If we see higher risk assets further over-valued, do not chase the move, but rather sell into price ...
Fabian's Funds: A Look at ETFs
06/03/2005 12:00 am EST
"I’m a simple guy," says Doug Fabian, belying his tremendous knowledge in the complex world of investing. "I don’t complicate things and I like to keep things easy." Here, he offers some general words of caution, as well as some favorites ETFs.
"For the past 30 plus years, I’ve been a surfer, and every time I go to surf, I just want to get in the water. But there are just some days when it's just rainy and there are no waves or the waves are too big. They way I look at the market right now is that it’s just not worth getting in the water. My defense is on the field. I have a 100% cash position, after taking profits in April. We’re standing on the sidelines. My outlook for the market here is to let the price direction determine what happens. But I believe that Greenspan is behind the curve. He’s going to continue to raise interest rates and I’m of the opinion that he will most likely take things too far. That’s going to create some sort of disruption in the market.
"I want to mention something about risk. Since we got through 9/11 and got through the bear market., and since the market bottomed in October of 2002, we’ve been in a cyclical bull market. There hasn’t been a lot of risk out there. There have been some pockets of risk, but overall, people have been able to survive with their portfolios pretty well. I believe they are going to have a higher level of volatility looking ahead. I think the General Motors syndrome—problems with its bonds as well as its business model— highlights that more and more American companies are going to be challenged from a business-model standpoint.
"So I think it’s important for you as an investor not to fall in love with each stock in your portfolio. You’ve got to have a point at which you will sell those positions and you can’t be afraid to hold a cash position. Whether a big cash position for you is 40% or 100%, don’t be afraid to hold some cash. It’s just not a bad thing. I think many people have been conditioned from the 1990s bull market that holding cash is a big thing. This is a big problem in the mutual fund field right now, and it is one of the reasons why you see so many mutual funds underperforming. Portfolio managers keep taking on excess risk and don’t do a good job of changing their portfolios. I would encourage you to scrutinize everything in your portfolio.
"The one investment area that I am really excited about is exchange traded funds. If you’re not using ETFs, I would encourage you to look at the mutual funds you do have in your portfolio. Almost without exception, there will be an equivalent exchange traded fund that you can buy to replace your mutual fund. By doing this, you will cut the management fees you are paying by 70% or 80% and will get the performance of an index— which beats 80% of the mutual fund managers out there.
"There are several areas of the market that I want to encourage you to start paying attention to. The number one sector is healthcare. I believe that there is a big story in healthcare. I’m calling healthcare the ‘next energy.’ I know that energy has been extremely hot. I know many advisors have been recommending energy stocks. Now, I am suggesting you buy healthcare. One of the exchange traded funds I’d recommend is iShares Dow Jones US Healthcare (IYH ASE), which is a basket of approximately 50 well-known healthcare companies. The leading company in that index is Johnson & Johnson, representing 14% of that index. This fund is a very easy way to play the healthcare sector. If you want to play the pharmaceuticals, the easy way to do that is with PPH. You get Merck and Pfizer and a basket of other pharmaceutical stocks. It’s just a much easier way to play this sector.
"I’d also suggest an ETF that is focused on fixed income. It is the iShares Lehman 1-3 Year Treasury Bond (SHY ASE). Certainly in a rising interest rate environment, fixed income securities are challenged. But in the short-term bond arena, one- to three-year Treasury bonds offer a yield of about 3.2% right now and that yield will be rising. The iShares fund is a simple way to put money to work in short-term bonds. It’s almost like a money market position. It’s got very little downside risk, a good yield, and it’s a place to park money for three months or six months and get a better yield than a money market fund."
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