The Best American Poetry

The Most Important Thing You Can Do

The single most important thing you can do to get your finances in order is to pay off your credit card debt, in toto, ASAP! And never charge more on a card than you can pay off in the thirty-day grace period following the billing date. Use your credit cards this way and they will work for you. Allow the debt to mount and you're one only step removed from the sharks. No one will come along and break your knees -- or put you in debtors' prison (see Dickens's Bleak House) but --

Charles Dickens

but they will take away your house, your Subaru, your Ella Fitzgerald record collection, your self-respect -- everything except the two-way television set that will be mandatory in every household just as Eric Blair predicted!

Cash-Rich Companies

The answer to last week's quiz question is that Exxon Mobil has the most cash of major blue-chip corporations (not surprising when you consider the meteorically-rising price of oil). Others cash-rich firms include Toyota, Microsoft, Apple, IBM,  Hewlett-Packard, and Johnson & Johnson.

Why is it important? Companies with a lot of cash on hand have a big advantage. It guarantees them a degree of flexibility. They can acquire a struggling competitor, for example. In a bear market, they can buy back shares of their own stock to halt a slide -- a ploy IBM has successfully deployed ever since the Louis Gerstner years in the early 1990s.

Stocks Versus Bonds

There comes a time in every young person's life, when he (or she) must choose: stocks or bonds. I have chosen stocks. Why? In one sentence: Because stocks rock, while bonds are boring. Bonds are predictable. That is, of course, their appeal to "widows and orphans" (Wall Street parlance for conservative investors of all stripes). There is one main fact you need to know about bonds, other than that they are a safe investment vehicle with a fixed rate of return, and that is that the price of a bond goes up or down in inverse relation to the movement (up or down) of interest rates. The price fluctuation is minimal, and you will sleep well knowing that a portion of your portfolio is in bonds (in a bond fund or a so-called blended fund like Fidelity Balanced Fund or Vanguard Wellington).

That said, I reiterate: bonds are boring because they are safe, and stocks are exciting because of the added risk and added potential for profit. Stocks are a sophisticated way of gambling, though if you're smart and you do your homework, the odds tilt in your favor as they never do in a casino or at the track. Stocks are also more complicated, and that counts in their favor as well: the study of a stock's fundamentals -- such as its price-earnings ratio -- can become addictive.

What are price-earnings ratios and why do they matter? The answer is coming!

Is the Air Ripe for Art? (by Jenny Factor)

Ever wondered why you were having such a great few months? Have you found a muse? Or are you just jumping onto a worldwide phenomenon?

Well, the headlines have the answer. Here is the latest from today's Associated Press:

Worker Productivity Up 2.2% In First Quarter

Poets, nice going with those pens!

-J.F.

Cash

Which of these blue chip companies has the most cash on hand:

-- Apple

-- Exxon Mobil

-- IBM

-- Microsoft

-- Toyota

And what difference does it make?

Watch this space for the answers!

[Source: Business Week, May 5, 2008]

Market Timing

http://www.vanguard.com/bogle_site/sp20030605.html

A reader asks, "What is market timing and why is it bad?" and "What are mutual fund managers buying thse days?"

Conventional wisdom has it that "market timing" -- cashing out your portfolio when you anticipate a downturn, and the reverse -- is a foolish strategy because no one can accurately pinpoint when the market has reached its apex or its bottom. The objection is valid, and you should hold your long-term investments (for retirement, for example) through thick and thin; if history is a guide, stocks trend upward over any period of length. On the other hand, it makes pefect sense to apply financial rule #1 -- buy low, sell high -- when you need to liquidate securities to finance a major purchase, such as a down payment on a house. For more on the perils of market timing, click on the link above to John Bogle's words of wisdom. Bogle founded the Vanguard group and was its CEO for many a long year.

What are the smart guys buying and holding? As of the end of January, Joel Tillinghast, head honcho of Fidelity Low-Priced Stock Fund, had placed bets on Bed Bath & Beyond, Oracle, United Health Group, and the Brazilian oil Goliath, Petrobras. [Source: Semi-Annual Report of January 31, 2008, compared with Annual Report of July 31, 2007.] As the year began, Will Danoff of Fidelity Contrafund had significant positions in Google, Apple, Berkshire Hathaway, Exxon Mobil, Hewlett-Packard, and Procter & Gamble. [Source: Annual Report of December 31, 2007.]

Bear Market Blues

A reader asks: I hear we are in a bear market. What should I do?

I hear this question all the time:
In a bear market, what should I do?
The answer is simple, economical, perhaps surprising.
The answer is: Nothing!
In a bear market, do nothing!

Do not check the Dow Jones Industrial Average
or the S & P 500 Index.
Do not ask for stock quotes.
Look not at the Value Line or Barron's
or whatever you read for financial guidance.

Whatever you were thinking of doing,
don't do it. Do nothing. Do not take
your broker's calls, if you have a broker.
If you are a broker, take a break.
Go to a Yankee game. Bide your time.

Do not sell unless you have no choice
and do not buy unless your risk-tolerance is high
and you have some rainy-day cash to make
a long-term bet on some beaten-down
blue chip stock like GE!

How to Choose a Mutual Fund

A reader asks: If I have five thousand dollars to invest, how should I do it? There are so many mutual funds. How do you choose among them?

Thanks for this very good question, Linda. If you are investing for the long run, you will want to begin with a conservative growth-and-income approach. Remember the wisdom of diversification. Irving Berlin wrote a great song, "I'm Putting All My Eggs In One Basket," which is a sweet strategy in love, where risk varies directly with romance, but is a foolish policy in the stock market. That is why a combination of mutual funds (which own a basket of stocks and bonds) rather than individual stock picks generally makes the most sense for your Roth-IRA or other long-term investment dollar.

Say you have $5,000 -- a modest advance from a small press for your proposed study of opening and closing lines in epic poems from Homer to Byron. (Wonderful idea, by the way.) You might divide your investment between a diversified equity-income fund and a slightly more aggressive but also diversified mid-cap growth fund. OK, but which ones?

A good way to choose is on the basis of the fund manager: his or her track record and longevity. It's a very good sign when a fund has outperformed its peer group for periods of one year, three years, and ten years -- and when the same manager has been at the helm the whole while.

Brian Rogers has run T. Rowe Price's Equity Income Fund for more than fifteen years and has a sterling record in both bull and bear markets. The same is true for two excellent Fidelity funds, Fidelity Contrafund (run by Will Danoff) and Low-Priced Stock Fund (run by Joel Tillinghast): either would make a worthy choice for the growth half of your portfolio.

Caveat: nothing said here is intended as a specific buy-sell recommendation; examples are given for instructional purposes only.

Readers are invited to send in queries for future columns.

Dollar-Cost Averaging

A reader asks for an explanation of dollar-cost averaging.

This refers to the strategy of investing funds on an incremental basis rather than all at once. An installment of, say, $300 on the fifteenth of each month rather than $3,600 on the ides of March each year makes excellent sense. It protects you against the risk that the stock or mutual fund is at or near its high of the year on the day you invest. It also gains you the benefit of a regular savings program requiring only adherence and no subsidiary decisions. That's how the pros do it. And the same applies when disposing of a security. Don't sell all at once, but a piece at a time. Say you hold 200 shares of IBM stock; you have a profit, and you want to take some money off the table. You decide to reduce your holdings in half. If you don't need the cash right away, you might sell 50 shares today, then wait a while to take advantage of the stock's volatility before selling the other 50. A recent quote for IBM is $118.93, which is on the high end of its range for the year, a good price if you're selling. But if you do not dispose of all your shares at once, you have hedged your bet: you have guarded against the possibility that the stock will go even higher. And it might. It just might. That sense of "hedge," by the way, is the logic behind many a "hedge fund," a restricted-entry mutual fund for high-rollers.

Value of the Roth-IRA

A reader writes: Tax time is approaching and I just got a small advance for a "memoir."  What shall I do?

Congratulations. In your shoes I'd consider establishing a Roth-IRA. This phrase refers not to a fanciful plot involving Philip Roth and the Irish Republican Army but to a way of investing money tax-free and saving for your future. The initials IRA stand for "individual retirement account." In the Roth variety you do not get a tax write-off in the year you invest the money. But when you make withdrawals after reaching the mandatory age, you pay no tax on any of your profits whether achieved from dividends or capital gains.

Young writers would be wise to invest the maximum amount in a Roth-IRA annually -- to the extent that their finances allow. You may do this once a year, when April 15 comes around, or set aside a fixed amount each month. The latter plan has the added advantages of dollar-cost averaging.

The ideal instrument for such an investment is a conservative, low-cost mutual fund, such as the Vanguard Wellington fund, which has been in business for a long time, boasts an excellent track record and has a relatively low expense ratio. At any given time Wellington holds 60% of its assets in diverse stocks and 40% in bonds and is a good all-weather fund. Other smart choices include an index fund devoted either to the Standard & Poor 500 or to the total stock market. But I see I have introduced terms that I will need to explain ("index fund," "expense ratio," "dollar-cost averaging"), so I will desist for now with the caveat that nothing said here is intended as a specific buy-sell recommendation and that examples are given for instructional purposes only.

Readers are invited to send in queries for future columns.