Lessons Learned: Tune out the voices, look for fundamental facts

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BY GENE KELLY/For the Lincoln Journal Star

It’s tough to ignore all the voices that want us to believe they possess pivotal stock market information.

Money managers, investment advisers and pundits hum a siren song, trying to convince investors to shift from value to growth-style stocks, or bail out of real estate or energy funds, or trim small-stock holdings in favor of big-valuation stocks, or become defensive by increasing their income-oriented holdings. I would argue that many prognosticators have a vested interest in getting investors — especially their own clients — to move money around.

It’s certainly no secret that when stocks and other assets are traded, commissions are generated.

That’s one reason sector funds that focus on brokerage and investment management stocks can report annualized returns of nearly 20 percent over the past 10 years, according to Lipper Inc. 

One goal of this column is to make readers skeptical of analysts who claim to know the next hot stock, market cycle or sector. Remember, stuff happens, and the future is unknowable.

Are growth stocks finally due for a rebound? 



For several years, pundits have predicted the rebound of large-valuation, out-of-favor “growth” stocks — those regarded as undervalued and poised for strong performance. They argue that small stocks are overheated and due for a rest. But analysts who believe they can out-guess market cycles are usually wrong.

During this year’s first quarter, the best performing index was the small-stock Russell 2000 index, which increased 13.7 percent. In contrast, indexes weighted toward large technology stocks moved ahead, but where’s the big rebound? The Standard & Poor’s 500-stock index gained 3.7 percent, and the volatile Nasdaq Composite Index increased 6.1 percent.

Forty-two months into the current bull market, stocks in the Russell small-cap index are obviously overpriced: They trade near a historic high of 44 times the past year’s earnings, compared with a price-earnings multiple of 18 for the S&P 500. Until valuations get back into line, small and mid-cap stocks will continue to dominate this aging bull market.

The last time highflying tech and health-care stocks were in favor, at the end of the 1990s, they were bloodied so badly in the 2000-2002 bear market that both the S&P and the Nasdaq have yet to return to highs reached six years ago.

What are the lessons here? First, listen to the prognosticators, but look for fundamental information before making a major decision regarding money. Second, diversify to limit risk.

In the late 1990s, investors with bets spread broadly — across growth and value-style funds, sectors not correlated with the markets, international funds, large, mid-cap and small stocks, plus flexible income funds — got through the technology selloff, badly bruised but able to recover. 

Give yourself a gift of tax-free income: April 17 is the deadline.



Since you have extra days this year to file your taxes, there’s time to take advantage of a terrific way to create tax-free retirement income: Make your 2005 Roth IRA contribution.

I’ve long been intrigued by the opportunity to squirrel away dollars that have already been taxed into a Roth account, where earnings benefit from tax-free compounding. With a Roth, you can withdraw contributions, at any time, for any reason — tax-free and penalty-free. Withdrawn earnings won’t be taxed either, after five years, provided you’re at least age 59 ½.

Until April 17, contributions of up to $4,000 can be made to a Roth IRA for 2005. If you are age 50 or older, consider adding a $500 “catch-up” contribution.

Two other powerful, flexible features of the Roth IRA are often overlooked.

For one, Roth accounts are exempt from the required lifetime minimum distribution rules. Annual distributions are a big burden for folks who’ve accumulated most of their retirement assets in traditional (tax-deferred) IRA accounts. Distributions required after age 70 ½ are taxed at ordinary income rates, as high as 35 percent. In contrast, Roth IRAs can continue to grow.      Moreover, distributions paid to beneficiaries of your Roth IRAs will not be taxed. The implication is that distributions can be spread over their life expectancies — possibly resulting in another 30 or more years of tax-free growth.

AARP was source of inheritance estimate.



In a recent column, I said baby boomers “will inherit roughly $60,000” as their retirement looms, attributing the estimate to T. Rowe Price. The correct source was an AARP study of the median inheritance received by boomer households during 2002-2003.

If you have a Lessons Learned topic to suggest, you can call Gene Kelly at 421-2861, write to him at 2611 Bretigne Circle, Lincoln 68512, or e-mail him at ck62819@alltel.net.