Recently, we talked about how Warren Buffet’s Congressional testimony about Moody’s responsibility for causing the banking crisis and stock market crash by rating collateral mortgage options (CMO) triple-A up until it was already obvious to everyone that these investments were in trouble, was wrong headed. Today, the ratings agencies Fitch and Moody’s gave us all another reason to wonder why we listen to rating agencies at all with its downgrade of British Petroleum.

It is not that downgrading BP is incorrect. It is both the timing and the sanctimonious nature of how the downgrades British Petroleum (BP plc – NYSE:BP) stock and debt came about.

It has been six weeks since the April 20th explosion on the Deepwater Horizon oil rig and the company’s stock has already fallen over 40% since the incident. Which has been a big hit on Members of Congress are calling for BP to put $20 billion into some sort of escrow fund out of concerns that the company may end up not being able to fully pay its legal obligations resulting from the massive gulf oil spill. Yet, both Moody’s and Fitch’s statements act like their concerns about BP are actually news to anyone.

“Today’s downgrade of BP’s long-term debt ratings reflects Moody’s expectatoin that the protracted oil spill … will result in significant containment and clean-up costs as well as litigation costs.”

Really? Gee Mr. Wizard, thanks for letting all us dumb Main Street investors know that we should be concerned about how much the cleanup of the biggest ever oil spill is going to cost British Petroleum, because otherwise we would have naively assumed that there would be no impact on the earnings of BP nor its ability to repay debt.

In other words, what are the ratings agencies good for again?

While I completely understand that downgrading a company’s credit rating is a very big deal and should not be taken lightly, it seems that the rating agencies are a day late and a dollar short, as my father would say. What value is there in investors waiting for the opinions of the major rating agencies?

To put it another way, if your credit rating score from FICO took this long to update, Fair Issacs would be out of business within the year, and yet, the business equivalent moves so slow that if they handled consumer credit you would be able to open a dozen new rewards credit cards before your score got lowered from 750 to 600 after you defaulted on your home equity loan.

Today’s downgrade simply gives financial writers one more thing to talk about and provides the “proof” necessary for newspapers and magazines to start talking about how the oil spill has hurt BP financially. Otherwise, there just isn’t any value in being told what investors already know.

I am always a bit curious when I read a cover story headline like the one on Kiplinger Magazine this month. It says 18 Ways To Earn 5% or More On Your Money.

A lot of readers will make an assumption that goes along with that headline that they are talking about low-risk investments or no-risk savings products. After all, it doesn’t take a degree in advanced personal finance to know that there are literally thousands of ways to earn 5% or more on your money. Of course, most of those also come with a way to lose 5% or more on your money too.

That is not what the article is about. Instead, this particular article, whose article title inside the magazine is, “Great Rates In A Low-Yield World” manages to give a better clue. The article is NOT about where to open a savings account to earn 5% or more. It is about how to get 5% YIELD on your investment. That is, 5+ percent as income, and not counting losses on invested capital.

Real Earnings Are About More Than Dividends and Interest

Unfortunately, while the article does indeed uncover available investments earning a 5% or higher yield, it ignores the potential change in value of those investments. If you are holding bonds to maturity, of course, this factor is moot, but if your personal finance needs change or you don’t plan on holding those munis for a couple of decades, then price volatility is a very real factor in whether or not you earn that five percent target interest rate.

The first way to earn more than 5% on your money on the list is taxable municipal bonds. Specifically, they talk about Build America Bonds (BAB) which in addition to having taxable interest, have a portion of their bond insurance paid for by the Federal Government. Long-term BAB are paying 6 percent or higher in many cases.

Of course, you better be planning to hold on to those long-term bonds for a long-term investment.

As any educated investor knows, bond prices fall when interest rates rise. This is true for Build America Bonds muni bonds too. So, the $1,000 you shell out to get the 6.6% 25-year Illinois bonds the article references will soon be worth much less.

While economists are predicting the Fed won’t raise interest rates until 2012, that still means that for the next 23 years, those bonds will be trading at a discount. That is not a pretty outlook for bonds.

If rates rise far enough and you end up selling those bonds for whatever reason, your capital losses will make your actual rate of return on the bonds far less than the 5% you were trying to earn more than in the first place.

Other money earning strategies on the list potentially have the same issue. The list includes some REITS, preferred stocks, and some exchange traded limited partnerships.

Nothing drives home this point more than the inclusion of British Petroleum on the list of ways to earn more than 5% on that money. Since magazines go to print months before they hit the newsstand, the article was written before the BP oil spill in the Gulf of Mexico occurred. So, on page 39, under “Juicy Dividend Payers” is British oil giant BP (with a listed stock price of $59) and its 5.7% dividend.

Unless you have been living under a rock, you know that this is one suggestion you do not want to take. Suggestions that BP eliminate or sharply reduce its dividend payment in order to retain enough cash to pay out mounting compensation and penalties are growing louder. Furthermore, the stock’s price has been crushed, closing under $34 per share on Friday. If you bought BP at $59 hoping for a nice juicy dividend, not only is that dividend likely to be much lower (if not zero), but you have also lost 40% of your original investment!

The point is not that this one suggestion turned out very bad, but rather that any one of the suggestions in that same article could have something happen to them as well. It wouldn’t take the world’s largest oil spill to turn a 6% dividend into a 3% yield, while at the same time wiping out 5% of your original investment.

Looking for ways to earn more interest on your savings is good. Knowing the distinction between savings and investments is even better. Don’t run down to your broker’s office with your savings account because a financial magazine or money management website touts higher returns. First investigate the risks and make sure you are putting the right dollars in the right financial asset strategy buckets.

In addition to writing this blog for fun and profit, I am also a professional financial freelance writer, as well as a freelance technology writer, among other things. So it is not without some professional writing background that I read with shock the financial news that Yahoo is acquiring Associated Content for “slightly more than $100 million.” Ostensibly, Yahoo buying Associated Content was done in order to boost Yahoo’s content offerings. If that is true, then it time to sell Yahoo! stock. Sell, baby, sell.

Before we go any further, let me just say that I think the publicly released one-liner about why Yahoo would buy Associated Content is either incomplete, or an outright bluff. There are plenty of other things Yahoo gets from buying Associated Content, not the least of which is a big fat swath of Internet real estate that ranks obscenely high in Google search results and Bing search results. A great deal of the traffic generated from these high ranking searches is monetized via, you guessed it, Google AdSense which pays content publishers based upon ads placed by Google on those websites. Yahoo, can now switch out those Google Ads and replace them with their own Yahoo Ads. Frankly, this strikes me as a pretty cynical move, and one made largely to dupe the investing public at large that is not savvy enough to sort out the results of Yahoo’s acquisition of Associated Content.

Value of Yahoo’s Associated Content Purchase

In my mind, here is how the buyout of Associated Content by Yahoo plays out. First, as always, there is the generous write down of “goodwill” and other acquisition related costs. All but the most unsavvy of investors are wise to the so-called value taken by acquiring companies when it comes to these intangible assets, but it still makes things look better for a while to those who can’t or won’t parse company stock filings and investor reports.

Secondly, once Yahoo has milked the costs of acquisition dry, it will move advertising on Associated Content to its own Yahoo advertising platform or to its partner ad platform with Microsoft’s Bing search engine. In the meantime, the company may be all too happy to simply collect revenue from online competitor Google based on existing AdSense advertising that already exists on the site. Of course, Yahoo management will not break out the “growth” in Yahoo advertising that is nothing more than swapping out Associated Content ads for its own from the true organic growth of its Yahoo Ad platform. (Management is under no obligation to do so, of course.) So, analysts will be left guessing how much real growth is occurring in Yahoo ad revenue and how much was simply bought via its Associated Content acquisition.

Here is a hing for savvy investors, however. The revenue Associated Content generates today has no reason to decline in the coming months. There is no radical shift in online advertising going on, nor is Google seriously updating its search ranking algorithm that provides fresh meat for the Associated Content content mill on a daily basis thanks to the large interlinking done by the site itself. Thus, once Yahoo advertisements start appearing in place of Google advertisements, investors should discount the current volume of revenue generated by Associated Content from the revenue numbers reported by Yahoo for its advertising platform as the purchased revenue. Any remaining growth can be considered real Yahoo earnings growth.

I do not own any Yahoo! stock as of this writing, but that may change at any time. This is neither a recommendation nor an offer to buy or sell securities.

I have written  for Associated Content in the past; some articles I have been paid for. However, no payment was made or offered for this article.

If you have money in a 529 plan to save for college, good for you.  529 plans represent one of the best vehicles for educational savings, and with the cost of tuition skyrocketing faster than anyone can keep up with, they also represent the middle class’ only hope of paying for even 1/2 of a college education in the future.

When 529 plans were created, lawmakers attempted to correct some of the perceived issues with 401(k) plans which are similar in nature, but with a different goal.  One of those issues was that the majority of 401(k) plan participants were doing it wrong, that is, investing incorrectly.  One such problem was changing their investments too often in response to news events or media hype.

The solution implemented in 529 plans was that they were restricted to just one reallocation per year.  In other words, if you started 2009 with half your money in the S&P 500 fund and half your money in the International fund, you could change that to something else, but only once for all of 2009.

This restriction only applies to monies already in the account and exchanging that money between investments.  You can change where NEW money goes at any time.  Thus, in the example above, the account owner could switch to 25% S&P 500, 25% International, and 50% bonds on March 1st, but then they could not adjust that mix again until 2010.  However, the investor could elect to have all future contributions to go 100% to the Money Market fund on March 20th, and could change that again on April 19th, and so on, at any time.

2 Re-Allocations Investment Exchanges in 2009

Congress passed a law changing the rules for 2009 only.  In 2009, the account owner of a 529 plan may make TWO changes to the investment allocation of the existing funds.  One could therefore make a change now, and another change in September, for example.  The extra change cannot be rolled over and it does not apply to 2010, as of this writing.

Ironically, this action only proves the point.  Congress knows that people will be freaked out about their investments this year.  That means they will want to make the same kind of current events based investment decisions that were trying to be avoided by having the once a year rule in the first place.  Doubly ironic, is the fact that if one were going to “go safe” it probably should have been done in 2008.

With the new twice this year feature, Congress allows people to go safe now (too late) and then go back to “normal” later this year (probably too late as well). 

If you are sitting across the dinner table from a 15 year old, then you have a pretty tough call to make, especially if you have already rung up huge losses.  You are still probably better off sitting on the investment strategy you calmly and carefully analyzed when you were not scared, assuming that is how you picked your investments in the first place.  While there would only be 3 years until the account was started to be withdrawn, if you are looking to use the money over a full 4 or 5 years, then you are still looking at 7 or 8 years total.  There will most likely be some kind of recovery during that period.

Bond prices can only go down from here because higher interest rates cause lower bond prices and interest rates are already at zero…

If you are looking at someone under 10, do NOT panic.  Now is not the time to go 100% bonds, and it is most certainly NOT the time to go 100% money market.  The 20% recovery the market has already had from its lows earlier this year was the best way to get some of your money back.  You have 8+ years until the money is needed, let the markets do their work during that time.

You current contributions should be going into equities.  Pick a market index fund, or one of the “growth” allocations available in your plan.  Yes, there may be some more downside in this market, but you will be buying cheap if you are buying into stocks now. 

The opposite is true of bonds.  Never forget that bond prices go DOWN when interest rates go UP.  Interest rates are currently set at 0% basically.  That means it is GARAUNTEED that interest rates cannot go down, they can only go up.  Do the math and that means that for anything but the short-term bond prices can only go down.  Why would you buy an asset that is assured of losing value?

Once any sort of recovery begins, the Fed will have to start raising interest rates, and when they do, bond prices will fall.  The only way to avoid this is to own individual bonds and hold them until they mature.  For bond mutual funds, they can only lose money once the recovery begins.

A quick word about money market investment options: College costs are increasing at 7% per year on average.  If you are earning 3% in a money market (fat chance) you are losing 4% of buying power each year.  Yes, it is painful to watch the account value go down, but it will come back and over time, the market returns 9% to 11% depending on who you ask, and how you count.  In other words, your only hope to keep up with the 7% inflation of college tuition is to get that 9% in the stock market.  There is no other choice.

If you can’t or won’t listen, then that is too bad for your children, but AT LEAST make sure your current contributions are going into equities.  They won’t go down much more, but they could go up a lot.  Maybe that will be enough to make up for making the other decision.

Too harsh?  Leave a comment or shoot me an email.

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Ok, here it comes.

After the government released the results of its stress tests, banks are scrambling to come up with ways to raise huge amounts.  It seems that the government money that was a much vaunted and absolutely necessary lifeline to banks has become tainted now that it comes with, horror of horror, strings on how the money can be spent.  As if the banks ever handed out a huge loan to anyone without some sort of control on the collateral.

Be that as it may, banks want out of TARP and they want out now.  Even banks that would be much better off holding on to their TARP dollars are looking to buy back the government shares of preferred stock that they had to put up in order to their money.  Seems there is a feeling that the banks that do keep their TARP funds will be viewed as sickly or less stable than their counterparts who repay, regardless of the cost or wisdom of doing so.

The only way for these banks to raise the kinds of dollars being thrown around is by selling off assets, which is fine if they are not part of the core business (which begs the question why they were acquired in the first place), and by selling more stock to the public.  The latter means undoing decades of stock buybacks in some cases, and flat-out printing new shares in other cases.  Either way, that is a huge flood of bank stocks headed for the market. 

Buy, Sell, or Short Bank Stocks?

What’s an investor to do?

Get out of the way.

Frankly, there are too many variables here for any bank stock investment to be anything other than an educated guess at this point.  Trading on banking stocks based on whatever methodology or information you have analyzed can be nothing more than the equivalent of counting cards in blackjack and may be nothing better than picking red or black on a roulette wheel.

When you start using gambling analogies to discuss trading options, its time to step back.

At issue, is what will happen as the various banks strive to implement their business plans to both get out from under the government thumb and pay back their TARP money.  What is about to occur is unprecedented.

Typically, large corporations carefully time any additional stock sales or new issues into markets viewed as particularly favorable to their goals.  Nobody is saying that is the market we are looking at today, and yet, oodles of banks are looking to unleash the single largest infusion of bank stocks into the market in…well, forever.

Secondly, as banks focus on implementing their TARP pay backs and mending their image, they are more likely than ever to take their eye off the ball when it comes to actually running their businesses.  Already, companies have made consumer relations missteps that have become front page news, and Congress is talking about making credit card issuers make money fairly, instead of with fine print and contract double-talk, something most of them haven’t done in years, and may not be able to do anymore at all.

In other words, it is completely possible that thanks to a recovering economy, the largest government intervention in recent history will be a huge success and the Feds will get back all of their investment dollars and get to claim credit for saving the economy.  Along the way, bank stocks may absorb the huge infusion of supply and continue upward.

It is also completely possible that more than one bank will bungle throwing off the government shackles, or in doing so weaken itself too much to stay competitive, resulting in the credit crunch failing to unwind, a short-lived dead cat bounce in the economy and the onset of a second recession or banking crisis, this time that may cause the banks to stay in government hands for good, or that will leave investors holding the bag…and their shiny brand-new shares of common stock that are now worthless.

Go buy Wal-mart or GE, or company that’s upside during a recovery is not tied solely to how it plays the game during the next 10 months.

The SEC became concerned that financial reporting and disclosure was in need of some smoothing out and improvement, so in true government fashion, it formed an advisory committee to explore ways to improve financial reporting for investors.

You may recall that I mocked the whole thing based on the fact that A LOT of that complexity is actually the fault of the SEC and other assorted regulators who insist on constantly adding requirements of dubious value.  However, making the system better is making the system better and I welcome the SEC advisory committee’s report even if most of what it does is to undo things the SEC has done before.

So, without further ado, I will download the Advisory Committee’s report elegantly entitled:

FINAL REPORT of the ADVISORY COMMITTEE on IMPROVEMENTS to FINANCIAL REPORTING to the UNITED STATES SECURITIES and EXCHANGE COMMISSION

After quickly reading over the document I will report the recommendations here and … wait a second –

So, the report is 120 pages long and then there are 48 pages of appendixes.  Hmmm.  Well I’ll get back to you a little later.  I guess we won’t be improving things by making them any shorter and easier to read

If you don’t want to wait, you can read it yourself here:  http://www.sec.gov/about/offices/oca/acifr/acifr-finalreport.pdf

Today’s inspiration comes courtesy of All Financial Matters (a solid blog with good hard numbers data) who notes that a Money Magazine article called “The Mole” discusses how just because a financial advisor says he puts his clients first doesn’t mean he does.  Really?  Did I miss something?  If it says “I put my clients first” on an attorney’s website does that mean that he does, or does it depend on the attorney?  Are there doctors who over bill your insurance company to boost their income?  Does a waiter ever suggest a more expensive wine to increase his tip?  I’m shocked, shocked, to find out there is gambling going on in here!

All of this, of course, is why you need a good trusted financial advisor in the first place, but that is not why we come here today.  I want to show you something from “behind the scenes” as the Mole says.

Financial Advisors and Commissions

Let’s make up a fake client with a $500,000 account to be invested.  Let’s ignore all taxes and legal implications for the sake of simplicity and concentrate on commissions.  We’ll also assume that the account value stays the same over the years for simplicity.  Do realize though that as your account value changes the fees would change too.  (These are only the fees from the advisor side.  He doesn’t get any of the other fees that you might pay; they go to someone else.)

Option 1: Wrap Account or Fee Account

The standard wrap account charges the client a 1% annual fee to manage their funds.  The firm or advisor eats all the trading costs.

One Year Fee = $5,000

Continuing Fee Each Year = $5,000

Fee over 10 years = $50,000

Option 2: Front-Load Mutual Funds (All one fund family)

Loaded mutual funds take a big knock because of their highest fee (usually around 5.75%) but that fee goes down the more you invest.  The average mutual fund family charges around 2% for amounts over $500,000.  Your advisor usually also receives a 0.25% fee called a trail to the “insiders”.  You’ll see it on your prospectus as a 12b-1 fee.

One Year Fee = $10,000 (Load)

Continuing Fee Each Year = $1,250

Fee over 10 years = $22,500

Option 3: Variable Annuity Suze Orman (and everyone financial writer) Nightmare

Variable annuities are always said to have the highest commissions.  That is only sort of true.  Most variable annuities offer different payout options including all the payout in one year or a smaller first year payout with an ongoing payout.  The financial press always talks about the HUGE COMMISSIONS these products have, so we’ll play their game and go with the big up front payout.  The up-front varies, but on regular products from the big companies it is around 7% to 8%.  You’ll hear about higher ones, but they aren’t the usual products and may not even be approved to sell by lots of firms.

One Year Fee = $40,000

Fee over 10 years = $40,000

Payouts

There are other options, but we’ll stick with these to make things easy.  Now, before you get excited, keep in mind that your advisor doesn’t get to keep all of this money.  Every financial advisor gets a little bit different deal, usually depending on who he or she works for, and how much they produce (sell).  But, this gives you a ballpark idea.

A financial advisor who works for a company that pays for expenses like rent, utilities, staff, and so on generally gets something between a 40% payout and a 60% payout.  A payout is how much the advisor gets from the commission he generates.  So, for easy math let’s say the advisor gets a 50% payout which means if he generates $10,000 in commissions, then he gets paid $5,000 and his firm keeps $5,000.  With me so far?  Good.

An independent advisor gets a higher payout but has to pay all of his expenses including staff benefits and so on.  We’ll stick with the “house” guy for now.

So in our above examples, our advisor makes $2,500 the first year and $2,500 every year after that off of Option 1.  He makes $11,250 the first year and $1,250 every year after for Option 2, and he makes $40,000 the first year and nothing after that on Option 3.  Notice how Option 1 and Option 3 actually make the advisor around the same amount of money over the long run.  This isn’t actually true.  If your advisor is making you even 8% return on your investment then the Option 1 numbers go up and up.  After 5 years the account would be worth over $700,000 (now getting $7,000 per year in fees) and after 10 years it is over a $1 million ($10,000 per year in fees!)

That is why a financial advisor who “screws” you into a variable annuity may not only not be a good advisor for you, but may not be good at his own money either.  Of course, this would help the advisor meet short term goals, but he has basically agreed to service your account for free over the life of your annuity.

In fact, the advisor selling you those loaded mutual funds is probably giving you the cheapest long-term option (he isn’t lying when he says that.)

Do It Yourself

As with everything, everywhere, it is cheaper to do it by yourself.  Remodeling your kitchen?  Save thousands doing it yourself.  Oil Change?  Cheaper if you do it yourself.  Brain surgery?  Good luck, but probably way cheaper if you do it yourself.

Your investments are no different.  Of course, if you don’t know anything about tools and electricity and so on, maybe it is still best for you to hire someone to remodel your kitchen.  He will make money when you do.  If you don’t know anything about investing and managing your money maybe you should hire someone to do it.  He will make money when you do.

Annuities and Insurance Usually Suck as Investments

Don’t get me wrong, I’m not looking to defend annuities as investments.  The vast majority of them are terrible investments for most people and whole life insurance is even worse.  However, there are people for whom they make perfect sense.  I deal everyday with people who are retiring from a company where they spent 30 or 40 years.  They have a 401(k) balance (thanks to matching) of around $300,000 and a pension where they can get a one-time payout of $400,000 or a certain number of dollars per year for life.  But, that number goes down if your spouse gets paid for life after you die.  Also, your kids get nothing if you and your spouse die after just two years!  On the other hand, you don’t want to run out of money before you die.  These are tough questions when it is your money, and your whole life, and not just an exercise on paper.

For these people, annuities sometimes make sense because they can get more per month than they could with including their spouse on the pension, and their heirs will get the remaining balance if they die early, and if they live a long time, the annuity will pay for life.  Yes, I will get a commission for selling them that product, but I ask you, whole has the colder heart here?  Me, who sells them a product that meets all their needs and keeps them from ever having to stare at the T.V. and worry if they will run out of money because of the economy, or the person who says do it yourself, you big baby.  Look at these numbers in black in white.  What’s wrong with you?  Don’t you know you are paying for that help?

Rip-Off Cliche

Seriously, is there no other way to rip off financial planning clients than to sell them a variable annuity?  It seems that every time a financial “insider” or “investigator” runs out of ideas they write a column about variable annuities and trot out the famed widowed-orphaned-school teacher who was sold variable annuities with her tiny pension.  There are TONS of ways you can get ripped off including plenty of do it yourself ways.  Don’t be lulled into security because you aren’t getting an annuity.

The U.S. Supreme Court in a 7-2 decision upheld the central tenant of most state’s municipal bond [tag]tax[/tag] policy, specifically that a state can exempt it’s own muni bonds from taxes while taxing the interest on other state’s [tag]muni bonds[/tag]. So, nothing changes from before. If you live in California, the only way to avoid state tax on bond interest is to buy California Municipal Bonds. If you buy bonds from Texas, they can tax that interest.

Taxes and Bonds

Because interest on bonds is taxed as ordinary income, avoiding taxes on that interest is more important to investors than avoiding taxes on dividends paid by stocks. Most corporate bonds are taxed at both the federal and state level which reduces the real rate of return to the investor. Municipal bonds issued by states are exempt from federal income tax because one branch of the government cannot tax another branch. Whether or not the state municipal bonds are exempt from state income tax is determined by the laws of the states they are issued in. Most states make their own bonds tax-free as a way to make them more attractive for purchase. This [tag]tax-free[/tag] status, plus the relative safety of most municipal bonds can make them an attractive investment for those in higher tax brackets.

However, these same benefits mean that muni bonds generally pay lower rates than other bonds. For federal taxes, if you are in a low tax bracket, the lower rate can actually mean a lessor overall return than if you invested in corporate bonds. The break even point is often somewhere around the 25% tax-bracket or above.

For state taxes, the analysis depends on the state you reside in. In Colorado, state income taxes are a flat 4.63% while in California, they go up with income like federal taxes. So, an investor in Colorado below the 25% income tax bracket may not reap any benefit from the tax-free nature of municipal bonds, while an investor in a higher bracket in California may come out way ahead by investing in California municipal bonds.

Higher Yield Muni Bonds

Some states do not have an [tag]income tax[/tag]. (They usually have much higher sales taxes or property taxes than those that do.) For those states, municipal bonds can carry a higher interest rate. Texas, for example, does not have an income tax. Therefore, there is no advantage to Texans to buy Texas issued municipal bonds over those issued by other states. As a result, similarly rated Texas Municipal Bonds often end up paying a higher interest rate in order to attract investors. If you are looking to invest in municipal bonds but don’t need the state income tax deduction for your planning purposes (if you live in a low income tax state) then when [tag]investing[/tag] always make sure to check out the non-tax state’s municipal bonds as well as your home state.

Great Stock Fund Re-Opened

One of my favorite mutual funds is the Dodge & Cox Stock Fund (DODGX).  It’s performance is virtually flawless for its purpose (large cap stock).  This isn’t some flashy hey-look-at-me mutual fund.  In fact, this is exactly the kind of fund that people started questioning during the Internet bubble, and that is a good thing.  Notice how it did not get caught up in the Internet bubble like many other stock funds.  Its returns of just 5.4% and 20.21% in 1998 and 1999 respectively earned it a lot of scorn when Janus Funds were near 100% returns, but the proof of greatest isn’t riding along with crowd hysteria.  The proof of greatness comes in 2000 and 2001.  When other funds were getting crushed, DODGX was making money!  In 2002, it managed to drop just 10.5%, almost half of what others were losing.

The real proof of greatness is that it did not achieve these results by hiding and investing in “safer” places.  In 2003, when the market turned back up, they were right there.  This is what a great fund looks like.

Limited Time Offer?

For the last several years, the Dodge & Cox Stock Fund has been closed to new investors, so I couldn’t recommend it to my clients.  If they had it available in their 401(k) plans, it was my only large-cap recommendation.  If the clients were savvy enough, we’d load up on one spouse’s plan and the achieve diversification with the other spouse’s plan (or even with IRAs assuming there was enough money in them.)  Now, the fund is back open for new investors.  My advice is to get in there, even if you just send in the minimum.  Last time they closed the fund, they still let existing shareholders add funds.  So, get your investment open now.  They’ll probably close the fund again sooner or later.

Evaluate Good Mutual Funds

To evaluate a mutual fund, ignore the 1, 3 and 5-year averages.  There are too many ways to hide flaws in averages.  For example, the 5-year average no longer includes the popping of the Internet Bubble.  So, that fund that claims the great 5-Start Morningstar rating  on the 1, 3 and 5-year could be hiding a brutal pounding in 2000, 2001, 2002 when it cratered and took investor money with it.

Instead, always look at the individual Annual Returns.  There is no way to hide then.  Look at the returns for DODGX.  This is exactly what you want to see in a value-oriented large cap stock fund.  It lags in 1998, 1999 when things were crazy, but it survives beautifully in 2000, 2001, 2002.  Just as important, it does not get caught by surprise in 2003 and posts solid returns.

There are few no-brainers in the investing world.  The Dodge & Cox Stock Fund is one of them.  Whatever you have, I’ll bet it isn’t as good.  This is your large cap growth fund.

Recently, a client explained to me how he thought [tag]gold[/tag] was a good investment and protection against inflation. I’m not going to talk today about if he is right or wrong. Instead, I’ll mention that his fabulous do it yourself investment solution was Fidelity’s [tag]Gold Fund[/tag]. Good call? Well, it came as quite a shock to him that actual Gold is only the sixth biggest [tag]investment[/tag] in the fund. Five bigger investments are in companies that have something to do with the gold industry. Granted, those company’s stock prices will be heavily influenced by the price of gold, but certainly not on a one-for-one basis, and it is very possible for gold companies to have problems (and thus lower stock prices) unrelated to gold prices. Gold companies are very susceptible to environmental lawsuits and regulations. Not to mention, gold happens to be mined in some very unstable countries throughout the world. A military uprising could drive the price of gold higher as it takes out some of the world’s supply, while at the same time sending a gold mining company’s stock plummeting because that same supply interruption that boosted prices also interrupts that company’s revenue.

Gold Investing or Gold Industry Investing

Taking some comfort in straight gold being the sixth biggest holding? Guess how much that is overall in the fund.

The point is, you have to understand ALL the aspects of what you are investing in. Being right about gold being a good investment is not helpful if the investment you buy isn’t really in gold, but in gold companies. Gold companies CAN be a good way to invest in the gold arena, but it is important to understand the difference between investing in raw gold (bullion) and in gold companies (stock of businesses).

Don’t make this same mistake. If you thing something is a good idea, research everything, or run it by someone who is a professional. Either way, you’ll make sure the investment you get is the investment you want.