Fabian's Fund for Rising Rates

05/21/2004 12:00 am EST


Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

"I believe Alan Greenspan has lost control of the interest-rate environment, putting many investors at significant risk," says mutual fund expert Doug Fabian, editor of Successful Investing and VIP Investor. Here’s his advice on how to benefit from this trend.

"What is going up? Interest rates. I believe what's important for all investors to be aware of, is that fact that in this artificially low interest-rate environment, we have had many people make broad shifts in their portfolios and taken advantage of the lower rates that we’ve enjoyed for the past three years. In my opinion, that trend has changed. I am really urging income and growth investors to take a good, hard look at their portfolios and see how much exposure they have to rising rates. I’m not looking for rates to spike higher, but I believe there will be a gradual rise in interest rates, accompanied by a gradual rise in inflation. I’m not saying that the Fed Funds rate is going to jump from 1% to 5% or that we are going to have a 10% prime rate. I am saying that the trend has changed and the direction now is toward rising interest rates.

"Rising rates is going to create a headwind for stocks. It’s not necessarily a catastrophe for stocks, but my allocation to the stock market right now is extremely low–zero percent. I think stocks will be stuck through the summer, due to rising rates and the uncertainty of the election. We saw $100 billion went into stock mutual funds in the first four months of this year, which has since given investors losses. So if a $100 billion inflow couldn’t move the markets higher, now–with all the uncertainties we have–I don’t see large sums of money coming into the market to move it higher. My dad used to tell investors to take a look at everything they have in their investment portfolio and ask themselves, ‘Would you buy it again today? If there is something in your portfolio now that you would not buy again today, then sell it.’

"I believe there will be a great buying opportunity ahead in stocks–most likely around the election, and I expect to be reallocated for a year-end rally in stocks. But I think it’s going to be rough going between now and then. In addition, think back to the losses seen in stocks between 2000 and 2003. And then realize that bonds can also lose value rapidly. I would suggest selling any income investments that are most susceptible to rising rates–long Treasury bonds, high yield, or corporates. Then, take a portion of that money and invest it in Rydex Juno (RYJAX )–a mutual fund that goes up in value when interest rates go up. The fund invests in 30-year Treasury bonds, but it doesn’t own them long. It holds them short. This may sound speculative, but it is not. As long as you are on the right side of the interest-rate trend, you can make money–even from just a mild rise in rates.

"The ten-year bond closed today at 4.77. If we were to go to 5.25 and 5.5 between now and the end of the year, the Rydex Juno fund could rise 8% to 10%. In addition, the fund has just moved above its 200-day moving average. As a trend follower, this is a good time to be buying, as it suggests the trend has changed. If you have some cash to put to work, buy Rydex Juno. I anticipate that this will be an excellent investment between now and the election. In fact, I am currently recommending that my Successful Investing subscribers hold two-thirds of their portfolio invested in this fund. I would also note that this is a no-load fund and there is no holding period and no redemption fee.

"I would add one caution. If we had a terrorist event in this country of any significance that would affect the economy, then interest rates would go back down again. In that case, this is not a mutual fund I would hold. If interest rates were to go back down, I would be looking to be at the long side of the bond market. That’s really the only circumstance I can see that would cause us to sell this fund on a short-term basis. But for now, the Rydex Juno fund looks like an excellent opportunity to make 8% to 10% between now and the election."

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