INVESTING COLUMNS : LOCAL STOCKS Learning how to invest your money for the long term By Lauren Rudd for the Skvannah Morning News HE Dow JONES INDUSTRIAL average was smoking recent1 ly as it sliced through 9.700 for the first time March 5. It was also 11 months, almost to the day, since the Dow dosed above 9,000 for the first tim&The nine-month journey to break 9,000 included a brief detour below 7,000 while the Streetwise road to 9,700 included a Lauren Rudd brief respite v at the 7i500 level . So will the market's relentless climb upward continue? The simple truth is that nobody can predict market behavior. Nonetheless; Wail Street's perennial bears can always be counted on to intone their cher- T Berlin was ebullient about the ished words of gloom and doom. market's prospects whereas Chaplin A better question is should you take some or all of your chips/off the was not. Chaplin tried to persuade Berlin to sell all his stocks and take • table while you wait for events to his profits, but Berlin wouldn't listen unfold? No, I do not believe you should. Historical data bears out the and the next day he suffered the . hypothesis that when you are out of consequences. OK, so Berlin took a hit. Now let's the market you have a higher probability of missing a rally than avoiding assume for a moment that he stayed a downturn. Furthermore, selling a with his investments, how would he have done? Based on the market's stock in which you have a profit performance at that time, it is reameans that you incur a tax liability. By not selling you relegate that " sonable to assume that Berlin began portion of your unrealized profit that investing with $2 million at the start of 1926. Those investments would would go for taxes into an interestthen have gown to the $5 million he free loan from Unde Sam. All of which is fine, but suppose the marhad at the time of the ciish. Using the S&P 500 stock index as a ket does correct in an unpleasant mannerand you find yourself subproxy for the market, Berlin would jected to what Irving Berlin endured have1 been down to a paltry $1.3 milOn the evening before the 1929 lion at the end of 1932. That's a loss stock market crash, film star Charlie . of 74 percent from where he was at Chaplin and songwriter Berlin were in 1929. By February 1937, he would have recouped all his losses. By 1945 dining together. Berlin at the time had $5 million invested in the stock his portfolio would have grown to market The market's performance $7.9 million. By the time of his death had been remarkable for the prior 2 in 1989, at the age of 101, Berlin 1/2 years, rising 37 percent in 1927, would have seen his $2 million grow 44 percent in 1928 and 28 percent to $1.1 billion. All this despite a stock during the summer months of 1929. market crash, a Great Depression, a. world war and other smaller crises. Each time I use a situation such as Berlin's for illustration purposes, someone cries foul Thf reasons offered up are that the time frame is too long and the circumstances hack then too different to be relevant today. In fact one reader wrote to me recently and said that if you had • bought property in a place such as Las Vegas back in 1929 and held it until now. you also would have made a considerable amount of money. Yes, you would and that is exactly the point I am trying to make — invest for the long term. Yet, it is far more exciting to jump in and out of stocks as you flatter yourself with ' your genius for predicting each turn of the market > Unfortunately, the thrill of trying .to take short-term profits in stocks by "timing1' the market is irresistible. In rebuttal, I offer up the sage words of John Bogle, founder of the Vanguard family of mutual funds. Bogle has been quoted as saying: "In my 30 years in this business, I do not know anybody who has done it successfully and consistently, nor STOCKS OF LOCAL INTEREST stooi men m nim nua j u> rtmr «ucn 12. COMPANY SYMBOL MARCH 5 MARCH 12 AmritMt/. CSW 28'A 26 Cwtyrr Swiii hi* wriu WC 72V. 68'A 46% irt 'us 46'/» 50 'A 49 »A t SlnttM ' BCC 3 Vs 4 oc .20 •% kfttrMKU rue «'A 29 V. mti U 29 V. W'A •'i raw KJVi 74 'A TO 'A mafic cr 47 'A 49 °A MM ' CAC 16 V. qjtlHjwNa HIM K'A *r« to 62V. isn«« ua 7 'A tiouirivM tarn Mb* •SMM iCimttff SMtnntJ ' . , MP il iri fW un SSCC SO STI . UCC Wl 40'A 64'A 23 BA 18 Z4'A M'/. . 63MA 88V. 65V. 7% 41 'A 64 'A 22 'A 18'/. 24 BA 68'A ' 66 • W'A anybody who knows anybody who has done it successfully and consistently. Indeed, my impression-is that trying to do market timing is likely ' not only not to add value to your investment program, but to be counterproductive." Years ago, Pogo cartoonist Walt Kelly penned the words,"we have met the enemy and he is us." Anyone who tries to time the market should take that line to heart INVESTING 101 The problems with investingin mutual funds rather than individual stocks HE QUESTION IS OFTEN RAISED as ' to why I never discuss muruI al funds. The main reason is JL that I believe investing in mutual funds is essentially an abdication of your investment responsibilities. Having said that, lets gel down to some of the specific weaknesses inherent in mutual funds and how you overcome those weakness- TARGET es by investing in individual stocks. You may be surprised to learn that the vast majority of mutual funds do not Outperform either the Dow Jones industrial average or the S&P 500 index. With all their resources how can this be? One explanation is that stock prices are probably more random, particularly over the short-run, than many would like to admit Therefore, because stocks are priced so effidenuy by the market, finding those issues that will outperform the averages may be more a matter of luck than skill. The Landings The 1999/2000 edition of Th« Landings Telephone Dlractory is now In the preparation stage. This private telephone directory Is distributed to an Landings' residents and contains a classified/display advertising section. If your business or service would benefit from direct Landings' advertising, please contact Jerry Sandy or Tracy Freymuth at 912-364-4393. Rates range from $130.00 to $870.00. p*M»m«nf and copy d##d//n« to Monday, April 5, 1999. Easiest, Fastest most Reliable Connection To the INTERNET www.g-net.net CaU 653-4000 140- Morning News •Sunday, March 14,1«W *,*.**. WRITE RUDD i You can write to financial columnist Lauren Rudd at 6 Keelson Lane, Savannah, 6A 31411, e-mail him at Lrudd9q-net.net or see him at www.sivinnaheapltal.com • If that is the case, then a typical mutual fund should have a performance equal to that of the S&P 500 less whatever tees and expenses are charged against the fund. Unfortunately, the majority of mutual funds do much worse So what are we missing? The answer is stock turnover. Mutual fund managers have to justify the use of extensive resources. They cannot simply invest in a couple of dozen stocks and then sit back and wait for three to five years to see how things turn out. . That is why a typical fund has a turnover rate in excess of 80 percent. In other words, four out of the five stocks that were owned at the start of a year have been replaced by yearend. Yet, even (lie most novice investor quickly learns that patience and success go hand In hand in the investment world. Sometimes a ['Tour Home Infutlon Specialist" 116 Oglelhorpe Professional Court (912) 691-0335 Fax: 691-JOJO JCAHO Acu«i)ii»'l°' wilt Co»»t»*«iio« stock is sold out of a mutual fund's portfolio only to be added back a short time later. Although such an action might appear to be neutral, you are likely to incur a tax liability. Most everyone ascertains how well he pr she did with their Investments on an annual basis. Portfolio managers employed by mutual funds do not have that luxury. They are judged on a quarterly basis. Not only are fund managers judged against the standard indexes but also against the funds and fund managers against which they compete Which is why you hear the term "window dressing" at the end of each quarter. It means that portfolio managers are trying to spruce up their holdings prior to the quarterly judgment day. > Over the past 25 years, a fund manager who simply bought and held what is referred to as the Dow Five or the "Dogs of the Dow" would have achieved a compounded annual return of about 22 percent. Implementing such a strategy would have required less than a single day of effort each year. Unfortunately, any manager employing such a strategy would have been let go long before the first year's returns were in. Yet, as an individual investor you are free to spend the 15 minutes it takes to calculate and invest in the Dow Five. Although there is no way of knowing what your future returns will be. historically you would have outperformed the majority of mutual funds and without the fees. One of the best reasons for not investing in mutual funds is the tax incurred, taxes on mutual fund activity derive from two sources: dividend income and capital gains. Dividend Income is not a major fadtor considering that'the average dividend yield is about 1.6 percent Capital gains are a different Issue You pay taxes on your share of the net gains achieved by the fund manager. A fund that has a high turnover of stocks in which they have some profit means that you will accrue a tax liability which will come due at the time you file your next tax return. Mutual fund managers do not concern themselves with the question of your tax liability: A mutual fund manager's bonus is based on pretax returns. Besides, many funds are owned in tax deferred accounts. Therefore, issue of taxes will not come up until withdrawal time. To make matters worse, you can be taxed on gains that were built into the fund before you owned it. For example a fund's portfolio has a capital gain of 28 percent. You purchase $1,000 worth of the fund today and tomorrow the fund manager decides to turn over all the stocks with a gain. The following day you owe a capital gains tax on $280. When you invest in individual stocks you decide when you want to take a profit and incur the tax liability.