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Kleiber's expert opinion
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December 9, 1996: 12:12 p.m. ET
New Century Asset Management chief answers your questions
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NEW YORK (CNNfn) - Robert Kleiber, president of New Century Asset Management, a fee-based investment advisory firm, manages portfolios for individuals and corporations, specializing in global asset allocation.
Q: I have received two subscription offers for "inside information" financial letters. Both are predicting a deep correction in the markets soon, expecting that it will last several months. One goes so far as to advise selling all stock holdings immediately, and putting the money in cash accounts.
Do you think these are scare tactics? If not, how is it possible to pull money out of IRA stock funds without paying penalties?
A: I have seen some advertisements predicting "doom and gloom" and others predicting continual prosperity and bull markets. You can find conflicting opinions on any financial barometer. The bottom line is, nobody can predict the future consistently, beyond making an educated guess. However, marketing tactics like the ones you mentioned do sell.
My feeling is that the traditional benchmarks for measuring stock markets are not as relative as they were 10 years ago. Perhaps by traditional measures, stocks are overpriced, or we're in the middle of a "bubble mania." But I believe what we're seeing is a global economy with economic issues far too complex to form rock solid predictions. Whatever the case, we're in uncharted waters!
Regarding your IRA stock funds: if you move out of the fund and into a money-market fund (cash), you will not have a tax penalty if the cash account is within your IRA. However, be sure that your fund has no "surrender" charge.
Q: I have a portfolio with Intel, U.S. Robotics, Netscape and Cisco Systems.
Which one of these companies do you think is the best long-term hold? Do you think a correction is on the way, even knowing that the fundamentals are there for all of these companies?
A: Intel is a leader in the industry and continues to drive the technology market. These other companies are also leaders in technology. At this time, Intel is probably the choice for long-term, due to financial strength and market scope.
However, these kinds of companies must continue to produce technological advances, as their products become obsolete in a matter of months -- providing competitors an opportunity to gain market share.
My suggestion for diversifying a portfolio into technology is to invest in a mutual fund with a high percentage of tech stocks. Remember, tech stocks are volatile, and it is extremely difficult to time that sector.
If you want to own individual tech issues, I would suggest selecting eight to 10 stocks for diversification within that sector.
I believe the technology area is a growing industry for at least the next decade. There's a growing, worldwide demand for it, and -- with the explosion of the Internet -- who knows where it will lead!
Q: I was recently advised to consider transferring my Jackson National Single Premium Deferred Annuity with Market Value Adjustment into Jackson National Series Trust. These series provide opportunities to invest in various funds that, according to JNL annual report ending March 31, 1996, have done very well in certain fund areas, (although) some have had a medium to poor growth profile.
My adviser suggested that to provide protection from a downslide, I diversify into multiple funds -- some with high performance profiles, some with medium and some, maybe, with just a "so-so" performance. Do you have any advice, and what does your database indicate as to the track record of JNL?
Incidentally, my annuity is presently paying only 6.67 percent, and it is not part of my IRA. I do have other investments, so this could be considered a little "play" money for me -- not a "do-or-die" situation.
A: Although I do not follow the Jackson investments, you must first determine all charges, fees, commissions and tax consequences before making any changes. Then, decide if it's worth it to switch. Make sure the recommendation is valid, not made to simply generate a commission for someone.
Your annuity appears to be paying a reasonable rate, but investing in a basket of mutual funds may provide a better growth opportunity. Determine how to invest among funds that compliment each other from a risk/return standpoint, not just market performance. Remember, history is not indicative of future performance.
Q: Many analysts are predicting that growth stocks will perform well domestically in 1997, as the sector hasn't performed very well this year. I have also heard a lot about the "January Effect" (where small caps often outperform blue chips during the month of January).
Keeping this in mind (and the fact that blue-chips are overpriced now), would you recommend selecting a small-cap mutual fund now, or should I wait for a correction and then enter the market?
A: This has been a good year for many growth stocks, and I believe 1997 should also provide rewards.
At the same time, small-cap stocks are moving as we speak, where blue chips have mostly dropped the last few days.
The "January Effect" may be happening now, (causing) the small-cap bounce. However, it appears the market as a whole has been dropping over the last week, and you may have a better opportunity shortly.
Most mutual funds pay out their annual capital gains in December, so you should definitely wait until after that date, as you do not want to be taxed on gains where you received no economic benefit. Call your mutual-fund company and ask them when you could invest without incurring the capital gain.
Q: I would like to diversify my U.S.-dominated portfolio by investing in Europe through mutual funds.
Since European markets correlate with the U.S. markets, am I really diversifying my risk? What is your outlook for European markets in 1997? Is it a good time to enter now, or would you say that the markets have peaked and a correction is imminent?
A: If you're thinking international, it's the prudent thing to do, and it's definitely not too late!
The U.S. market has been a non-stop bull for two years, and may continue being so. However, any unexpected economic, political or Federal Reserve action could send this market into near-term volatility.
At the same time, there are 25 to 30 other countries with more than two-thirds of the world's stocks.
Investing in international mutual funds provide excellent diversification to a U.S. stock portfolio. These markets do not consistently correlate (go in the same direction) with Wall Street.
Even if the U.S. market drops, it doesn't mean the others will follow on the longer trend.
Also, look at international bond funds, as interest rates overseas are still declining, helping bond-fund performance.
I like Europe, but I like Southeast Asia better. You should have funds in both areas. It seems to me that investing only in the United States has much more risk than combining with an international fund. Also, your performance may increase with this added diversification.
Q: Back in July or August, small cap/emerging growth mutual funds began to take a nose dive as the Nasdaq Composite plummeted. Now that the Nasdaq has recovered and has set new highs, small cap/emerging growth mutual funds do not seem to be coming back nearly as strong as the Nasdaq. They dropped heavily when the Nasdaq dropped, but have shown relatively slow growth compared to the Nasdaq's rise.
I have invested my small cap/emerging growth funds primarily into two families of funds: PBHG and Van Wagoner. Do you have any comments as to when we will see a resurgence or another strong downturn in small cap/emerging growth mutual funds? Any comments about the two specific fund families mentioned above?
A: You're right about July and August. However, most small cap/emerging growth funds have recently come back quite nicely. I checked your funds, and it appears they hold between 15 to 25 percent cash, which may be why they did not recover as quickly (as the Nasdaq Composite). However, this cash may save them and provide opportunities if the market drops due to economic or political surprises. Remember, most of these funds will not always track the index consistently.
Q: What are the pros and cons of investing in fixed-rate annuities or variable annuities for retirement? Which investment companies (e.g. Fidelity, Montgomery?) have the lowest insurance costs, best returns and lowest fees?
A: The main advantage of annuities is their tax-deferral feature. Some have free switching between funds, which allows you to manage your portfolio without tax consequences as long as the money remains in the annuity. You need to determine all the advantages and disadvantages various annuities offer.
As far as the pros and cons of a fixed rate vs. a variable annuity, that depends on your needs and involvement.
I like variable annuities for the variety of investing that they offer.
Although you may not have a fixed rate in a variable annuity, they usually provide a money-market fund for the cash management.
Their investment options have also become quite diverse over the last five years. You can diversify among U.S. and international stock funds, U.S. and international bond funds, precious metals, real estate and more.
If you choose an annuity, shop around and find one with flexibility for managing your money and withdrawing it as needed.
Q: My company's 401(k) plan is with high-load New England funds. I also have IRAs with Schwab. I have been putting 10 percent (of my salary) in my 401(k). I want to go to 15 percent, but with the loads and fees New England has, I think I might be better off putting the additional money in my IRA instead. I also like Schwab's choices a lot better than these New England funds. What would you recommend?
A: I agree (with your plan). There are so many choices now to invest into mutual funds, and so many places to research them. With a couple of hours research on the Web, you can find no-load mutual funds to fit your needs.
I didn't realize they still made 401(k) plans with loads. Perhaps if you work for a small company, you could convince the decision makers to shop around. A loaded 401(k) is not competitive!
Schwab, Fidelity, and other fund families have services to help you with your research for determining which funds are appropriate for you.
Q: What percentage of a portfolio would you recommend in international concerns? Specifically, could you recommend one or two international mutual funds?
A: First of all, I believe everyone must be an international investor for a variety of reasons. When you invest in an international fund, you get diversification into 20 or 30 overseas markets that do not correlate with each other or with the U.S. market.
International stock and bond funds usually outperformed U.S. markets prior to 1995 and 1996, (and I believe) their time is here again.
What percentage would I suggest (investing overseas)? It depends on your objective and goals. I usually recommend that a long term investor put about 10 to 15 percent into international bonds funds and about 20 to 35 percent into international stock funds.
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