... but an investor can certainly do well by buying what is unpopular...
To extend upon the philosophies of looking foolish in the crowd and buying into weakness, I thought I would share a few observations I've recently made regarding buying opportunities. I'll also end with a re-cap on my Socratic Model portfolio as the long-term investor practicing active management should already be looking where to invest in 2008 and the years beyond...
As my readers are aware, I believe "timing the market" is a fool's pursuit while seeking time in the market, accompanied by small, yet incremental moves (buying into weakness, selling into strength) is prudent, assuming your investor personality is appropriate.
As fear overcame investor sentiment over the past few weeks, I noted an opportunity to buy financial stocks via a mutual fund (my selection was Davis Financial -- RPFGX) that has a deep value objective. The idea is that the fund's holdings have strong fundamentals, the management style avoids buying "greed," and the mass "guilt-by-association" selling opened a door for scooping up some quality long-term deals.
Now, for the first time in about 18 months, I see an opportunity to purchase some real estate shares in the same manner. (Note: I do not believe in buying anything unless you intend to hold it, or most of it, for at least five years).
Over the past several days, I took a fresh look at some real estate investment trust (REIT) funds. (Remember, REIT's do not necessarily invest in "real estate" in the popular sense of the term. They often hold mid to large-size property groups that typically buy hotels, office space, shopping malls, and other holdings beyond personal real property).
The primary reason to get interested in REIT funds, not only to lever the knowledge of an experienced fund manager, is to gain exposure to some gems that suddenly look attractive after the recent broad and non-discriminating sell-off. Here are a few other reasons:
- Tumbling prices have some REIT firms buying back some of their own shares.
- The DJ Wilshire REIT Index, as measured by it's ETF mirror (RWR), is over 20% off of it's one year highs -- the mark of an REIT "bear market," if you will.
- REIT's have a low correlation to the broader stock market; therefore, provide a good diversification tool and defensive measure as the current market and economic cycles wind down.
This buying opportunity window for the long-term investor appeared to "open" last week amidst the market turmoil, but looks to continue to remain open as long as the investor "herd" steers clear of anything associated with the words "financial,' 'mortgage,' or 'real estate."
- Long manager tenure: Each fund has had the same respective manager for at least nine years, which indicates valuable experience covering more than one market cycle.
- Low turnover: Neither fund turns over more than 25% of its portfolio over the course of a year, which indicates high confidence in stock selection and minimal expenses...
- Low expenses: The highest prospectus net expense ratio between the two is 1.11% of assets (the average specialty real estate fund charges 1.48%)
"Passively-managed" funds such as Index funds or Exchange Traded Fund (ETF)'s can provide outstanding exposure as well but you may want to visit my Index Funds vs. ETF's posts before jumping in. Additionally, in a volatile environment, I tend to lean toward experienced, active management. That way, I can spend more time living my life and less time following the financial markets.
As for the portfolio update, I suggest the following portfolio as we move toward 2008 (all funds are actively managed unless noted otherwise):
- Large Cap Index (30-40%) - holding
- Foreign Large Cap (15-20%) - holding
- Small Cap (5-10%) - holding
- Mult-Sector Bond (10-15%) - increasing
- Defensive Stock / Contrarian Plays (Health Care 5-10%, REIT 2-5%, Financials 2-5%) - To achieve 5% each by early 2008
- Cash (2-10%) - fluctuating
I do not wish to "pull the rug out" from under anyone but to add emphasis to the fact that actively managing a portfolio is not for the "average investor." I believe investors who do not have at least 10 years investing experience, a passion for investing, a long-term (10 years-plus) investment horizon, and a logical (rather than emotional) disposition should utilize the wise and "passive" practices of dollar-cost averaging, re-balancing, indexing, or even life-cycle fund investing.
To say the least, the current market environment does make for some interesting, yet selective, opportunities for the actively-managed portfolio; however, whatever your investment style, it should ultimately be for the purpose of making your life with money -- not for making your life about money...