Five investment strategies for 2005
Rafael Gerena-Morales. Knight Ridder Tribune Business News. Washington: May
30, 2005. pg. 1
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Abstract (Document Summary)
May 30--It has been a choppy investment year: Oil prices remain historically high. U.S.
inflation jitters have fueled interest rate increases. And there's a possibility that zooming
real estate prices -- especially in some South Florida segments -- could slow, experts
say.
One way to benefit from this -- if you think the U.S. dollar will continue falling -- is to buy
international stock and bond funds that exclude U.S. investments and currency hedging.
If the greenback continues to slide, your foreign stocks will be worth more money when
you cash out and convert gains back into U.S. dollars. Foreign bond funds would
become more valuable for the same reason.
Well, experts say China's thirst for commodities, such as oil and steel, is pushing up
demand and prices. Tight crude supplies and political instability in oil-producing nations,
such as Venezuela, have pushed up oil prices by 33 percent in the past year. And a
booming U.S. housing market is also feasting on commodities.
Full Text (1284 words)
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May 30--It has been a choppy investment year: Oil prices remain historically high. U.S.
inflation jitters have fueled interest rate increases. And there's a possibility that zooming
real estate prices -- especially in some South Florida segments -- could slow, experts
say.
What's an investor to do? Here are five strategies for 2005:
1. BE WARY OF MIAMI CONDOS: A flood of investor money is pouring into what
is becoming a huge Miami condo canyon.
In the first quarter ending in March, for example, nearly 19,770 condo units were under
construction in Miami's greater downtown area, most of which are expected to be
completed in 2007 or 2008, according to West Palm Beach-based Metrostudy. That's up
roughly 74 percent from nearly 11,365 condos under construction in the same period last
year.
On top of that, there are tentative plans to build another 35,000 condo units in the same
area.
"If all of these planned units are built, there will be an oversupply," says Bradley F.
Hunter, a Metrostudy housing industry analyst.
Real estate investors looking for quick profits should think twice about buying Miami
condos at this stage, Hunter says, in case there is a condo glut in the next two or three
years.
For now, investing in condos in Broward or Palm Beach counties seems safer because
fewer are being built, Hunter said. Investing in a traditional, single-family home is even
better because of fewer speculators in this slice of the market, Hunter says.
Still, South Florida's overall housing prices could slow to single-digit annual growth over
the next year or two as interest rates rise and demand softens.
"We've reached a point where it's no longer a guarantee" that investing in real estate will
net big profits, Hunter says.
2. ADJUST YOUR BOND MIX: Sure, bond prices rallied in late April.
But three forces could cut bond prices over the next year: rising inflation, climbing
interest rates and the fact that the bond ratings of General Motors and Ford were
downgraded to junk status.
As a fixed-income investment, bond values fall when inflation rises. Why? Because
higher inflation means the money your bond pays out will be worth less in the future as
consumer prices rise.
Inflation worries knocked down bond prices in March when the Federal Reserve Board -the U.S. economy's chief steward -- warned that inflation pressures had "picked up in
recent months."
Partly to stem inflation, the Federal Reserve Board raised short- term interest rates in
May, which marked the eighth consecutive rate increase in the past year. As banks raise
interest rates, bond prices fall.
General Motors and Ford also muddied the bond picture in May when their ratings slid to
junk status, and their bond prices fell immediately. The event could lower investor
expectations for corporate bonds as a group, experts say.
What to do?
For one, investors can shift their money into high-grade bonds with short maturities of
five to seven years, says Howard Simons, of Bianco Research in Chicago. Shorter terms
are perceived as less risky, which reduces price swings.
Investors can also buy bond funds that provide diversification and typically hold their
positions for at least five years in an effort to cut trading costs, Simons says.
3. GIVE MONEY MARKETS AND CDS A SECOND LOOK: Sure, money market
accounts and certificates of deposit were paying a pittance in 2004. But a spate
of interest rate increases means banks are now willing to pay more to get your
money.
The average national yield on a one-year CD has tripled to 2.8 percent from 0.94
percent a year ago, according to BanxQuote.
Meanwhile, money market accounts are yielding as much as 3.3 percent nationwide, up
from as much as 2.15 percent a year earlier, according to Bankrate.com in North Palm
Beach.
The returns on fixed-income investments "have improved significantly," says Greg
McBride, a senior financial analyst at Bankrate.com. "Everyone needs an emergency
fund. These are good places to" store cash for the short run.
The only caveat: Investors considering a CD should purchase only those with terms of
one year or less because interest rates are expected to continue rising, McBride says.
This will allow you to invest at higher rates later this year.
McBride's other tip: Buy Treasury Inflation Protected Securities, better known as "TIPS,"
that maintain a payout above inflation. The downside, though, is they offer lower returns
-- compared with other bonds -- in exchange for lower risk.
4. AS THE U.S. DOLLAR STRUGGLES, BUY FOREIGN STOCK AND BOND
FUNDS: It's a global economy, so some of your money should be invested
globally.
Typically, investors should keep up to 25 percent of their stock allocation in foreign
securities, and roughly 10 percent of their bond allocation in foreign bonds, suggests Jay
Shein, a financial planner at Compass Financial Group Inc. in Lighthouse Point.
If you're not at those levels, now may be a good time to get there because of the U.S.
dollar's relative weakness. True, the dollar has rallied since January. But in the past 12
months, its value is still down more than 4 percent against the euro and nearly 5 percent
against the yen.
One way to benefit from this -- if you think the U.S. dollar will continue falling -- is to buy
international stock and bond funds that exclude U.S. investments and currency hedging.
If the greenback continues to slide, your foreign stocks will be worth more money when
you cash out and convert gains back into U.S. dollars. Foreign bond funds would
become more valuable for the same reason.
But beware, experts warn. The U.S. dollar could strengthen, which could trigger losses
in your portfolio if you buy and sell foreign investments too fast and try to "time" currency
fluctuations.
5. BOOST RETURNS WITH A DASH OF -- DON'T LAUGH -- COMMODITIES:
Sure, investing in oil, grains or steel seems boring.
But some experts say doing so can add pizzazz to your portfolio because the demand
for commodities should stay strong as the global economy expands.
Consider this: The Goldman Sachs Commodities Index is up 17.8 percent for the 12month period ending last Monday, following a nearly 40 percent jump in the preceding
12 months. The index includes the energy, metals, agriculture and livestock sectors.
What's driving this?
Well, experts say China's thirst for commodities, such as oil and steel, is pushing up
demand and prices. Tight crude supplies and political instability in oil-producing nations,
such as Venezuela, have pushed up oil prices by 33 percent in the past year. And a
booming U.S. housing market is also feasting on commodities.
While this creates inflationary pressure, it also creates opportunity for investors, says
John B. Brynjolfsson, portfolio manager of the Pimco Commodity Real Return Strategy
Fund in Newport Beach, Calif.
One way to benefit: Invest in stocks of companies that, say, produce grain, refine crude
oil or mine iron, Brynjolfsson says. You could also buy shares of heavy equipment
makers that build, for example, the bulldozers and earth-moving equipment that others
use to hunt for commodities, he says.
A better way, though, is to invest in commodity funds because they give investors a lowcost way to diversify, Brynjolfsson says. Typical investors should limit their commodity
exposure to roughly 5 percent of their total portfolio, he adds.
One caveat: Commodity prices have slipped recently. The Goldman Sachs index fell
almost 9 percent over the last two months.
To reduce the risk of short-term losses, commodity investors should hold their positions
for a minimum of three years, Brynjolfsson advises.
Credit: South Florida Sun-Sentinel