The Big Picture For The Week of October 16, 2005

I had a couple of good questions come in that I will take a stab at answering.

I'm a newbie who's managing my mom's 401k. It's up about 2.5% ytd. That reflects all asset classes in her "pie chart". It's around 40% divided between a money market and a bond fund; 50% divided among various domestic equity funds, mostly large cap growth and value with a smidgen of small-mid cap exposure; remaining 10% in international equities. My mom's 401k sucks. She has only one fund option per asset class ... and they threw in an index fund (s&p benchmark with relatively high fees). However, her company has a 5% match, so I guess her return is actually 7.5%. Where does 2.5% ytd return (across all asset classes) fall on the asset management bell curve? Also, how do I know when to listen to equity economists and when to listen to bond economists? Is it ever obvious who has the stronger argument?

There's a lot there. So the allocation is 60% equities and 40% bonds and cash. If newbie's Mom is young enough to be working I would suggest reviewing 60%/40% as mix. I don't know this person so I can not know what is right but I can say that a person with normal tolerances for volatility with a life expectancy of more than 20 years may have a lot of inflation to keep up with.

A little nugget I picked up in a book by Nick Murray (don't remember the title) about inflation is that inflation over long periods of time can be easily measured in postage stamps. Remember the Elvis stamps twelve years ago? They were $0.29. Stamps have been $0.37 for a while and might go up soon, I guess. That is a 27% move in ten years (stamps have been $0.37 for a couple of years).

60/40 right now as a defensive position is another matter but as a target should be reviewed.

The reader asks where his YTD of 2.5% return rates. Well if the S+P 500 is the benchmark the readers has a 4.5% spread YTD which is pretty good.

The last question is how to know when to listen to stock market economists or bond market economists.

The current state of the stock market cycle or the economic cycle won't make any type of analyst more or less smart. You should always listen to someone you think is smart and, more importantly, someone you think you can learn from.

Another email asked me about Japan and Mexico.

I have no exposure to Japan. During the last 15 years of economic misery there have been short bursts of good stock market returns and commentary saying this time is different always accompanies those bursts. Maybe this time is different, I don't know. What I do know is that Japan imports 100% of its oil. If the yen goes up vs the dollar that will hurt Japan. There are also a lot of the same systemic problems that have plagued the country. I choose to avoid what I perceive are obvious headwinds but I fully acknowledge that the stock market could now be the place to be as some, like Hugh Hendry whom I think is a smart guy, say.

I have a little exposure to Mexico for some clients and I may add Mexico across the board. This is an oil story even if there aren't really any big oil stocks to own, similar to owning a Canadian bank.

Brazil and Chile are my picks ahead of Mexico though. I should disclose (or remind) that I did get lucky with reducing Chilean exposure a few weeks ago and I may put that back on soon.

John Rutledge picked the iShares S+P Global Health Fund (IXJ) on one of the Fox shows. I own this ETF for some clients for whom individual stocks are not appropriate. IXJ is not my first choice but for some folks it is the best choice as a proxy for the sector, I think.

It does not really matter if IXJ is the best healthcare fund or not and I don't know how good or bad John's returns are but I like the fact that at almost every turn he seems to be trying to create awareness of the product. Its these types of tools that will enable most do-it-yourselfers to succeed with their own portfolios.