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Fabian's Favorite Funds
02/25/2005 12:00 am EST
A frequent theme heard during The World Money Show was the value of using exchange traded funds as an easy way to gain diversification. One advisor who has developed an expertise in this area is Doug Fabian, who offers his current top ideas among ETFs.
"There are four things that could happen when you invest money. You could make a lot of money. You could make a little bit of money. You could lose a little bit of money. Or you could lose a lot of money. When you look at those four things, three of them are okay. One of them is really bad— losing a lot of money. So I encourage you to put a strategy in place that keeps you from losing a lot of money. And the best way to do that is to figure out at what point in time you would sell a security.
"Indeed, the most important lesson I learned regarding protecting against a big loss is to figure out when you are going to sell, before you buy. That way, you’ve made that decision unemotionally and maybe you will take a small loss—and there’s nothing wrong with taking a small loss— but we know a big loss is something that is very difficult to recover from. I’m a trend-follower, and the US market is still in an uptrend. If the S&P 500 breaks below the 1135 level, then the trend will have changed and I’m out. Plain and simple.
"I would also strongly suggest using exchange traded funds in your portfolio versus standard mutual funds. There is a real change going on in the mutual fund industry right now. I’m of the opinion that 80% of the mutual funds out there are charging you too much and providing returns that are too little. I would emphasize that there is a comparable exchange traded fund today for just about every type of mutual fund that is in existence. And using these ETFs will often result in lower costs and higher returns than comparable mutual funds. Thus, my recommendations today are all ETFs.
"I’ll begin with the energy sector. OPEC has discovered that $40 oil did not ruin the US economy. And they kind of like $40 oil. It’s good for their cash flow. They’ve gotten used to $40 oil. So I believe $40 is the new floor in oil and with oil traded at $40 or more, there are plenty of profits within energy companies. A very simple way to play the oil markets is with an exchange traded fund that invests in a basket of energy stocks. The S&P Energy Index (XLE ASE) includes all the big names in the energy area. You could buy or sell this fund with $1,000 or with $500,000. And there are no redemption fees or penalties if you choose to sell three days from now. Most investors are under-allocated to energy right now. I’d suggest a 15% allocation to this sector.
"The other area I like is basic materials. We are continuing to see a tremendous buildout of the economies in China and India. And basic materials—the raw materials that are necessary to make that happen— continue to be consumed at a very rapid pace. Again, there is a very easy way to play the basic materials sector with the Basic Materials Index (IYM ASE), which gives you exposure to copper, aluminum, steel, and all the basic materials used in the buildout of an industrial economy.
"In general, I believe most US investors do not have enough exposure outside of the US dollar. A very simple way to do this is also through ETFs, which give you exposure to specific countries outside of the US. And one country that I really like now, that’s very close to home, is Canada. Canada is knee-deep in basic materials and natural resources. Canada is really enjoying this tremendous consumption of raw materials around the world. The iShares MSCI-Canada (EWC ASE) is an easy way to take advantage of these trends, while gaining exposure outside of the US dollar."
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