Posted on: Sunday, June 29, 2003

Investment Portfolios

By David Butts
Assistant business editor

How would you invest $100,000 in today's market ?

The Advertiser asked six of Hawai'i's financial professionals to create $100,000 investment portfolios for a theoretical client starting on April 1.

Today we report on how the portfolios have performed as of the close of the market on Friday and what the professionals who built them have to say about the market.

The professionals were asked to invest for a fictitious client who is 50 years old, a woman, married (husband is also 50) and both want to retire at 65. They currently have a joint income from all sources of $150,000.

They have a net worth (including their home) of $1.3 million, and their assets owned for investment total $400,000. They are in the 31 percent tax bracket and want this $100,000 to be invested for growth.

These portfolios should not be viewed as recommendations. Selecting the right investment for you depends on your current situation, goals and tolerance for risk. Before investing you should consult with a professional and read the investment prospectus.

The theoretical portfolios were limited to purchases of U.S. stocks, mutual funds and certain bonds. Below is a sampling of each professional's holdings. A flat $25 commission is charged on most trades and cash balances earn interest of 3 percent.

If you have any questions or comments, please contact: David Butts, assistant business editor, 535-2453 or dbutts@honoluluadvertiser.com.

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If this portfolio were an automobile, it would probably be a Ford Explorer. It will get where you need to go through a variety of conditions with a relatively smooth ride. Fund selection is a key component of portfolio design. It should be noted that past performance is no guarantee of future results. I like funds that outperform their respective benchmark index over the past five years, have low volatility, and historically have strong risk-adjusted performance when compared against their peer group. Employing recognized, time-tested strategies gives us a greater potential of achieving long-term goals. Let’s stick to the basics.

Given early signs of an improving economy and continued low interest rates we believe growth will accelerate in the second half of the year. At the same time, the Federal Reserve rate cut this week of 25 basis points, while on the low side of expectations of as much as 50 basis points, should provide continued monetary stimulus, but signals a reduced risk of deflation. The dramatic rallies in both bonds and stocks in this improving environment will likely result in continued volatility over the near term, but a better economy and low inflation should be good for the financial markets in the second half of the year.

After the Federal Reserve Board met on Wednesday and lowered interest rates, deflation was a word that was talked about. Deflation is a decline in general price levels, often caused by a reduction in the supply of money or credit. Look at corporations that have experienced deflated profits and revenues that lead to price deflation. What concerns me now is what happened in Japan. Their deflationary period began 14 years ago. By understanding the problem and historical references in other economies, we can determine which investments to concentrate on or avoid completely. Do your homework and stay vigilant.

The market has capped a stellar quarter by rising again this month. Although we believe that we are in a new bull market, stocks have temporarily outraced the improvement in earnings and are due for a correction. Overall, equities are not undervalued as they have been at the beginning of previous bull markets. Therefore, stock valuation and selection will be critical going forward. We have taken profits in some expensive stocks (equities with high price/earnings ratios), and look to redeploy the funds on pullbacks into equities whose valuations are in line with their growth prospects.

Since our personal financial plans and strategies are intermediate and long term, the up and down motion of the equity markets should be measured against the longer-term direction of the economy. After a strong rebound, we are seeing some expected equity selling. As we approach an election year, with tax relief, a very accommodating Federal Reserve infusing liquidity into the economy and the lowest interest rates in 45 years, the prospects for economic growth are enhanced. As long as this is the expectation, our five and ten year financial plans remain on track.

Last month we talked about planning for retirement. For those already in retirement, the question may be: How long will my money last? The answer to this question is a function of how much you’re withdrawing and how much it’s earning. For instance, if you’re withdrawing 6 percent while earning 2 percent, your balance will deplete itself. Withdrawing 6 percent while earning 7 percent should see a rising balance. If the majority of your assets are in an IRA, TSA and/or Deferred Comp, you may want to look at the “Stretch IRA?” Check with your adviser.