Fabian: Unconventional Options
10/17/2003 12:00 am EST
"We live in a different world today," says Doug Fabian, editor of Successful Investing. "To achieve success we must realize we are living in an uncertain economic climate with the threat of geopolitical events. As a result, we must expand our horizons to be successful at achieving our goals." Here, Fabian offers some unconventional funds to counter the potential for a variety of financial risks.
"Stocks in many segments of the market are over-valued, Fannie Mae could single-handedly bring down the financial sector, rising interest rates have slowed the flow of money into real estate, and inflation is a real threat. These are just some of the predictions and forecasts of others. While these themes may materialize into profit opportunities for us, my purpose for bringing them up is to get you prepared. The market has continued shrugging off those factors so far this year. So, why should we even concern ourselves with the what ifs ? By expanding our investment horizons, we'll have opportunities for profit and options for our idle cash should this rally fail.
Our Unconventional Options
"For every negative situation in the economy--inflation or deflation, weak dollar, rising interest rates, a popping tech or real estate bubble--there are investment tools that thrive in those conditions. It's often said that markets climb a wall of worry, well, sometimes they just hit a wall. I don't want your portfolio to hit one too, so I'm looking at those investment options outside of the traditional plan that we can put a portion of money to work if any of the above should happen.
Rising Interest Rates
"With interest rates hitting 45-year lows this summer, the trend is certainly changing in this arena. There are two funds available from Rydex and ProFunds that go up with interest rates--and therefore move in the opposite direction as the price of the 30-year Treasury. ProFunds Rising Rates Opportunity (RRPIX), moves 125% the inverse of the most recent 30-year Treasury bond. Rydex Juno (RYJUX ) moves 100% the inverse of most recent 30-year Treasury.
"When interest rates climb and inflation creeps back into the economic equation, energy, oil and other commodities tend to do well. Inflation doesn't necessarily mean that stocks will perform poorly, in fact, a mild case might mean a continuance of the uptrend. Deflation, however, usually is a death blow for the broad market. RS Investors Natural Resources (RSNRX) invests at least 65% of assets in securities of US and foreign companies in the natural resources industries. The fund generally maintains investments in at least three countries. T. Rowe Price New Era (PRNEX) normally invests a minimum of two-thirds of fund assets in natural resource companies that could benefit from accelerating inflation. At least half of fund assets will be invested in US securities, but up to 50% of total assets may be invested in foreign securities. US Global Investors Global Resources (PSPFX) seeks capital growth and protection against inflation. The fund invests in the equity securities of companies engaged in natural-resources activities.
"So, what are the ideal conditions for gold prices to soar? Inflation (brought on by rising interest rates and a government willing to do anything in its power to fight off deflation); a huge, US deficit; a perceived weak, risky stock market; and a falling dollar. Gold is very much a panic play--a hedge against risk. In the early '90s, gold stocks tripled in value over a three-year period. Rydex Precious Metals (RYPMX) corresponds to the XAU index, a benchmark for metals-related securities. ProFunds Ultra Precious Metals (PMPIX) moves 150% the daily performance of the Philadelphia Stock Exchange Gold/Silver Index.
"When the dollar's value declines, foreign issues heat up. Prudent Bear Global Income Fund (PSAFX) is an international fixed income fund with a precious metals component. This international fixed income fund is poised to benefit from a declining US dollar and rising gold prices. American Century International Bond (BEGBX) invests primarily in US Dollar and non-US debt securities issues located in at least three countries."