Streetwise for Sunday, May 28, 2017
Memorial Day is upon us once again and for many it will simply be a day off from work and a time to drag out the barbecue grill. Yet, as I point out each year, the day should be a somber reminder of those who sacrificed their lives to ensure our freedom.
Unfortunately, as you age the devastating impact of armed conflict has a way of fading from memory. Few are left who can recount the untold horrors of the Holocaust. A younger but graying generation pushes remembrances of the sickening sweet smell of Napalm and burning flesh ever deeper into the dark recesses of their minds.
Nonetheless, the jarring impact of seeing young soldiers with missing limbs should not only unleash a gushing torrent of emotion, but hopefully will act as a constant reminder of the seemingly never-ending violence that takes place across the globe in the name of peace…oh and yes religion. And as the recent horror in Manchester, England showed, the violence knows no limits.
You are probably wondering how those comments relate to investing on Wall Street. They do not…except to point out that Memorial Day is an excellent time to once again reflect on the phrase, “Not what your country can do for you but what you can do for your country.”
That would be excellent advice for Wall Street. Unfortunately, the Street’s supercilious attitude is only upended only by its unvarnished self-indulgence. Moreover, the financial largess that now floats freely within the Temples of Wall Street is unlikely to ever make its way to Main Street.
Which brings us to the more germane topic that I address this time of the year, when and what to sell. Too often the subject is exploited with generalized and often erroneous terms such as, “the market is going up, sell,” or “the market is going down, sell.” Or even worse, idiocy such as, “Sell in May and go away.”
Deciding when and what to sell is an investor’s most vexing decision. Given that it is Memorial Day weekend, may I once again suggest you contemplate the words penned over a century ago by Catherine Lee Bates in “America the Beautiful.” She wrote, “Confirm thy soul in self-control.” In other words, keep your investment decisions unemotional.
One time-proven approach is to ask yourself if you would buy the stock today. In answering that question consider whether the company has been increasing dividends for 10 or more consecutive years and has an intrinsic value per share (using a program such as ValuePro.net) that is 10 to 15 percent above the market price.
For example, using those criteria General Electric (GE) continues to be a sell candidate. GE has an intrinsic value, using the ValuePro’s discounted cash flow to the firm model, of $3.95. The shares recently closed at $28.28. And this year I am going to add IBM to my list. A future column will describe in detail why, but for now just go along with what Warren Buffett has said.
Next on my sell list would be bonds and bond funds. Interest rates are going to move higher this year, maybe as soon as June but almost certainly by September. The result will be a drop in the price of bonds and bond funds. Furthermore, the drop could be precipitous.
My final sell idea is my least favorite investment; all mutual funds (401k plans exempted). While most funds do not exceed the S&P 500, the nasty issue is fees and expenses.
According to the Investment Company Institute, the mutual fund trade group, mutual fund fees average 1.44 percent on equity funds, 1.02 percent on bond funds and 0.24 percent on money market funds. Fees for emerging-market funds or alternative-investment funds can be more than 2 percent.
Mr. John Bogle, who founded Vanguard, has pointed out that a mutual fund expense ratio understates the total costs investors pay. In addition to the expense ratio, investors need to look at transaction fees, sales charges and the “drag” of a fund manager who holds assets in cash.
If you feel you need professional assistance, select a fee-based manager that does not receive commissions on what he or she proposes. And no mutual funds unless you want to pay two management fees plus fund expenses and sales charges.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.