My foggy crystal ball......

I think we are in for very interesting times ahead for the Global Markets. There's quite a few factors that might make for continued choppiness.

1) As everyone knows there's the sub-prime mess that started in the US markets and spread to some extent globally. At this point, we still dont know how much more bad news there is - a couple more billions in write-downs maybe? Have all the banks truly assessed the damage and been honest with their projected losses?

2) The sub-prime fiasco above is aggravating the already slowing housing market in the US. Here too, we dont really know the extent of the damage - it may take another year to really figure out where we stand as far as housing goes.

3) The Fed reserve is trying to put band-aids in place by cutting interest rates in the US. This causes certain dead cat bounces in the market (like the one we are having today), but its not a long term solution. The fed cutting rates also weakens the dollar, thereby spiking commodity prices and inturn increasing inflation (which is already rampant). Dont believe the official 3% crap that the Govt dishes out from time to time. Real inflation is way way higher than that. The falling dollar also increases the flow of money to emerging markets. I think the Fed finds itself between a rock and a hard place at this point. Do they raise rates to curb inflation, or decrease rates to bring liquidity into the markets that are suffering from the sub-prime fallout? I think they have chose the latter since its tied into the housing market. They would rather have a soft landing in the housing market rather than a crash which would be catastrophic.

4) Looks like Hillary is going to take the White House next year - hmmmmm wonder what that will do to the healthcare industry (with her plans for state run healthcare). She is also going to increase taxes that will cut into consumer spending.

So, my crystal ball is extremely foggy (like it always is). I can only say - diversify and stay the course and hope for the best.

Doesnt look like the majority of shoppers in the US really care about all this uncertainty. One look at the shopping malls on the day after Thanksgiving will lead you to believe that the American consumer hasnt cut back on any holiday spending. Jam packed parking lots at the malls and lines in the middle of the night for the early bird specials are the oder of the day during the holidays. But I guess thats what keeps this economy going.

Happy Holidays everyone!

BRIC - out, CEEMEA - in? Change of guard in emerging markets...

I was happy with my Emerging Markets index fund thinking it had me covered across all emerging markets - well not really :-)

The "traditional" concept of emerging markets being primarily the BRIC countries (Brazil, India,China) has now taken another turn. Probably because these countries have started looking a little frothy with billions of dollars of foreign investment in the last 5 years or so. They've got to take a breather sometime - right?

Well, now you dont need to restrict yourself to only the traditional emerging markets. The new (well atleast for me) buzz around is CEEMEA - meaning Easter Europe, Middle East and Africa.

If you want to be early to the party of the next decade (who knows - it might be), consider investing in these countries. Of course it is a given that these are highly risky investments (ever been to Nigeria?), but with great upside potential as well.

Wanna roll the dice on this with some play money?

Check out TRowe Price's new Middle East Africa fund - TRAMX. It opened up in September this year and it has already returned over 11% (in a month!). Of course it may go the other way next month and correct by as much as 50%, but we're talking a small portion of one's assets here - not one's retirement savings.

This fund stays out of the murkier areas in Africa - has quite a few holdings in South Africa and taps into countries like Bahrain, Qatar, Oman etc. The expense ratio is quite reasonable given the exotic fare in which the fund invests.

Another plus I believe is that since this fund is brand new, it does not suffer from asset bloat and the manager has a lot of freedom to really "light it up" :-)

I'm thinking of giving it a shot.......

Ken Heebner - Poor Man's hedge fund manager?

Name a US Large Cap blend fund that has returned 75% YTD? Yes you heard me right - 75% - its beaten (well beaten is not the right word, thrashed is more like it) the S&P 500 by a whopping 63%. And if you look at its returns in the past - well judge for yourself:

CGMFX - CGM Focus Fund

2003 66.5% (beat the S&P by 37.8%)
2004 12.3% (beat the S&P by 1.5%)
2005 25.4% (beat the S&P by 20.5%)
2006 15.0% (pretty much the same as the S&P 500)
2007 73.3% (beat the S&P by 63.5%)

2004 and 2006 would be considered bad years for Heebner, but for an average fund manager, they would be considered pretty decent :-)

And he's got other funds that have stellar performances as well. Check out the CGM realty fund (CGMRX) - its up 30% YTD while other real estate funds are in the red for the year.

Now, whether he keeps up this performance up in the long run remains to be seen, but he's been doing great lately, we'll have to give him that.

Personally, I've got my eye on the CGMRX as I do not have any RE fund in my Asset Allocation plan (apart from what the total stock market index holds) and I'm looking to add some RE exposure but am wondering if I'm already late to the Heebner party.

So how does Heebner do it? Dont know - maybe he just has a knack for spotting whats "in". The 330% annual turnover (meaning he does tonnes of buying and selling in a short span) seems to suggest so.

So, if you are on the lookout for a poor man's "hedge" fund and dont have the millions to invest in a "real" hedge fund, check out the Capital Group.

Better armour up for the bumpy ride tho......

East is East and West is West and the twain SHALL meet!

Indexing and Active Management are two very different investing strategies. With Indexing, an investor relies on the performance of the broad market indices for his returns. With Active Management, he believes that the stock picking ability of his fund manager will beat the returns of the market indices.

Battle lines have been clearly drawn between the two strategies since time immemorial. Bogleheads and Vanguard Diehards will always claim that over the long run, indexing beats active management and others that dont believe in indexing will claim its the other way around.

So who is right and which one should I pick? I look at it this way - well both are right. It is a fact that indexing (specially when it comes to efficient markets like the US) beats active management 70% of the time over the long run. BUT, if I pick the right funds with stud fund managers, I could be in the 30% that beats the index as well.

So why not do a little of both?

Pick index funds for your US allocation since the US is a highly efficient market and it is indeed hard for fund managers to beat the indexes over the long run (70% of them fail to do so). And by long run I mean over 10 years.

For your international allocation, go with actively managed funds since the foreign markets are not as efficient and fund managers have a better chance of beating the indexes (by finding inefficiencies) over the long run.

I personally have my core portfolio in index funds. But I do have some international and mid/small cap funds that are actively managed.

What's on your Christmas list this year?

Well, if I were to overweight a couple of sectors in my long term portfolio going forward, I would vote for buying into Emerging markets and Energy.

Sounds like performance chasing doesnt it? Might be. Emerging Markets and Energy have been on a tear lately - check out the best performing funds over the last couple of years - you'll see most of them fall into 2 categories - emerging markets and Energy :-).

So why am I putting my money (atleast some of it) on these two in particular?

It looks like over the past few years, the rest of the world is catching up with the US and other developed countries. We are in the process of seeing the often mentioned "Global Economy" really take shape.

In this new global economy, everybody's got a shot. Its not only the big boys that can have all the fun (read the US and other developed nations). Latin America, India, China, Eastern Europe and even Africa have joined in the party and are showing real signs of development and progress ("Real" companies making "real" profits).

IMO, over the long run, Emerging markets have a lot more room to grow and when the next opportunity presents itself, I will be adding to my EM holdings.

As far as oil goes - the falling dollar, a Republican government in the White House (at least until the next election), geopolitical tension in the middle east thats here to stay, increasing global demand, are some of the reasons oil prices will continue their upward trend over the long term.

So the next time oil prices dive a bit, I'm going to get me an energy fund :-)

Ofcourse, these "recommendations" come with the standard disclaimer - be ready for a lot of short term volatility and do not put all your investable assets into oil and emerging markets :-) These should make up only a small part of your portfolio (in my case, not more than 20 percent)

The funds in these categories that I like are

EM

VEIEX - Vanguard Emerging Markets Index (already own this one - will be adding more to it). Its low cost, diversified across the globe and has a great record (more details at Morningstar)

Energy, I am leaning towards

FSENX - Fidelity Select Energy (I dont own it yet but probably will on the next "correction" in oil prices)

Hey, for what its worth - the next time you see gas prices rise at the pump, you can find solace in the fact that at least your energy fund is doing well :-)

Have you gotten your XRAY done yet?

Nope - not talking about the much dreaded doctor's visit that you've been dodging :-)

Morningstar has a great tool (free and you don't even need to register) that gives you a complete breakdown of your portfolio - just feed in the ticker symbols and dollar amounts.

It tells you (among other things)

1) Your overall stock, bond, cash allocation
2) Which countries your stocks are invested in
3) Break up of which sectors your stock allocation is invested in
4) Interest Rate sensitivity of your bond holdings
5) Whether you are large cap, mid cap or small cap weighted
6) Whether your portfolio leans towards value or growth

Pretty cool. Check it out here

I always use the XRay when I need to re-balance my portfolio (to get before and after snapshots) and can say that I've prevented a few broken bones in the process :-)

Commodities anyone?

What asset class does the following?

1) Gives you diversification over and above cash, stocks and bonds
2) Benefits from the falling dollar
3) Benefits from increasing infaltion and rising prices

well you guessed it - commodities. With the dollar on its way down, prices on their way up and global demand for commodities spurred on by red hot growth stories in the emerging markets, desh included, does it make sense to add a touch of commodities to your long term portfolio?

Take a look at the long term returns of the Dow Jones commodity index (^DJC) as compared to the Dow Jones Industrial Index (US stock - ^DJI) and the Vanguard short term bond index (VFSTX). Click on image below to enlarge



Looks like the overall performance of the commodity index falls somewhere in between (that of stocks and bonds). Also, if you look at this chart across shorter timeframes, you can see that commodities have their own cycles of ups and downs and are loosely corelated with the stock and bond cycles, which gives you good diversification.

There are quite a few ETFs and ETNs that track various commodity indices

1) GSG - iShares S&P GSCI Commodity-Indexed
2) DBC - PowerShares DB Commodity Idx Trking Fund
3) DJP - iPath Dow Jones-AIG Commodity Idx TR ETN
4) GSP - iPath S&P GSCI Total Return Index ETN

I'm leaning towards DJP. Its well diversified across all commodities - precious metals, energy, agriculture products you name it and is also tax efficient. Haven't pulled the trigger yet tho.

Comments are always welcome.

A little gambling with play money? Sure!

Once a bulk of your assets have been allocated into a broadly diversified portfolio to suit your financial goals and you are on cruise control - well things can get a little boring. Long term investing if done right SHOULD be boring.

However, IMHO it doesn't hurt to set up a small "play money" portfolio (about 5% of overall asset base) just to keep things interesting. With this play money - you could trade stocks, options, derivatives, heck even buy into Cramer's tips all you want.

I would be lying if I said I didn't get a rush from watching a penny stock that I just bought triple in a couple of days. So go ahead - make a killing on penny stocks and the likes. Trade 'em, short 'em, ride 'em up the hill and speculate to your heart's content.

Just remember to do so with only your play money (money that you can afford to lose completely) and don't get carried away and big headed when you double your money in a couple days. It was probably just luck :-)

Its like eating healthy on weekdays and pigging out on the weekends - gotta have the double cheese burger and curly fries once in a while!

Happy trading.....and if you've got any "hot" picks, leave a comment. I'll check them out too.