This past week featured the earnings release of several major technology companies, coming closely on the heels of major earnings announcements from other tech companies, including Google and Apple.

IBM Earnings

First up, IBM reported revenue of $24.7 billion leading to earnings of $2.78 per share. The consensus estimates from analysts were a bit higher for revenue, but a bit lower for earnings per share. The company did raise its full-year earnings guidance, but it wasn’t enough. Investor reaction wasn’t pretty with shares dropping 2.4 percent the following day, and continuing down. The technology giant closed on Tuesday before reporting earnings at 207.31 and closed Friday at just 199.55. IBM’s results have also been blamed for the general downward direction of the markets for the end of the week.

Still, IBM has a long history of boosting its share prices, primarily by buying back enormous amount of stock each year.

Intel Earnings

Intel’s earnings didn’t make investors any happier. The stock has had a pretty good run-up as of late, so anything other than a gangbusters quarter was likely to lead to a poor reaction. Intel shares got it. The stock closed before earnings on Tuesday at 28.48, but finished the week at 27.60.

The company reported revenue for the first quarter of $12.9 billion and net income of $2.74 billion. Earnings per share were 53 cents.

Microsoft Earnings

Microsoft reported earnings on Thursday. Unlike Intel and IBM, the software giant’s earnings news did not disappoint investors. Rather, the stock rallied more than five percent on Friday.

The company reported third-quarter results (of its fiscal year) of $17.4 billion in sales and a $5.1 billion, or 60 cents per share, profit. Although 60 cents is slightly lower than last year’s 61 cents a share profit, that number included a one-time tax benefit to the company’s bottom line.

The big news out of Redmond was that personal computer sales rose last year. Many technology pundits have been forecasting a decline to the rise of personal computing devices like tablets and smartphones. That data translated into a four percent increase in Windows sales ahead of next year’s release of Windows 8, which, once again, is considered a make or break product for the company.

It wasn’t all good news. The company reported lower sales in its entertainment business, which consists primarily of its Xbox gaming system. The aging platform is reaching saturation, where pretty much anyone who wants to have a current Xbox system already has one. Since the company isn’t expected to release an update to the system in the near future, this is an area where weakness will likely continue.

EMC Earnings

EMC is the world’s largest maker of corporate data storage equipment, and the owner of VMware. It’s earnings, therefore, show specific insight into how big business technology spending is going.

The company earned 37 cents per share on revenue of $5.1 billion, an increase of 11 percent. The company attributes much of that gain to continuing demand for cloud computing. However, the company’s outlook for the future disappointed investors who dropped the stock down four percent on Friday.

eBay Earnings

On Wednesday, eBay reported quarterly revenue of $3.3 billion, and a profit of $725 million or 55 cents per share.

The company, which also owns popular payment service PayPal, foretasted similar profits for next quarter.

Unlike the others, eBay’s earnings impressed investors who pushed the stock price from a Wednesday close of $35.87 to a close on Friday of $40.29.

Tech Forecast for 2012

The outlook for technology stocks for 2012 looks mixed right now. If the economy manages to maintain its slight upward growth, it looks like the tech bellwethers will be in good position to capture the upside. However, if economic growth fizzles, it looks like customers and business will have no problem quickly retrenching and quashing tech spending for the remainder of 2012.

If you are going to be investing in tech during 2012, keep a sharp eye on the economic indicators going forward. The industry does not have the momentum to rise in the face of an overall decline in the economy for the remainder of the year.

No related posts.

Tech Earnings Week originally published at Personal Finance Blog - FinanceGourmet.com

Albert Einstein once said that the most powerful force in the universe was compound interest. What most people don’t understand is that, while powerful, compound interest needs a lot of time to work.

Unfortunately, when most people start looking for financial planner, or stock broker, or just researching how to invest on their own, they start with unrealistic expectations of how rich investing can make them. The most important thing to remember is that it takes money to make money, even in investing.

If you aren’t starting with a million dollars, you won’t be making a million dollars any time soon.

How Fast Can Investing Make Me Rich?

When a lot of people start investing, they start with something like their 401k plan or other retirement plan. Usually, they contribute a small part of their paycheck each month. Over time, the money adds up nicely, but not to the extend that makes anyone excited. After saving up some money outside of a retirement account they start thinking about online trading, or investing in something that grows faster. Not to put too fine of a point on it, they want to get rich fast.

Unfortunately, that isn’t really how investing works. If you don’t already have a lot of money, investing isn’t going to make you a lot of money, no matter how well you do.

Let’s say that you have $10,000 to invest. You can risk it all and invest in the riskiest investment strategy out there. Now, let’s say that I’m the best investor in the entire world. I’m so good that I earn you 50 percent return every year, with no fees or expenses. In other words, this is completely unrealistic.

There is no one who can do this. Not Warren Buffet, not the best mutual fund, not the best hedge fund, not even Bernie Maddoff’s ponzi scheme. No one. In fact, if you start talking about a 50 percent annual return with any financial professional anywhere, they will start talking you down, because 50 percent is utterly unrealistic.

But if you could earn 50 percent return per year, how fast could investing $10,000 make you rich?

Let’s see what happens if you earn 50% on your money every year.

• Start Investing: $10,000
• After 1 year: $15,000
• After 2 years: $22,500
• After 3 years: $33,750
• After 4 years: $50,625
• After 5 years: $75,937
• After 6 years: $113,906
• After 7 years: $170,859
• After 8 years: $256,289
• After 9 years: $384,433
• After 10 years: $576,650

After a DECADE, you finally have half a million dollars.Now, at this point, compound interest really does start to work. Of course, you had to have a few hundred thousand dollars before it gets impressive, and remember we’re talking about very unrealistic returns here.

Not really what you were expecting is it?

What about the more standard 10 percent return?

How Much Can You Really Earn Investing?

There are just as many people out there who will tell you that a 10 percent annual return is unrealistic as there are who will tell you that a 10 percent annual return over time is completely realistic. It is important to remember that no matter which one it is, they are talking about average annual return, but for the sake of simplicity, how much would you have after 10 years at 10 percent?

• Starting with $10,000: $25,937
• Starting with $25,000: $65,843
• Starting with $50,000: $129,687
• Starting with $100,000: $259,374
• Starting with $250,000: $648,435

I don’t know about you, but until you get to $250K, those numbers don’t seem very impressive.

But, look what happens after 20 years:

• Starting with $10,000: $67,275
• Starting with $25,000: $168,187
• Starting with $50,000: $336,375
• Starting with $100,000: $672,750
• Starting with $250,000: $1,681875

Those numbers are a little more impressive. But, it took TWO DECADES to get there.

What it all adds up to, is that investing is slow. All of those people out there who are billionaires didn’t get rich by investing $25K or even $100K. They got rich by running companies and businesses. Even then, it usually took decades.

As far as those who got rich “by investing”, they got rich by investing millions and billions of dollars. Even Warren Buffet didn’t get rich investing his own money. He went out in the beginning and got people to invest millions of dollars with him. If he started with just $250,000, and somehow had the exact same track record, he’d have millions of dollars by now, but not billions.

When you start investing, be sure you understand the reality of expectations. Do some quick math to see how much money you would have, even if you doubled your money every year, and then realize that isn’t going to happen. But, if the 100% return numbers aren’t impressing you, you can be pretty sure that you won’t be impressed by what happens at 8 percent or even 10 percent either.

It takes a sizable starting investment to end up with a million dollars before decades have gone by. Always remember, compound interest is very powerful, but it is also very slow.

Related posts:

1. Get Rich Not So Quick in Real Estate
2. Should I Pay Off My Mortgage Instead of Investing

Get Rich Investing? originally published at Personal Finance Blog - FinanceGourmet.com

Apple (AAPL) announced that after years of building up a massive pile of cash with its record earnings that it will begin to return some of that money to shareholders. Apple will pay a quarterly dividend of $2.65 per share starting in July. It will also repurchase up to $10 billion in stock over the next three years.

So, what does this Apple announcement mean for the stock and for the company?

Apple Dividend

At first blush, Apple’s announced quarterly dividend seems very large. But, how much is Apple’s dividend? It works out to $10.60 per year. That’s higher than most companies pay out in dividends. However, remember that Apple’s stock price is much higher than most companies. The stock currently trades around $600 per share. That makes the dividend approximately 1.8 percent, which, while respectable, is nothing to write home about.

Why did Apple announce a dividend now?

There are several reasons that Apple has finally decided to start paying a quarterly dividend after refusing to do so for years. First, and foremost, is that Steve Jobs is no longer around. Apple’s iconic CEO had the street cred to tell people, “No dividend,” no matter how high the companies cash balance got without getting anything other than minor push back. Although new CEO, Tim Cook, gets to claim some of that credibility as Apple’s CEO, the truth is that he is not Steve Jobs, and the larger Apple’s cash horde got, the more people would wonder whether he was doing the right things with it.

Second, Apple’s cash pile had grown very close to the psychologically important level of $100 billion. Although there is little real world difference between $99 billion and $101 billion, there is a big difference in people’s minds. Building up a cash account of greater than $100 billion would only raise more questions about what that much money could possibly be used for and when, if, such a huge transaction (or series of transactions) occurred, would they actually be worth the price.

Finally, Apple is growing up. As THE growth company of the 21st century, Apple raced ahead of former tech superstars to become the most valuable company in the world by market capitalization. It’s hard to make the claim that growth will continue to come forever when you are already so big. By moving now, while there are no questions about Apple’s state, the company establishes a sizable dividend as the normal course of business. Waiting until growth stagnated would have sent the message that the dividend came because the company ran out of room to grow. Paying a dividend also opens the company up to investment from mutual funds and other institutional investors who require dividends to allow an investment. This means Apple no longer relies on only growth investors for its stock price.

Apple’s Share Buyback

Apple’s share repurchase announcement makes much less sense. The company’s stock trades at an all-time high, making it difficult to suggest the stock is undervalued.

I’ve questioned the size of IBM share buybacks in the past, which seem designed more to allow executives an easier time of hitting financial targets than improving shareholder value. It seems odd that Apple would need to be doing such things with everything going right. However, it is possible that the directors and executives at Apple see the writing on the wall. By announcing the share buy  back now, they avoid the scrutiny of using such share repurchases to meet those all important per-share metrics that bonuses are tied to.

Ironically, the stated reason for Apple’s buyback is the most concerning. The company says that it is repurchasing stock to avoid dilution caused by future stock grants to employees and executives. $10 billion worth of stock grants in the next three years? That seems incredibly generous.

For now, there is really no downside from an investor’s point of view. Apple shares are still priced well based on projected earnings. Also, it appears that even with the new dividends and share repurchase, Apple will still be adding to it’s reduced cash pile as new earnings and profits roll in.

Overall, this is good for Apple stock, especially if the company continues to focus on dividends and not so much on share repurchases.

Related posts:

1. Apple Stock Good Investment or Passing Fad
2. Apple Stock Price Tied to Steve Jobs

Apple Stock Paying Dividends originally published at Personal Finance Blog - FinanceGourmet.com

Sometimes it seems like the stock market is just messing with people. After seemingly running off of a cliff to end the third quarter of 2011, the market has recently staged a rally. Take a look at a chart for the Dow Jones Industrial Average and you’ll see a low point on October 3, 2011. It’s almost like the market wanted to make sure that your third quarter statements looked bad before any sort of upward movement.

Of course, there is a long way to go until the end of the year and pressing economic matters like the debt crisis in Europe, the joint budget cutting committee and an unemployment rate that won’t go down are still to be resolved.

For the time being, non-day trading investors should remember that short-term movements in the stock market are notoriously difficult to predict.

End of Year Portfolio Rebalancing

Many experts recommend rebalancing your long-term portfolios like retirement accounts (IRAs, 401k, and other retirement plans) once a year. Traditionally, many people do it near the end of the year. If you haven’t rebalanced your portfolio since last year, it’s a good time to start thinking about doing it soon.

Related posts:

1. 2011 Stock Market Update Q3
2. Stock Market 2011 Results

Stock Market 4th Quarter Turn Around originally published at Personal Finance Blog - FinanceGourmet.com

Ever since the iPhone became the must have gadget and was followed up by an even more impressive iPhone 2 and 3, people have been walking into my office declaring that they have bought Apple stock, or are going to buy Apple stock. The reasoning is almost always the same. The products that Apple makes will be amazing and unbeatable forever and, therefore, Apple stock will go up forever.

I’ve long since stopped trying to add anything to these conversations because Apple stock fanboys are no different than Apple computer fan boys. Everything Apple does is right and great and anyone who thinks differently is a brainwashed slave to the system.

The truth is that Apple stock has done phenomenally well and that it is not now, nor has it ever been a “bad” investment. However, as with all things related to personal finance, there is no such thing as a universally “good” investment. What makes an investment good or bad is how well it is suited to your specific situation and goals.

What Happens To Apple Stock Now That Jobs Has Resigned

The one thought that I had every time someone told me about their Apple investment plans was, “What happens when Steve Jobs leaves?” Much like those who invest in Berkshire Hathaway stock, people who invest in Apple are in some ways investing in Steve Jobs and then, his successor.

As analysts have pointed out, Apple’s product line is likely already very solid for the next few years. It takes time to design and bring a product to market, and many of Apple’s next things are already well down that timeline. However, the one thing that Steve Jobs gives Apple, and its stock, is a Get Out of Jail Free card. If Apple’s next iPhone or iPad dissapoints in any way, it will quickly be excused because everything else the company makes is awesome and because everyone knows that Steve Jobs will make the next one even better.

All of which brings us to the question. How much, if any, of all this carries over to the new CEO? If the iPhone 5 is amazing but the iPhone 6 is even minimally disappointing, does the panic begin? Does the stock crater? Do investors remember that this is still Steve Job’s pipeline for the next few years?

Just like at most times during the past few years, there is a lot of upside in Apple stock, but the downside could be very ugly.

People I discuss these things with point out at how well Apple stock has done over the past decade, and they are not wrong, but that stock price depended at every step of the way on things going as well as they did. A similar stock chart for the future depends on the same level of execution.

Ironically, the answer we get tomorrow when the markets open will only be half an answer. Jobs is staying on as Chairman of the Board, regardless of how little or how much that role involves Jobs in Apple’s products in the future, investors are likely to assume that there will be plenty of Jobs magic in everything Apple makes and that will temper any stock movements. Still, Thursday should be interesting for whatever does or does not happen.

Update: No significant sell-off on new of Steve Jobs stepping down. We’ll see how long the, it’s just as good, feeling lasts. Either way, it seems Apple shareholders are comfortable with things as they are.

No related posts.

Jobs Resigns Apple’s Stock Price Falls? originally published at Personal Finance Blog - FinanceGourmet.com

Pimco Total Return is the biggest bond mutual fund in the world. It has a long-term track record that any bond fund would be jealous of. As a result, its fund manager, Bill Gross, has become something of an oracle of investing in bonds.

Recently, the mutual fund reported its holdings. Like all mutual fund reporting, the data provides only a snapshot of one day of holdings within the fund. The Wall Street Journal reports that the allocation of assets in the Total Return fund in U.S. Government bonds and securities dropped again to just 12 percent of the overall portfolio, down from 22 percent at the end of 2010.

Gross has become increasingly critical of the government’s intervention in the bond market and in particular of the Fed’s action to hold down interest rates by buying U.S. treasuries.  One can understand his frustration as these manipulations make it difficult for a money manager to do his job, regardless of their overall value (or lack thereof) to economic stability and growth.

The real irony is that with U.S. treasury yields depressed, and Gross having sold out almost anything he can at the Fed’s inflated pricing, there are few places to turn for higher yields.  The amount of the Total Return mutual fund allocated to the mortgage sector now stands at 42 percent.

If you want to follow this bond oracle down the investment trail, you’ll have to not only dump a large hunk of government bonds, you’ll need to step in and buy some more mortgage bonds.

Have a profitable Tuesday.

Related posts:

1. PIMCO Equity Funds Win Again
2. Meredith Whitney Muni Bond Defaults Fails to Materialize

PIMCO Total Return Bond Fund Cuts U.S. Government Holdings originally published at Personal Finance Blog - FinanceGourmet.com

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.

Related posts:

1. United Dining Rewards Earn Airline Miles for Dining Out
2. Refinancing the Mortgage to Take Advantage of Lower Interest Rates

Safely Earn More Interest on Your Money originally published at Personal Finance Blog - FinanceGourmet.com

Whether or not now is a good time to invest in banks that are repaying their US government bailout dollars to the Treasury is an easy analysis to make, but a tricky question to answer.  Which among banking stocks like JP Morgan ( JPM ), Goldman Sachs ( GS), Bank of New York / Mellon ( BK ), and Wells Fargo ( WFC ) are good stock market investments in this economic environment?

For those large US banks who never really wanted any government bailout money in the first place and that have stayed relatively stable and profitable since taking the TARP funds, now might be a good time to invest.  However, for those US banks trying a little bit too hard to look like the good banks that are repaying their government loans with ease, the answer is much different.  The tricky part is knowing the difference.

Recently released emails and documents from the US Federal Reserve suggest that certain big banks had to be brought in line for the good of the whole industry when it came to taking government aid.  Other banks, like Citigroup, were already teetering too much on the edge of bankruptcy to have any real shot and avoiding a bank collapse without government help.  In between were the other big banks which definitely benefited from the banking bailout.  Knowing whether they are stronger or weaker bank stocks now is difficult to tell.

Analyzing US Bank Stocks

Any bank that was on the verge of collapse without government help should be avoided as an investment.  The only difference between now and six or eight months ago is that the economy is a little bit better.  A lot of that economic improvement is because of the massive economic stimulus package passed by Congress and the Obama administration.  Stimulus like that doesn’t last forever and if it wears off at the wrong time, the economy could head straight back down taking those banks and their stocks back with it.

Banks that never really needed the TARP funds or the CAP program are better investment targets although they will continue to be tainted by the sector overall and may have trouble returning to full health.  However, considering the banking industry no longer has a giant housing boom to bail it out if things are a little off, and that consumers might not be quite as anxious to do the kinds of banking business they used to even if things get better, the banking industry may be in for many years of lean growth regardless of how strong any single company is.

Banks that over-reached to repay their TARP money are also in danger of getting back into trouble.  Some banking companies have undone YEARS of share buybacks by reissuing as much or more stock than they managed to buy back over those years.  That means that those bank stocks will have a big supply to continuously weigh down on share prices.  It also means that forgoing all of those dividend payments over the years were wasted since there is just as much stock now as their used to be.

Banking Sector Health

Lastly, never forget that usually the way a troubled sector is able to rebuild and move forward is that the weaker players and the poorly managed companies die off and are forced into bankruptcy or sold to stronger better managed competitors.  With the US Government and the US Treasury Department stepping in a saving many of those weaker and badly managed banks, the sector did not have the necessary purge.

That means that when things return to “normal” there will be just as many competitors trying for the same number (or less) customers which means smaller profit margins and little or no room for error.  Just because that bank didn’t go bankrupt this year doesn’t mean it won’t next year, or the year after.

For now, banks are an unusually risky stock investment with little or none of the traditional upside of risky investments.  If you want to take on more risk in anticipation of a stock market run or a steadily improving US economy, then by all means do so.  Just find your risk somewhere where there are better rewards to go along with that risk.

No related posts.

Are TARP Repaying Banks Good Investments originally published at Personal Finance Blog - FinanceGourmet.com

The U.S. Supreme Court in a 7-2 decision upheld the central tenant of most state’s municipal bond tax policy, specifically that a state can exempt it’s own muni bonds from taxes while taxing the interest on other state’s muni bonds. 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 tax-free 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 income tax. (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 investing always make sure to check out the non-tax state’s municipal bonds as well as your home state.

Related posts:

1. Meredith Whitney Muni Bond Defaults Fails to Materialize
2. Not Cashing Savings Bonds to Avoid Taxes

Muni Taxes Stay the Same originally published at Personal Finance Blog - FinanceGourmet.com

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.

No related posts.

Dodge & Cox Stock Fund originally published at Personal Finance Blog - FinanceGourmet.com