Q...........
Tom,
I am about to embark on an AIM adventure! I am about to begin my first AIM program. I have done my homework. I have picked the PBHG Technology and Communications fund (beta of 1.54!). According to your "Idiot Wave" I would place $10k in the fund, and $5k in cash money markets (since I am beginning with $15k total). This may sound silly, but I cannot help but question "why start now, at this high a level in the US stock market?!" The reason for this concern is I happened to read a recent WSJ article and scanned a chart comparing the today's US market with Japan's Nikkei in 1989. They are very similar, and since your indicators are flashing "high risk" I am little concerned. Since this is AIM we are talking about, should I just bite the bullet and jump in? Any other suggestions? With this much money would you rather see me in individual stocks, or am I doing the right thing by picking a VERY volatile fund?
Thanks, Kirk
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A...........
Good morning Kirk,
Your question is a valid one. Yes it seems that the swelling balloon is nearing the point that almost anything could make it pop. Certainly the tech and comm area of the market is the heat that is expanding the balloon. At this point I'm glad that the IW is giving some high risk signals, even if all four components aren't in agreement as to this being a bearish time.
My guess at this time is that there will be a short, sharp correction sometime in 2000 or 2001. The continuing flood of money will seek a new home temporarily, but tech and comm is still in the beginning of probably a 5 to 10 year expansion. I don't think there will be much more expansion in the P/E ratios of these companies (a significant portion of the gains in the last three years) but the solid growth will continue in revenues, earnings and book value.
Because you are choosing a "sector fund" over a diversified one, you may want to shift the equity/cash ratio a little more towards the Cash side. Maybe half way between the Stock and Mutual Fund IW settings - say about 40%. That should help.
Another alternative is to keep the Buy SAFE at a full 10% and use the current 2/3:1/3 equity/cash ratio. This will keep the buying under control in a downward spiral. You can alway ease off on the Buy SAFE setting later on when the Idiot Wave is back to something more reasonable.
Almost the entire emphasis that is keeping the IW in the High Risk area is my Speculation index. It can stay Bearish for long periods of time without dire consequences. It needs to be confirmed by the other components to be validated. What is surprising is that Value Line's P/E ratio is better than its been in a long time.
As we've seen for most of last century, it was almost always a mistake to be out of the market - if your time horizon was longer than just a few years. Yes, there have been crushing bear markets, but their duration is nothing compared to the bulls that have followed.
You are taking two steps to keep your 'exuberance rational' - one is to choose a good mutual fund and sector. The sector should continue to give us good performance for a very long time and the diversity of owning a fund should lessen your risk. The second thing you are doing is to use AIM. It is a very conservative plan for your investment business. If it turns out that today's prices need some consolidation, you will be there at the bottom buying up shares at the new discounted prices. If the prices continue to rise, you will keep a significant portion of your account in money market funds, which give you significant purchasing power all along the way.
The main thing for you to do is maintain, through all the "news" on CNBC, in the WSJ and Barrons and any other financial papers, a very long term perspective. So much of today's market 'news' is geared to staring only at the trees and forgetting the forest.
Of course, who advertises in those papers and on those shows? The brokers, and trading houses and fund switching strategists. They all have a vested interest in watching you churn your portfolio. They have no real interest in your success. If you understand the need for expansion in the telecomm and tech areas as we bring the rest of the world into the new age, then you can see how big and long lasting the expansion will be. There will be some 'bad days' along the way. That's what AIM's designed for. When everyone's walking around with long faces, unwilling to talk about their portfolio, you will be quietly buying up shares from those with a short term time horizon. Later you'll get the privilage of selling them back the shares. Somebody must provide the liquidity during bear markets - somebody must provide the equities during bull markets! That's the AIMer's job!
Thanks for taking the time to write me about your plans. I hope some of this makes some sense for you. The first bear market will be tough, but the second one will be much easier to take.
Finally, I should let you know that at the current time nearly 1/3 of my total investments are in mutual funds. There's no shame involved in using someone else's research for yourself! My funds have rarely had as "bad" a year as I have in my stock portfolio. They don't usually exceed my good years, either. However, with AIM's assistance they've provided a secure base for my investment pyramid. Because they are very good at doing what they do, overall the funds have kept up on a percentage basis with the rest of my account.
Best regards, Tom |
