rise: They fall in value. That has brought them some negative attention in the last few months. Preferred stocks declined in value as investors scrambled to find higher-yielding vehicles when rates rose. They may now may be oversold and offer some bargains.

Preferreds straddle a territory between common stocks and bonds. Mostly issued by financial companies, preferred stocks confer no voting rights, but represent a higher claim on earnings than common stocks, and are less volatile.

Will rising rates bring rising stocks?

Aug 13, 2013 16:47 UTC

CHICAGO (Reuters) – For years, the conventional wisdom has been that rising interest rates are no friend of the stock market. A combination of higher costs of borrowing and potential inflation can be a one-two punch for companies and consumers.

But rising rates and stock prices happen more often than investors know, and they can herald brighter economic fortunes in the short term. There are ways to invest in both without getting burned.

This duet has had some off-key news of late because of fears that the U.S. Federal Reserve will curtail its bond-buying program: Bond yields have been rising over the past few months, which depresses bond prices. This has caused a minor shock to income-oriented investors.

Dividend darlings can beat S&P 500 index

Aug 5, 2013 19:23 UTC

CHICAGO, August 5 (Reuters) – When stock-fund managers beat
the market average, often it’s because of a roll of the dice.
Skill may come into play, but only rarely.

Sometimes, though, you can think counter-intuitively and
come out ahead. Such is the case with high-dividend funds that
may avoid loading up on the most glamorous stocks.

Dividends create something of a security blanket around a
stock price. In a market selloff, the stocks with the highest
market capitalization often get dumped and the dividend payers
often stay in portfolios because they promise higher total

After Detroit, muni bonds are safe, but no slam dunk

Jul 30, 2013 14:29 UTC

CHICAGO (Reuters) – Despite the Detroit bankruptcy and record sell-off of municipal bonds this year, most top-quality “munis” are safe to hold.

If you are a conservative, buy-and-hold investor who wants to temper risk, you might want to stick to the highest-rated bonds from states and localities that do not have looming pension or other payment problems.

Those quality munis offer decent yields and their prices are even more attractive in the wake of the Detroit bankruptcy.

Why emerging markets still offer good stock bargains

Jul 22, 2013 18:05 UTC

CHICAGO (Reuters) – There’s been a lot to grumble about when it comes to Europe and emerging markets this year.

Most of Western and Southern Europe is still trying to dig out of a recession. Economic growth has eased in developing countries. And when the Federal Reserve hinted that it might back off its bond-buying program recently, equities in most emerging markets went into a funk.

But attractive valuations and some palpable signs of rebounds are boosting the fortunes of shares of non-U.S. companies, particularly in the emerging markets. If you don’t have any stake in them, it’s a good time to buy.

Column: Gold still not the best inflation fighter

Jul 16, 2013 14:45 UTC

CHICAGO (Reuters) – As U.S. interest rates have risen, owning gold has been a loser’s game for anyone is trying to hedge against inflation.

Gold isn’t a smart inflation hedge, but many people have been using it that way because they think they have few alternatives.

A low-inflation rate has been punishing to gold investors for the past three months, and the Consumer Price Index has been running well under 2 percent this year. As evidence, the leading gold bullion vehicle, the SPDR Gold Trust ETF, has lost nearly a quarter of its value over the past year as investors continue to sell out of their positions. It was down 23 percent year to date through July 12.