QUESTION: We are thinking about selling Dell and Southwest Airlines for shares of Google. Is this a good move for 2006? — D.
ANSWER: It sounds like you have been bitten by the “Google bug.” Do you remember what happened to individual investors who were bitten by the “Internet bug” a few years ago? They jumped on to the Internet stock bandwagon, simply because it seemed that inordinate amounts of money were being made by anyone who bought. We all know it ended, with a NASDAQ crash and technology bear market.
In just one year, GOOG has become one of the world’s largest companies in market value. Some investors feel it is justified, while others do not. The fact is that much of the gains are probably already behind the stock — unless GOOG takes over the world. At almost $500 a share, they probably already have.
Dell is the premier PC company in the world and the stock is attractive at these levels. Southwest Air is considered to be one of the best run and managed airlines in the world and has performed well.
The answer to your question, in my opinion, an unequivocal no.
QUESTION: Is it possible to put an automatic stop (sale) on a mutual fund if the stock market takes a dive? I have had the Legg Mason Value Trust (longer than Dagan) since 2002. The price often fluctuates wildly during the day. Why not sell when the market is going down and then repurchase at a lower price. Yes, I know I am in for the long haul! — Sue (Jackson, MS)
ANSWER: Unfortunately, you cannot place an open stop-loss order for an open-end mutual fund.
A stop-loss order is a great way to manage risk in individual stocks, ETF’s, or closed-end funds. But you can only place a stop order on a security that trades during the day. Open-end funds are priced only at the end of the day and there is no mechanism for open orders. You may simply only buy and sell an open-end fund.
Owning a mutual fund should be considered an intermediate-to-long-term proposition. One reason is that there may be significant costs associated with buying and selling which could easily lessen your total return. This is one of the main reasons why investors do not trade mutual funds.
If you want to trade individual sectors, give sector ETF’s a try. They trade just like stocks and can benefit from sector movements.
One of the best mutual fund web sites is www.maxfunds.com, run by Jonas Max Ferris, who is also a FOX News business contributor.
QUESTION: What do you think about investing in IPOs? — Roger
ANSWER: IPO’s are usually great investments and are highly desirable, but the problem is that few can actually get an allocation of pre-market IPO stock. Sure you can buy all the stock you want after a company is trading publicly, but buying pre-market stock is very difficult.
When a company goes public, they issue stock through an underwriter, which is usually a brokerage house. Only the originally issued pre-market stock is considered “IPO stock.” That stock is usually only offered to preferred clients of the brokerage house underwriter and the company going public.
Many IPOs go up in value from where they are priced to go public (in the aftermarket) and that is the time when anyone can easily buy stock. But buying in the aftermarket has produced mixed results. Quality companies with earnings can be outstanding performers, but over-hyped stocks, with a skyrocketing first day price, is not usually a good investment as companies must prove themselves through fundamental performance.
As with all investments, doing your homework is of key importance.
QUESTION: Which is better in the long run in relation to return and management fees: Active managed funds or passive managed index funds? — Ross (Naples, FL)
ANSWER: It depends.
Money managers have broken the market down into individual sectors like small-cap growth, large-cap value, international, etc., and invest based on their “style.” There are sectors that do extremely well, while the overall market treads water (like last year when active-managed international funds outperformed the passive-managed domestic index funds that are tied to the market averages.)
Usually, active-managed funds take more risk and have larger gains or losses than a passive index fund. But index funds have much a much lower cost structure.
The bottom line is that active-managed funds have outperformed passive-managed funds by only 5% over the last decade. The key is to diversify your portfolio with different investment styles and in varying sectors over the long-term.
QUESTION: My Mom recently died and in the settlement I have the following three options: receive her BP stock (210) shares, receive her AEP stock (143) shares or take the money. Any suggestions? Immediate cash is not my top priority. — Tom
ANSWER: Take the stock as it is because it is, in essence, a tax-free transfer.
When stock is transferred from an estate, the cost basis is calculated based on the date of the deceased. Your mom may have owned those stocks at a much lower price than upon her death, but your cost basis will be based on the day she passed away and not at her original cost. Plus, capital gains taxes are taxed at a much lower rate than almost any other asset.
I suggest you then sell the stocks and begin a well-diversified investment plan where you can own more than just two stocks.