2 Funds For Capturing Global Returns

07/26/2011 10:00 am EST

Focus: FUNDS

Charles Zhang shares his ideas on the best ways to respond to the current market uncertainty in today’s interview, telling MoneyShow.com’s Kate Stalter about two of his picks from the Dimensional Fund family.

Kate Stalter: Today, the advisor we’re speaking with is Charles Zhang, of Zhang Financial in Kalamazoo, Michigan. Thanks very much for joining us today, Charles.

Charles Zhang: Oh, you’re welcome.

Kate Stalter: What’s your view on the current market condition, and what do you think individual investors need to know about right now?

Charles Zhang: Well, this past quarter has shown increased market volatility here. The market ending the first quarter had a 5.9% gain, and the year-to-date gain is now 6%. We do not see a large net gain or loss in the second quarter.

Many investors turn to safe, defensive stocks and bonds, normally the more high-quality, short-term bonds. I think a lot of people right now are concerned about European debt, as well as the US debt ceiling, and the continued high unemployment.

So the volatility in the market does present some risks to avoid, but also presents an opportunity that an investor can take advantage of.

Kate Stalter: What are some of the sectors or global regions that you do see as possibly those to take advantage of right now?

Charles Zhang: We think defensive sectors like health care and utilities are performing well. It’s best to avoid risky sectors of the bond market, like long-term bonds and junk bonds, and turn to more high-quality, short-term bonds.

The muni bonds are one of the best performing sectors right now. Typically, in times of uncertainty, a lot of people also purchase precious metals because they view them as a safe investment, but in the second quarter, gold went up and down. At the end of the quarter was a net gain, so a lot of people also involve more precious metal like gold, too.

Kate Stalter: You’ve alluded to some of the areas you believe should be avoided, but any other investment vehicles or sectors that you feel investors would be wise to stay away from right now?

Charles Zhang: Financials. Financials were the worst performing sector in the second quarter, due to the fierce increase in regulations from the Dodd-Frank Act, as well as concerns that banks will have to raise more capital to meet high capital requirements.

Another thing is: Commodity prices moved lower in the second quarter. There was a lot of decline following news of bin Laden’s death in early May—especially for silver, which fell sharply, as well as oil. So commodities are also a little bit of a concern right now, too.

Bank loans was one of the worst sectors in the second quarter, with returns of just 0.1%.

Kate Stalter: What are some of the investment vehicles that you are using frequently these days, Charles, to meet your clients’ objectives?

Charles Zhang: You know, we continue to believe in risk-premium returns, so people need to involve equities. No one can precisely predict the market, what’s happening next month. So, we involve a lot of investments, still with a diversified portfolio.

We’re using Dimensional Funds, low-cost mutual funds, as well as making sure we are well diversified and meeting the objectives. Another thing: We do add a certain amount of REITs (real estate investment trusts) as well.

Kate Stalter: Any particular funds among the Dimensional Funds you just mentioned, or any particular REITs that investors might want to take a look at?

Charles Zhang: CPA REITs [from W.P. Carey], that’s another one we are using.

The Dimensional Fund, for clients who don’t want to be very aggressive—for moderate risk—we use the DFA Global 60/40 Portfolio (DGSIX), which is 60% global stock and 40% in short-term global bonds. That is a good choice.

Also the DFA Global 25/75 Portfolio (DGTSX), which is 25% in global stocks and 75% in short-term global bonds. For a conservative investor, this would be a good choice, as well.

But again, it depends on individual cases, individual clients’ goals, too. I think people should talk with their financial advisor to determine what type of investment is right for them.

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