Annual Financial Section

Can you survive the '80s? Profit from the Far East? Strike it rich with gold coins? Figure the ins and outs of mutual funds? Our experts have the answers, and they're eager to make your pocketbook bulge.

From Now to '90

What lies ahead in the speculative markets.
Robert R. Prechter, Jr.

Assessing the future course of market prices is always a tricky exercise but nevertheless a worthwhile one. Many market analysts deride forecasting as worthless (usually because they've failed at it so often). However, forecasts do provide value in at least three ways.

First, a person usually does his best thinking during quiet times away from the hurly-burly of market gyrations and the rush of news reports. It is at those times that an investor can make the most rational, least emotional assessments. In other words, forecasting, as opposed to "calling" the market in the heat of battle, is often approached with a higher quality of thought.

Second, a good forecast allows the analyst to attain a certain degree of psychological comfort. As long as the market is following the expected path, you can relax and let the market do the work in generating profits, while others alternately wax euphoric and rush to panic with each new piece of news, which in most cases is irrelevant to the basic trend.

Finally, a forecast is useful because it serves as a check against being wrong. Market players who do not spell out their expectations often will rationalize a losing position week after week, month after month, as each new price blip or news story serves to bolster their hope that the trend will reverse and go their way. Outlining your expectations in advance and tacking it on the wall is a tangible picture against which to compare the actual course of prices. If the two diverge seriously, you can't ignore it; it's time to abandon your losing position, reassess your conclusions, and perhaps even question the assumptions and premises upon which your forecast was originally based. In almost every case, you will learn something from your error, a "return" which may not be immediately consumable but which may be the seedcorn from which a better strategy and a more bountiful outcome will be realized in the future.

Over the past 14 years, I have examined well over a hundred methods of market analysis and forecasting. I've kept some and thrown out many. By far the most useful, reliable, and accurate I've found is the Wave Principle, an empirical description of the way markets behave, developed by Ralph N. Elliott in the 1930s and '40s.

After studying charts of all types of speculative markets, Elliott noticed that price movements traced out the same patterns and sequences of patterns regardless of the market under study. He then catalogued, with clear specificity, the 13 patterns found in speculative markets. Each pattern, he observed, has implications regarding the position of the market within its overall progression, past, present, and future. His basic observation was that moves in the direction of the larger trend will subdivide into five "waves" (an up-down-up-down-up sequence in an advance and vice-versa in a decline), while moves against the trend, which may trace out any one of a number of specific "corrective" patterns, never take the "five wave" shape. By studying these differences in form, the larger trend can be identified and investments can be made accordingly.

Elliott ultimately concluded that mass human behavior is apparently such that a crowd acts the same way (and will always act the same way as long as people are people) in each situation where its members are betting against one another on the future course of prices. Its mood will swing from optimism to pessimism and back again in this sequence, which is natural to human beings and which occurs regardless of the surrounding extramarket news. That forms based on the same underlying principle have been observed throughout the natural sciences has merely added to the interest in Mr. Elliott's discovery.

As verified by independent performance-rating services, the Wave Principle has an excellent record of forecasting and calling market turns. Like all useful forecasting tools, however, it does not allow perfection. Therefore, as with all opinions on the market, please observe that time-tested maxim, caveat emptor. In the end, after reading all the pundits' opinions, you must make your own decisions. As input to your thinking, I present here my outlook for the next few years on six major areas of concern to most investors: the stock market, precious metals, interest rates, commodities, oil, and the economy.

The Stock Market. In the 1978 book Elliott Wave Principle, A.J. Frost and I applied Elliott's concepts to the long-term progression of US stock prices from the Depression lows of 1932 and argued that from the then-current level of 790, a powerful bull market was due to carry the Dow Jones Industrial Average (DJIA) to near 3000. Our stance was in opposition to the widespread expectations that a "Crash of '79" or a "Kondratieff wave depression" lay dead ahead. At this juncture, the Wave Principle's evidence about the typical progression of prices in a bull market points to several conclusions:

• The major bull market dating from 1974 in the broad market indexes and from 1982 in the DJIA is not yet over.
• The ultimate upside target is approximately 3600–3700 on the DJIA.
• The late 1980s (probably 1987 or 1988) is the most likely time period for the final bull market to peak.
• Along with numerous minor pullbacks, there should be one severe correction in the averages of approximately 15 percent (akin to the 16 percent decline that occurred in the first half of 1984) at some point prior to the final top.

The DJIA has already more than doubled from the 1982 low of 777 and therefore appears high to many market watchers. But this rise is well within the normal parameters of price behavior at this stage in the long-term mass psychological progression toward increasing market optimism. In fact, the DJIA is likely to double again before the final high is seen. Although the bargains of 1982, 1984, and even September 1985 are no longer available, the US stock market still appears to offer the most promising long-term investment vehicle among today's major markets. Five to 15 percent corrections along the way (several of which are due to occur this year) should provide good entry points for new investors.

The Bond Market. From 1981 to now, the market for debt—from top-rated US government bonds to "junk"—has experienced one of its greatest bull markets in history. In my opinion, it is likely that the end of that bull market is occurring now. In the past, advances in bonds have shown a tendency to top out prior to peaks in the stock market, so this conclusion fits fairly well with the outlook for stocks. The best interpretation of the price structure in bonds indicates that the maximum likely downside limit for 30-year Treasury bond yields is 7 percent (plus or minus .25 percent), and that target zone has been met. Even 90-day Treasury bills have achieved their downside target level at just below a 6 percent yield. Although bonds may still provide an attractive interest rate return, it is probable that bonds will no longer provide the dramatic capital gains that they've produced over the past five years. This is not to say (though it's certainly possible) that interest rates must begin rising immediately and dramatically but only that in all likelihood they'll stop going down.

Gold and Silver. Although every financial issue of REASON has contained at least one analyst's fervent call for an upward explosion in precious-metals prices, gold for the most part has remained in a down or sideways trend since its peak in January 1980 at $850 per ounce. Silver, in turn, has been an unmitigated disaster, falling 90 percent from its $50 peak registered at that time. Is this the major bottom for precious metals? Is inflation ready to "resume," "reheat," or "resurge"?

Although rallies may occur at any time, the evidence from the price structure argues strongly that the major bear markets in gold and silver remain in force. In support of this contention are (1) the lack of bearish conviction on the part of investors, a precondition for a major bear-market bottom, and (2) the position of the time cycles in gold. In the past, the precious-metals markets have displayed a remarkable tendency to bottom at regular intervals. The next scheduled major low for gold and silver is not due until 1988. According to normal Elliott Wave parameters, moreover, gold still has potential ultimately to decline to the $100- to $180-per-ounce price range before the next major bull market begins.

If this potential appears ridiculously low to you, please consider the fact that all markets tend toward extreme overvaluation at tops and undervaluation at bottoms. There are some further points, too, that make such a target worth considering. Silver has already met its Elliott Wave bear market target zone of $3.50–$5.50, which itself appeared ridiculously low when it was originally suggested. Moreover, the prices of commodities, from grains to oil, have fallen dramatically from their all-time highs, and the trend toward deflation is well established (brief inflationary interludes notwithstanding).

So why hasn't gold fallen as dramatically as silver and commodities? Market watchers have long noted that in the final stages of a bear market in stocks, the blue chips are tossed overboard last, as the environment of panic finally persuades investors to give up even on shares of the nation's finest companies. Gold, of course, is the "blue chip" of the inflation-hedge investments. It may well be that gold, in reflecting a dynamic similar to that found in the stock market, will be the last inflation-hedge investment to be sold by long-term hard-money investors. Time will tell. Whatever the ultimate low in gold, it is likely to under-perform the US stock market, so unless and until gold begins tracing out bullish price structures, it is best avoided.

Commodities. The general uptrend in commodity prices that began in the late 1960s ended in 1980–1981. The Wave Principle recognized the peak and forecasted a two-step decline carrying the Commodity Research Bureau's Futures Index from its peak at 337 to a low between 175 and 205. The 205 level has already been met, and the price pattern indicates a strong likelihood for a spring-summer rebound in general commodity prices (probably led by the agricultural markets). However, that rally phase is expected to be merely an interruption of the overall bear market, which should resume later in 1986, carrying the CRB index of commodity prices to the lower end of its target range in 1987.

Oil. Petroleum prices collapsed from November to April in a classic Elliott Wave pattern. Unfortunately for producers, the crash that brought the price of crude oil from $30 to $10 per barrel is probably not the end of the long-term decline in oil prices. A countertrend rally is due, but I expect it to peak below $18 per barrel. At some point in the next two years, petroleum prices should decline to below their April 1986 lows.

The Economy. For the past three years, the US economy has been in a very selective expansion in a situation similar to that of the 1920s. Areas such as computer and service companies are enjoying boom times, while farmers and oil companies are experiencing an out-and-out depression. The best single leading indicator of the economy is the stock market, and the stock market's selective upside performance since 1983 has accurately foreshadowed the positive but selective performance of the economy.

The powerful rise in stock prices in early 1986 is forecasting further favorable economic performance overall. When the stock market undergoes the expected 15 percent correction that I suggested above, some time in the next nine months, it will be foreshadowing a mild recession beginning several months thereafter. The Wave Principle suggests dramatically higher stock prices over the next two years, so the beginning of a deep depression or economic disaster will not be in the cards until at least 1989.

Upcoming Long-Term Changes. While my interpretation of the Wave Principle indicates continuing good times for stocks and rough times for the inflation-hedge investments (with the exception of some countertrend movements), it also indicates a dramatic change of direction for both areas in the late 1980s. The chart pattern in stocks strongly suggests an end to the bull market late in this decade and a devastating bear market thereafter, probably beginning by 1989. Gold, the only true "store of value" money, is not "dead," either. While the current bear market is likely to cause the vast majority of "gold bugs" and hard-money believers to give up on gold just as it is bottoming, that bottom is expected to provide the second super "buy" in a generation.

Although my analyses of markets are done separately based upon their price structures, they do indicate a major top in US stock prices and a major bottom in gold at approximately the same time. This concurrence indicates that the trend among investors toward optimism about the future will end fairly abruptly, probably in 1988 (coincidentally an election year), and lead to a period of sharply increasing pessimism about the future. A powerful bear market in stocks beginning at that time would further suggest a full-scale economic depression in the 1990s. A powerful bull market in gold would suggest that the financial and monetary conditions will be disastrous enough to cause a worldwide flight to real money.

As to the causes of such a change other than the natural progression of human moods and market prices, we can only speculate (the world debt situation, obviously, is a prime candidate). As to the details of the financial environment at that time, we can only surmise. In the meantime, stay on the right side of the trends, reassess your opinions when necessary, and put your money where your conclusions are. When all is said and done, that's the best way to stay financially healthy.

Robert R. Prechter, Jr. is coauthor of the book Elliott Wave Principle and editor of The Elliott Wave Theorist, a financial forecasting newsletter based in Gainesville, Georgia.

Baby Boomer Mortgages

How to save a bundle in buying a home.
Howard Ruff

The real estate market was battered by high interest rates in the late '70s and early '80s, but now that rates are tumbling, real estate has come to life. Home buyers are flooding back into the market, and opportunities abound.

The key to making a successful real estate investment often lies in finding good financing and keeping up with the trends. And the hottest trend to hit the real estate market in the last year is the stampede toward what I call "baby boomer mortgages"—15-year, fixed-rate home loans. With housing starts booming, interest rates down, and many Americans moving up, these shorter-term mortgages have evolved from a trendy form of "yuppie financing" into one of the most popular types of home financing available today. They are much more than just a craze. Today, lenders who don't offer 15-year mortgages are the exception rather than the rule. If you're in the market now for a new home, or if you're joining the hundreds of thousands of Americans who are refinancing their real estate, a 15-year mortgage could be of interest to you.

The Pros. If you've shopped for a home loan lately, you've undoubtedly come across 15-year mortgages. Lenders love them because most have fixed rates, so exact returns can be calculated, and the shorter payback period reduces their risk.

Shorter-term mortgages also offer borrowers several benefits:

• Rates are about one-half point lower than those on 30-year loans, and monthly payments are only 10–15 percent higher. A $100,000 loan at 9 percent interest amortized over 15 years has monthly interest and principal payments of $1,014, compared to $841 for a $100,000 loan at 9.5 percent over 30 years—a difference of $173 a month. With rates down, such payments are well within the grasp of many families.

• Equity builds more rapidly, so homeowners can get a fast start in moving up to bigger and better housing. It takes 22 years to pay off half of the principal of a 30-year mortgage, compared to only 10 years for a 15-year loan.

• Lenders make money by compounding interest, so paying off your principal quickly means tremendous interest savings. A 15-year mortgage can cut a borrower's total interest costs by more than half over the life of the loan. On a 15-year $100,000 mortgage at 9 percent interest, you would pay just $82,520 in interest, as opposed to $202,760 on a 30-year $100,000 loan at 9.5 percent—a savings of $120,240.

• Many borrowers like 15-year mortgages because they can own their own house free and clear before their kids reach college age, or before they retire, after which their cash needs are greatest.

And the Cons. There are three primary arguments against 15-year mortgages:

First, the higher payments require more cash to be tied up in illiquid home equity, which produces no income and reduces the leverage that a mortgage provides. On the other hand, higher payments and less liquid cash can be a plus for people who tend to spend every penny, because it forces them to save. And for many people who want to fulfill the American dream and own their home outright, the higher payments are not prohibitive.

Second, borrowers get fewer dollars in tax savings. Payments are higher, but there's less interest being paid, which is the deductible portion of a home-loan payment. And if the Senate tax-reform proposal to slash tax rates becomes law, the tax savings will drop proportionately. In response to this argument, it's true that long-term tax savings are greater with a 30-year mortgage; but in the first few years they don't differ much from those of a 15-year loan. After 5 years, interest payments on a 15-year loan would total $40,936 compared to $46,689 on a 30-year loan—only about a $2,876 savings for someone in the 50 percent tax bracket. And when the mortgage is paid off in 15 years, you can look for a new tax shelter.

Third, some lenders offering 15-year mortgages require biweekly payments. This requirement may reduce the borrower's flexibility, leaving little room to maneuver if things go wrong.

Another option. The biggest question for most borrowers is whether they can afford the higher payments of a 15-year mortgage. Lenders report that 15-year mortgages are most popular among affluent home buyers rather than first-time buyers, who are usually already stretching to qualify. For these buyers, or for homeowners who don't want to hassle with the time and expense of refinancing, it may be smarter to stick with 30-year mortgages and simply increase the monthly payments to reduce the pay-back period.

As long as they don't trigger a prepayment penalty, increased monthly payments also save borrowers thousands of dollars in interest, allow equity to build more quickly, and reduce the time over which the loan will be repaid. But they provide more flexibility than being locked into the high payments of a 15-year loan, because borrowers aren't obligated to make the higher payment every month.

Here to Stay. The 15-year mortgage is more than just the latest craze to hit the real estate market. More than two-thirds of all savings and loans offer them, and consumers are beating down the doors to sign up for them. They are going to be around for a long time.

When shopping for a home loan, check out shorter-term mortgages or consider increasing the payments on your 30-year loan. If you can afford the higher payments, you'll save a bundle in the long run and you can own your home in half the time—and those are not trivial pursuits.

Howard Ruff is editor of The Financial Survival Report and author of several books on investment and financial survival, including Making Money (Simon & Schuster, 1984).

Which Coins to Buy, Which to Sell

Don't rely on the flip of a coin.
James R. Cook

Exactly 10 years ago, gold and silver were sputtering, the dollar was dropping, inflation was a thing of the past, the Fed was creating billions out of thin air, stocks and bonds were in and tangibles were out. Back then, interest rates were going lower, gold bugs were considered quacks, and the economists and Wall Street soothsayers waxed confidently about the dawn of a golden age. Déjà vu.

Many things seem the same today. A vast expansion of money is buying us another boom. Although the Consumer Price Index is flat, the stock market forecasts an impending economic boom. The rising prices of securities foretell the rising prices of everything, and a mind-wrenching inflation probably looms around the corner. Consequently, the investment decisions you make now have great bearing on your future profits.

Gold and silver coins are currently out of favor, which is historically the best time to act. Why buy coins? Investment banking firms and financial publications have consistently ranked coins among the top two or three investments of the past 20 years. Coins—especially those containing gold—have an excellent rate of appreciation and offer a good hedge against inflation. And unlike stocks or real estate, coins are portable and collectible, with a unique ability to satisfy people's acquisitive nature.

In order to profit from coins, you need to get the facts. You also need to make clever and adroit moves before others do. Have the courage to act contrary to the crowd.

What to Buy. During 1980–84 the US government minted a series of one-ounce and half-ounce gold coin medallions that bombed. In a fervent attempt to distribute the coins equally rather than allow some investors to get 10 or 20 at a time, the government limited the amount that anyone could buy to a few ounces. This egalitarian foolishness meant that no serious gold investor bothered with them. By the time they changed the rules, it was too late. The whole program foundered, and the medallions were dumped onto the market.

But these coins are worth buying for one reason: their limited mintage. For example, only 500,000 Robert Frost and Grant Wood medallions were minted, and only 35,000 Hayes and Steinbeck medallions were minted. No more of these coins will ever be made, which distinguishes them from gold Krugerrands, Maple Leafs, and other bullion coins with open-ended annual mintages. The Hayes one-ounce medallion is already selling at 25 percent over its gold value, demonstrating the propensity of these coins to take on a numismatic, or collector, premium. And if the premium of a medallion rises to 15 percent, it is classified as a numismatic coin whose sale need not be reported to the government. So trade in your Krugerrands and Maple Leafs for these medallions. Check with your accountant, but the best tax information we can get says that gold for gold is a tax-free switch. This is a low-risk way to pick up an additional gain on your bullion holdings.

Newly minted US gold coins are also hot. The brand-new 1986 Statue of Liberty gold coin has already doubled in value, as have the five 1984 Olympic gold coins.

Despite a big move up in most US gold coins, the $20 Liberty gold coin in MS60 condition still seems underpriced at about double its gold value. (Coins in MS, or mint-state, condition have never been circulated. The number is a measure of absence of surface blemishes, with 70 being a perfect coin and lower numbers indicating more blemishes.) This coin, which is nearly 100 years old and not as common as many dealers think, contains almost an ounce of gold. It is a two-way investment, with both antique value and gold value. If inflation resumes, this coin has a long way to go.

The deadest investment in the world today is silver; nobody seems to want it. Nevertheless, silver is a precious metal with heavy industrial usage. When the public buys, silver soars. Will they buy again? In my opinion, they will buy more than ever before. Everyone knows what silver did in 1980. When it starts to move again, the crowd will follow.

So don't give up on silver. Buy 100-ounce bars. The 90-percent silver coins are not as good as the bars because they aren't as pure. Consequently, their price may slump in a bull market.

Also buy circulated Morgan silver dollars, which have over three-fourths of an ounce of silver. The best of these are graded XF (extra fine) to AU (almost uncirculated) and are dated 1878–1904. They are the best known and most popular silver coin in history, with a high collector value which has stayed high even when the price of silver has fallen. The better dates and grades cost about $20 each.

What to Sell. Over the past several years the so-called MS65 dealers have promoted silver dollars, Franklin half dollars, and silver quarters and dimes in this grade. The price of MS65 dollars has soared nearly 300 percent.

Cash these in and take the profits. The new MS64 grade probably indicates that some MS65 dollars are being reclassified. Currently the MS64 coins are rising in price, while the MS65 dollars are stagnant. Dealers are so fussy now about what constitutes an MS65 coin that it makes sense to sell off your MS65 dollars. In particular, get rid of the common-date MS65 Morgan and Peace dollars that rose by such an extraordinary percentage in the past two years.

What to Be Wary of. A number of new coin-grading services have popped up, claiming they're the saviors of the coin business. Put this into perspective. When colored gems and diamonds were hot a few years ago, everyone insisted on having grading certificates. Today gems and diamonds are bought and sold with no mention of certificates. The market pays for what the market sees. Certificates don't change mediocre gems into high-quality ones.

So it is with coins. A coin certificate won't mean a thing when you sell; only the true grade of the coin counts. If your certificate is in harmony with the grade—in other words, if the certificate is accurate—then you will get the price for that grade. Otherwise you won't realize the certificate price when you sell.

Certificates are only good for peace of mind. If you don't trust your dealer's grading, or if you don't think your dealer will buy back your coins at an accurate grade, then perhaps you should get a certificate. But I think certificates are mere boilerplate. However, if you insist on a certificate, I recommend NCI, 311 Market Street, Dallas, TX 75202. They charge 4 percent of the value to grade your coin.

Another trend in the coin business is delayed delivery. It has become fashionable for some dealers to claim that a scarcity of coins requires a six- to eight-week shipping delay before buyers get their coins. This is nonsense. Many dealers have gotten into trouble by abusing their clients' trust. They commingle customers' funds and live off the float. This scam has been the primary cause of every major failure or scandal in the coin business. Never let any dealer hold your money for a lengthy period. Any trustworthy dealer promises delivery within 48–72 hours, so insist on speedy performance.

Many people who advocate buying gold recommend that you walk in to your local coin dealer with money and walk out with gold. Sounds reasonable, but I have a few caveats about Ye Old Coin Shoppe:

• Small coin shops have recently been the focus of significant IRS scrutiny. Some dealers have been asked for their records, and many play funny sales-tax games. Avoid any shortcuts when dealing here.

• Security has sometimes been a problem. For example, an Illinois couple drove to a Chicago dealer, bought 100 Krugerrands, returned home, and were immediately robbed of the coins. You can't be careful enough when you buy and own gold. Maintain strict security and know your dealer.

• Many local dealers hold your money while they order your gold. Small dealer stocks mean you pay in advance and wait. This is poor policy, as I previously explained. Don't let anyone hold your money for a long time.

Also beware of buying from the many newsletters that have recently jumped into the coin business. Besides the obvious conflict of interest between giving advice and selling an investment, many nettlesome problems beset the inexperienced coin dealer. Everybody seems to think the coin business is a quick way to pile up a fortune. In reality, coin dealing is a demanding business that takes at least five years to master. Many investors have been ambushed by dishonest dealers, but inexperienced dealers are just as much of a problem. The customer gets gypped and even the dealer doesn't know it. Experience is crucial in any business, and coins are no different.

It's probably more important to become an expert on coin dealers than on coins. Take the time to investigate potential dealers. Make sure your dealer meets the following criteria:

• has been in business at least five years;
• has no complaints at the Better Business Bureau, state securities departments, and the post office (call them);
• has a bank reference from a bank officer (call the bank);
• has a bond with a major insurer;
• does not make obnoxious, high-pressure sales pitches;
• has a guaranteed return privilege for a specified period of time;
• guarantees delivery to you within five days of payment;
• has scrupulously honest salespeople (monitor for exaggerated claims or fibs of any kind);
• sells US coins only—doesn't try to switch you into foreign coins with exorbitant commissions;
• sends coins directly to you, without storage, financing, margin, or leverage; and
• has gracious, competent, and service-oriented personnel.

Too Many Red Flags? I've been roundly criticized for stressing too many negatives in the coin business. For almost 14 years, I have warned about traps, frauds, and bad investments. Does this mean that you should avoid the coin market? Not in the least. On the contrary, I think nothing will appreciate like gold and silver coins. But you must be shrewd. Learn to size up dealers, whether they be in coins or any other collectable. And remember that when you are looking for better-than-average gains, you must always take some calculated risks.

James R. Cook is president of Investment Rarities Inc. and the author of The Start-Up Entrepreneur (Truman Talley Books).

How to Score with Stocks

Go for the mutual funds.
Bert Dohmen-Ramirez

Investing should be fun as well as profitable. Because the average investor does not have time to become an expert, his investments often turn into nightmares. He usually buys popular stock groups at their tops, just before strong downturns. Suddenly an investment which was to finance his next vacation becomes the cause for sleepless nights. Brokers then advise the investor to "average down" by buying more stock at a lower price in order to average the total share price in the portfolio. Psychologically that works for a while, although in most cases it's throwing good money after bad. Soon the second purchase also turns out to be a loser.

Often the news is good while the stock declines. The investor is puzzled: good earnings have just been released, the dividend increases, and the industry is getting good publicity. The average investor doesn't know that most stock groups get the best publicity just before a major downturn.

As the stock price continues to erode, nights and weekends turn into gut-wrenching periods. Finally, the investor can stand the agony no longer and bails out. That's usually right at the bottom.

How can you avoid such frustrating experiences? Forget about individual stocks and buy mutual funds instead. Selectivity is important, but if you pick a fund with a good track record, you'll minimize your risk while maintaining an excellent opportunity to participate in any market upmove.

Mutual fund investing offers many advantages. While the average investor can devote only 5 or 10 minutes to his investment each day, the experts at a well-run mutual fund spend all their time investigating stocks, industry groups, and the economy—and they do this from a technical viewpoint. It's logical that these professionals will outperform most part-time investors over the long term. In fact, any admittedly amateur or novice investor is foolishly optimistic to think he can win the battle in the marketplace against the experts. The experts are armed with years of experience, high-powered computers, and all the tools available to reduce risk and enhance profit potential.

Unfortunately, many investors still make the mistake of believing that mutual funds are stodgy investments. Wrong! Look at sample performance figures: since 1974, Magellan Fund is up over 3,300 percent, and other funds are up over 2,000 percent. The figures for shorter time frames are also impressive: in 1985, Fidelity OTC Fund, which invests in over-the-counter stocks, brought in a gain of 69 percent; Fidelity Overseas, an international fund, appreciated 78 percent; and Magellan Fund, a $5-billion giant, appreciated 43 percent.

When choosing the mutual-fund route, investors should further diversify their investments by selecting several different funds. With the availability of special sector funds, diversification offers something for everyone. These funds let you choose the specific area of the economy in which you want to invest. For example, if you think that lower oil prices will cause a boom in leisure-time stocks, you could choose Fidelity Select Leisure, a high-performing leisure-time mutual fund.

International funds were the top performers last year because of soaring foreign currencies; they may repeat their performance in 1986. Many investors are now considering the energy funds, thinking that the time to buy energy is when "blood runs in the streets." I strongly urge you to stay away from such bottom-picking; in my opinion, the blood bath in the energy sector has just begun.

If you don't care to choose specific areas of the economy in which to invest, let the mutual fund managers do it for you. Select a well-managed fund like Magellan, Manhattan Fund, Nicholas Fund, Evergreen, Janus, or 20th Century Select.

After you've chosen several funds for your portfolio, you have to know when to buy and when to sell. Many investors use an emotional "gut-feel" approach, which is usually disastrous. Others try to analyze the market and the economy.

One strategy involves the simple moving average, which attempts to time the entire stock market rather than individual mutual funds. In my opinion, however, it's too simplistic to believe that all mutual funds behave in the same manner. During the bear market of 1984, for example, such funds as Mutual Shares and Lindner appreciated handsomely. And during the strong bull market of 1985, not all mutual funds went up. 44-Wall Street Fund, a hot performer in the '70s, lost over 20 percent during 1985 after having lost 59 percent the year before.

Use a strategy geared toward individual mutual funds. By having a computerized strategy which gives specific "buy and sell" signals on each fund, you can sell only those that produce a sell signal while keeping those that stay strong. Fund selectivity is more important than market timing. Select your investment properly, especially in these precarious times when some sectors in the economy are depressed while others are strong.

A disciplined strategy for investing in mutual funds need not be very active. Our Worry-Free Investing strategy, for example, when tested on 10-year data for numerous funds, showed 6–10 signals, or less than one transaction per year on average. Yet this strategy of compounded annual returns produced results of 30–40 percent and more, depending on the fund. A good strategy produces a buy signal at the start of a major upmove and a sell signal before a major downmove, allowing you to put your money into money market funds. It's not necessary to catch the very top or bottom of the moves in order to make substantial profits.

By using a systematic approach to mutual fund investing, most investors can become millionaires. Assume you made a $10,000 investment which grew at a 25 percent compounded rate in a tax-free plan such as an IRA, Keogh, or other pension plan. Here's how your investment would increase:

5 Years $30,517
10 Years $93,132
15 Years $284,217
20 Years $867,361
25 Years $2,646,698
30 Years $8,077,935

If you invest $10,000 when you're 40 years old, your investment could be worth over $2.6 million by the time you're 65—without adding a nickel. Making additional contributions along the way would make you a millionaire many times over.

In early 1985 I wrote, "This is the greatest bull market of our time." Since then the Dow Jones Industrials have soared over 600 points, but investors are still skeptical. Many have been scared out of the market by the gloom-and-doomers, who predict that the world will end because of the high federal budget deficit, high trade deficit, bulging Third World debt, farm-sector problems, and loan defaults at major banks. Investors don't realize that these conditions actually help the stock market, since they force the world's central banks to pursue a more generous monetary policy. Such a policy assures that money will remain plentiful, which in turn drives up the investment markets. These conditions have existed for the past four years, and the stock market has had one of the strongest surges of the past 50 years. The market responds only to one thing: the availability of money. Money will be plentiful as long as these conditions prevail.

In 1985, sales of mutual funds broke all previous records. The skeptics see this as a testimony to excessive speculation typical of a stock market top. What they fail to realize is that about 80 percent of the money going into mutual funds has been going into those funds which invest primarily in bonds. This confirms that the public is still basically out of the stock market. The final phase in any bull market comes when investors liquidate their fixed-income portfolios, such as bonds, and commit their money to the stock market. We're nowhere near that stage now.

Today's super-bull market offers an investment opportunity which occurs maybe once every 50 years. Act now, or you'll have to wait a long time for another chance like this.

Bert Dohmen-Ramirez is editor and publisher of The Wellington Letter, Wellington's Worry-Free Investing, and Wellington's Capital.

How to Profit from the Pacific Rim Miracle

Even the small investor should look to the Far East.
Adrian Day

The Pacific Rim–Far East region continues to be the fastest-growing area in the world. Its annual growth rate of 8–9 percent over the past decade far surpasses the rates of the more mature economies in Europe and North America as well as the underdeveloped economies in South America and Africa. Though this phenomenal growth will likely subside as the economies mature, the Pacific region will continue to outperform the rest of the world. And the relatively inexperienced US investor, even with little capital, can easily profit from this miraculous performance.

Nothing on the horizon seems likely to threaten the status of the Pacific nations as fast-growing economies with significant profit potential. The so-called newly industrialized nations of Asia have been growing at an astounding average rate of 7.5 percent per year (discounted for inflation) for the past 12 years, and the developing nations have been growing at 5.6 percent. Even Japan, the most mature economy in the region, has been growing at 3.7 percent. Compare these figures to the growth over the same period of the member nations of the Organization for Economic Cooperation and Development (OECD), which averaged only 2.3 percent.

The Pacific Rim countries have proven their resiliency. While the OECD nations chalked up "negative growth" in the recent worldwide recession, the Asian nations continued to bounce along. They did experience a sharp decline in growth, but the drop was shorter and less severe than elsewhere.

And all signals indicate continued growth in the region. Why?

As "developing" nations, they are on the steepest part of the traditional growth curve, which means that a lot of their development is yet to come. Even the relatively advanced nations like Korea and Taiwan have not reached industrial maturity. Only Japan has, and its growth is still high by world standards.

In addition, most of the countries in this region share several characteristics which facilitate rapid growth, including:

• generally free markets and few restrictions on entrepreneurs;
• free trade policies;
• an openness to foreign investment, which supplies a ready pool of capital without draining the resources of the nations themselves;
• very high savings rates;
• relatively low tax rates;
• a combined pool of cheap and educated labor;
• low inflation and debt burdens; and
• stable and open political systems.

Poor immigrants can still become millionaires in most Asian countries. Horatio Alger success stories abound—like the penniless refugee from Communist China who started hawking goods on the streets of Hong Kong as a 13-year-old child and is now a multimillionaire. Or Thailand's billionaire banker Chin Sophonpanich, who got his start by hauling rice bags in Bangkok. Or Malaysia's "Honda King" Loh Boon Siew, who started out making bicycles from scrap metal. The free markets that supported these people continue to nurture prosperity.

Which countries are likely to present the greatest potential over the coming years? And which the least?

Japan, although a mature industrialized nation, has proven itself well able to adapt to changing market demands and new technologies. It dominates many high-tech industries and is now experiencing especially fast growth in ship- and aircraft-building. I predict continued growth in Japan, with investment opportunities to match.

Australia will remain a cyclical economy, doing well in times of inflation but not during recessionary or disinflationary periods. Despite the fairly rapid growth in recent years, Australia's economy exhibits many distressing features, including high unemployment, the highest interest rates in the industrialized world, and massive bureaucracy (not surprisingly, it is the only major Western nation in the region). Investment opportunities will reflect these fluctuations.

Hong Kong, which remains under lease from mainland China to the British crown until 1997, may continue to grow and develop rapidly, though China remains a wild card. China's takeover of Hong Kong when the British lease expires may bring things to a crashing halt. The prospects for Hong Kong depend on how fast China opens up and how much it will tolerate in its free-market neighbor.

Malaysia, Singapore, and Sri Lanka have the highest potential for problems because of latent racial and religious tensions. Moreover, Malaysia and Sri Lanka depend largely on commodities (rubber, palm oil, and tin) that are in gross oversupply on world markets.

On the brighter side, Korea should continue to exhibit above-average growth, even for this region. And Thailand will probably experience the greatest growth over the coming years.

How does one invest in the Pacific economies? The easiest and best way is through the stock market, which offers instant quotations, instant liquidity, the chance to invest in small amounts, and the opportunity to invest without visiting the countries. Each of these nations has its own active stock exchange, with shares in a broad range of local companies. Most of these markets have done very well in recent years, far outperforming the US market. Only Singapore, Malaysia, and Australia have lagged.

Before we look at what to buy, we should briefly consider the state of the major stock markets.

Japan, the largest stock market in the region, has experienced the greatest long-term growth. Its index rose from less than 60 to over 600 in the last 20 years—a tenfold increase! The growth has been very steady, with no sustained downturns. However, Japan's stock market is one of the most expensive in the world. Whereas a "standard price" for a stock to trade is about 1.25–1.5 times its book (breakup) value and 12–15 times its current earnings, the Japanese stock market is selling at an average of 2.7 times book value and 26 times earnings.

Hong Kong, in contrast, tends to be an extremely volatile market, both in the short and long term. Its growth has been impressive, shooting up from 100 on the index in 1970 to 1200 today. But during that period, the stock market moved like a wild roller coaster. Between 1972 and 1974, Hong Kong stocks lost, on average, over 90 percent of their value. In the next four years they increased their value 10 times; then in the next three years they lost over half their value again. Investors must ask themselves if they're ready for this kind of ride.

The Australian stock market has seen quite strong growth in the last four or five years but continues to lag behind the world average. It remains moderately cheap, particularly for US investors who can buy Australian stocks with the still-strong US dollar (the Aussie dollar has lost some 25 percent of its value in the last 18 months and has hardly moved since the US dollar's dramatic decline against most currencies in the past year). The main opportunities here continue to be the resource stocks—particularly gold shares.

Now that we've surveyed the markets, what are the best investments? Many Japanese, Hong Kong, and Australian stocks are freely available in the United States. But if you want broad exposure to the entire region, including the smaller and possibly fastest-growing countries, you'll need to invest in a mutual fund. A good one is GT Pacific (601 Montgomery St., Suite 1400, San Francisco, CA 94111, 415/392-6181). This has a minimum investment of only $500 and is quoted every day in the Wall Street Journal. It invests in stocks in all the Pacific Rim countries, with an emphasis on Japan, Australia, Hong Kong, and Singapore.

If you want to be more selective, here are my specific recommendations:

• Japan: The stocks which will do best in the coming year or two are the major blue-chip exporters, which have been knocked down by the market recently in response to the rising yen and protectionist fears. In my opinion, these stocks as a group are now cheap enough to buy again. A rising yen, though it may hurt exports, will increase the profits from your investment. If you invest $1,000 in a Japanese stock when the yen is at 200 and convert back to dollars when the yen is at 150, you've made a profit even if the stock hasn't moved.

Buy Fujitsu, Toyota, and Fuji Photo, all well-known names which trade on the over-the-counter market in the United States. You could also buy the Japan Fund, a closed-end mutual fund which trades on the New York Stock Exchange and invests primarily in large blue-chip companies.

• Hong Kong: Swire Pacific, a major conglomerate with interests in real estate and transportation, is well placed to profit from the opening up of China. It trades over the counter in this country.

• Singapore/Malaysia: Although these are two separate exchanges, they are linked because most stocks on each also trade on the other. My favorites are two new issues by airline companies that have recently been partially privatized: Singapore International Airlines and Malaysian Airline Systems. These don't trade yet in this country, so some brokers may have difficulty buying them. A good internationally oriented broker, however, can easily obtain them.

• Australia: The Australian gold-mining industry is growing at a rapid rate and threatens to overtake Canada and the United States within a decade. The stocks are very cheap right now, and if we're on the verge of a new gold rise, these stocks will do very well. I recommend Jingellic, Southern Resources, and Regent Mining. These trade in the United States on what are known as pink sheets, which tabulate the recently issued securities of emerging growth companies not yet listed on the major exchanges.

It's relatively easy to buy most of these stocks. But you should not put less than $1,000 into each issue or the commission costs will be too high. You should also deal with a broker who has some knowledge of international markets. I can recommend three such brokers: in Florida, Huberman, Margaretten at 800/327-1067 (for Florida residents, 800/432-1016) and International Assets Advisory at 800/327-5703 (for Florida residents, 800/432-4402); and in California, Dennis Hardaker at 800/243-3355 (for California residents, 714/962-6661).

Any one of these stocks may not do well. A basket of them, however, will allow you to participate in the continued Pacific miracle.

Adrian Day is author of International Investment Opportunities (William Morrow) and editor of his own newsletter, Investment Monthly.

Procrastinator's Guide to Financial Planning

Getting started when you'd rather delay.
Gary North

A successful financial planner is an entrepreneur, and entrepreneurship is essentially two skills. First, you have to be able to make accurate forecasts of the economic future. Second, you must be able to plan efficiently. If you have these two skills in greater proportion than your competitors, you will make a profit in whatever market you're in.

In other words, profit—what's left over after you've paid all other expenses—is based on your ability to forecast the future and to plan efficiently for that future. That's the heart of profit—there's no other source of profit.

As you read through this special financial issue, you will find writers of varying persuasions, with varying predictions. And you could end up coming away almost utterly confused about exactly what the future will be. Now some will say that there are good reasons for having this kind of confusion. One standard reason is that everybody ought to have the best information on a wide number of opinions, so they can make better decisions. That may be, but when people hear a wide variety of opinions, they tend to get paralyzed and don't make any decisions.

Whatever you learn from the articles presented here, you need to take at least preliminary steps at applying what you've learned. In what follows, I present some things to think about that will help you to make decisions about your future and to deal with the future in an efficient way.

I, of course, have my own opinions about what the future holds, but you're going to have to draw your own conclusions about what's ahead: deflation or inflation, depression or boom with crash, price controls and rationing, military crisis…Whatever decision you make, however, the plan you establish in order to meet that forecast is absolutely crucial. In fact, the plan is even more important than the forecast, because you can change your mind about the future, about what to expect. Conditions can change; your opinions can change. You may come into a lot of money. You may lose a lot of money. But the point is, the self-discipline of a plan will help you recover from a crisis, if anything will.

Financial planning, then, is the central focus of any long-term investment program. But planning is not simply forecasting the future better than anybody else. It is also a program of self-discipline—of saving and investment—that will enable you to compensate for whatever errors you make in forecasting the future.

When you sit down to create a financial plan, start by asking yourself three simple, preliminary questions: What do I want to accomplish? How soon do I want to accomplish it? And how much am I willing to pay?

Now you can't answer these questions perfectly in advance, because your opinions will change. But you have to get at least preliminary answers to those three questions in order to inaugurate a systematic financial program.

These questions force you to take the crucial first steps of setting specific goals and thinking them through. Professional money manager Dick Fabian, of the Telephone Switch Newsletter, says that the difference between the investor who winds up rich and the speculator who doesn't is that the first one has specific goals in mind and the second one doesn't.

"When I ask an individual, 'How much do you want to make when all this is over?'" says Fabian, "the standard answer is: 'As much as I can.' That man won't make it." But if the man comes to him with a specific figure of what he wishes to accomplish, Fabian says, "I can work with that individual."

After you've got those first three answers down, the next question is, Will I discipline myself? That's a tough one. The numbers don't tell you anything. You've got to know yourself. And you can start learning by studying, by taking a good look at various aspects of your personal situation.

A good place to begin is with your retirement program. Does it contain a lot of shares of the company you work for? If so, get out of that program. Even with the discount that the company may be giving you to buy in, you're vulnerable to a double-whammy: if the company goes belly-up, you lose your job and your retirement benefits. You don't want to be invested in the same institution that provides your income.

You should also look closely at how well your retirement program is doing. If you are not outperforming inflation by at least 5 percent, find a better way of providing for your future. Either get the money out if you can, or put less money into the retirement program—do your own program on the side instead.

If you've got to pull out of the program, what are you going to do? Starting a Keogh plan might be one possibility. You might not be legally permitted to get a Keogh, however, if your employer provides a program. But talk to an accountant and see what can be done—maybe you can become an independent contractor instead of a salaried employee. At the least, you can get an IRA. One way or another, though, you've got to do the very best to run your own money.

The other great concern about retirement programs is that the government may change the rules on them. Already it has flushed out billions and billions of dollars from retirement programs, which are the largest single untapped pile of money in the country. They're probably worth $1.2–1.3 trillion.

I expect that Gramm-Rudman is not going to work, that Congress won't cut the deficits enough. So the government will go looking for untapped funds. But they'll have to look for untapped funds that aren't closely monitored by the public, where the public has basically put its mind on hold and said "call me when it's over." And those funds are to be found in retirement programs.

I see coming a day when the government says, "We have found some bankruptcy in retirement programs, and here is what we are going to do. We have created a new government-assured, guaranteed retirement bond program. And we're going to require all IRS-approved tax-deferred retirement programs to put x percent of their funds in these absolutely government-guaranteed security retirement bonds. This is going to stop the crooks from ruining your future." They won't go as high as 80 percent—maybe only 10 or 15 percent. But when that day comes, cash in your retirement plan if you can. Pay your penalty, pay your back taxes, pay whatever you need—but get out of that system. The end is coming. And I think it's going to happen within this decade.

After analyzing your retirement program, turn to that area in which many of us hesitate to act: life insurance. People don't like to think they're going to die. In fact, insurance people are taught never to use the words die or death. Instead, they say, "What would happen to your family if you went to work today and never came back?" But my attitude regarding death and life insurance is that life insurance premiums shouldn't kill you. Yet people pay extraordinary amounts for life insurance—or for what they think is life insurance—and they're getting absolutely killed. One credit-card company, for instance, offers a plan to pay off your card bill if the family's breadwinner dies. It costs something like $25 per $1,000 of coverage. At that premium, the company will be rolling in money if it can get people to buy the plan. And people will buy it, because they don't think.

You need competitive insurance, and insurance companies are competitive. They're after different people, in different age groups, and different companies give you better deals depending on how old you are. Most of you, especially those under 45 years old, can easily cut your expenditures by $300 to $600 a year. And you can put that savings into whatever investments you choose.

The next step in devising a financial plan is family budgeting. This is where things get tough. Sit down with your family and find out where you can cut. Look at your assets and look at your lifestyle and ask yourself if you really have to spend as much as you do. That means not only budgeting but budgeting to a goal. It's tough to budget if you don't have a goal. You must know why you're resolving to cut back your spending.

So you set goals as a family decision. And you decide that achieving these goals is worth the sacrifice of cutting the budget now. That way, you can do it.

Now just as you must budget your money, so too must you budget your time. This is vitally important, because you can't replace time. The adage that "you only go around once in life" is pretty accurate. That slogan sold a lot of beer, because it's true.

There's a great story that wonderfully illustrates the importance of budgeting your time. In the 1920s, Charles Schwab was head of Bethlehem Steel—one of the most powerful businessmen in the world. And on retainer he had the man who invented public relations—or if he didn't invent it, he convinced everybody he invented it, because he was such a great PR man. He was the PR man for the Rockefellers, the Carnegies, Schwab, and all the major corporations. His name was Ivy Lee.

One day Ivy Lee was sitting with Schwab, and Schwab was complaining that he was having terrible management problems. He would take a stack of work home, he told Lee, but he couldn't get caught up. Lee said, "Well, I think I could help you with that."

"Really?" Schwab asked.

"Yeah," Lee said. "I think I could."

"What would it cost?"

"I'll tell you what," Lee answered. "I'll give you the program that will solve your problem. Try it out, and if it works, pay me what you think it's worth."

Schwab said, "That's a deal!"

So Lee picked up a piece of paper and a pen and wrote, "A, B, C," and gave it to Schwab. "What's this?" Schwab asked.

"When you go home from work," Lee answered, "write next to A the most important thing that you have to do the next day. At B, list the second most important thing, and at C, the third most important thing. Don't do B until you've taken care of A, and try not to go home tomorrow with A left undone."

"That's the secret?" said Schwab.

"That's the secret."

Within one month, Schwab sent Lee a check for $25,000—in 1927 dollars—for that particular tip!

How do you get your time budget into shape? You can start by walking into your family room right now with a pair of wire cutters—and you know where you must go. You will not see Dan Rather any more. You will not see Dynasty any more. You will cut the plug on the TV. Television is called "free entertainment"—but how much income do you forfeit by watching TV instead of working? Ten bucks an hour? Thirty bucks an hour? Some of you are worth a hundred, maybe two hundred bucks an hour, maybe more. Yet TV is free entertainment, right? You just sit there—and the thing eats away your income. The real money that people are paying for "free" TV is astronomical, if they would have put that free time into entrepreneurship. Over a lifetime, TV may be costing you millions and millions of dollars!

In budgeting your time, consider your work situation as well. If you're not getting a good enough return from your employer, cut time out of your job. Work for yourself, not for your employer. Give an honest 40 hours a week, but for anything above 40, there had better be big compensation. I don't mean time-and-a-half—I mean a piece of the company. Better yet, start your own business.

And no matter how old you are, even if you are retired, you can't afford to stay out of the work force unless you have $200–$300,000 of active working capital in reserve. Retirement avoidance is the name of the game.

If you are systematic with your plan, then you're disciplining yourself to do the best that you can. Conversely, only by establishing a systematic, self-disciplined, goal-oriented plan can you keep from slipping into financial oblivion. And that's why you've got to start a personal financial program right away.

Gary North is editor of the biweekly economic reporting service Remnant Review and author of Life Insurance Premiums Shouldn't Kill You (American Bureau of Economic Research, 1986).

On the Other Hand…

In the end, you can't take it with you.
Stephen G. Barone

In last year's financial issue, I recommended hysterical paralysis as an investment strategy. I suggested that we very small investors admit to our own fear, ignorance, and docility in order to avoid doing anything more stupid than what might befall us anyway as a function of mere happenstance.

I will venture to say that a review of the performance of the various markets available to the very small investor will bear out my recommendations. Any poltroon could have realized a healthy three- to four-percent capital gain over the last year if only he or she had sat tight and not fooled with things that are real hard to understand unless you get a subscription to the Wall Street Journal, and that costs over 100 bucks.

In spite of all this, hostile letters keep pouring in to my investment newsletter, Financial Nihilism, from those who heeded my advice and kept significant investment capital out of stocks. I do not want to be mealy-mouthed about this. Let me state in all candor: Maybe this was not timely advice.

But it's not as if the stock market was foolproof during this last year. Egged on by so-called discount brokerage houses—which offer no advice, but whose order-takers giggle a lot at the stupidity of your trades—many very small investors have ventured into the stock market armed only with the advice of kindly uncles and vindictive brothers-in-law. I offer myself as an example.

On the advice of a woman who claims to hold an MBA in finance, I purchased 200 shares in a chain of Mexican fern-bar restaurants at 16 bucks a throw, each with the par value of a floured tortilla. One year later, my investment isn't worth the cost of the nachos plate. At the local franchise near my office, I indignantly identified myself as a shareholder when they refused to take a check. So informed, they called authorization before they would consider my Visa. Later, I find that the woman was awarded the MBA as part of a divorce settlement. She put her husband through college, etc., etc.

Something else to remember: Americans enjoy convenience. So when the department store where one buys hardware, appliances, garden supplies, and leisure suits suddenly advertises financial services, there is temptation to impulse-invest, which is a lot more dangerous than coming home with a quartz-digital rectal thermometer that you might later admit you didn't really need.

Be leery if the financial planner is the same guy who last week sold you a vacuum cleaner and a year's supply of paper refill bags. You might walk out of there with three polyester shirts, a set of socket wrenches, some weather stripping, and 400 shares of a mutual fund that invests exclusively in gourmet-popcorn futures.

I could go on. But suffice to say there is no use getting hot and bothered about rates of return on investments. You cannot take it with you. And just in case you can, we'll talk next time about what might be the exchange rate up there.

Children's psychologist Stephen G. Barone has most of his capital tied up in the Ukrainian dairy industry.