Beware advice from 'experts'

by Stephen Butler

I once played a small role in producing a movie with Tanya Roberts called "Sheena," a total bomb that Pauline Kael, the film critic, wrote had "some of the finest animal acting she had ever seen in a film."

Columbia Studios, which spent $30 million, was convinced that "Sheena" would be a huge hit and opened it in 1,200 theaters across the country. Their only other film for that summer was "Ghostbusters," a long shot that the studio bet would "probably appeal to at least a few burned-out Saturday Night Live fans."

So much for the knowledge of what should have been "the experts." I thought about this recently when I have been reflecting on the extent to which we, the investing public, depend on the pronouncements of Wall Street firms and the Federal Reserve to give us a "heads up" on the future of the economy and the stock market.

We like to think that the Federal Reserve can control interest rates, and its major role is to convey the notion that it can. In his book, "Maestro" about Alan Greenspan, Bob Woodward says that the Fed is really more like Prince Charles. It is more like a figurehead that can inspire confidence in people, but (and these are my words) "at the end of the day, its just a bunch of mostly older men who put their pants on one leg at a time."

In an earlier column, I cited the Richard Young "Intelligence Report" that illustrates with graphs and charts the extent to which the Fed is just following what the market generates in the way of short-term interest rates.

Wall Street makes obscene amounts of money during boom times, and the Federal Reserve's hand on a perceived economic joystick is its reason for existing. Both have an interest in painting a rosy picture of what they can accomplish, but at times like this, they may be just whistling by the graveyard.

I don't know about you, but I can't recall ever feeling so alone with my money. If these are the times that try men's souls, then we should be prompted to become knowledgeable about bonds. The average investor has an intuitive understanding of stocks and stock mutual funds, but a knowledge of bonds demands counter-intuitive thinking (i.e. when market interest rates go up, the value of existing bonds goes down, etc.) and as a general rule, we are reluctant to invest in something we don't understand.

The exception to that rule for the unfortunate few is the complicated investment that is just too good to be true, like an abusive tax shelter or hedge fund, but that is the subject for another column.

Some bond fund favorites of mine for years have been Vanguard's short term corporate fund, its GNMA fund, the high yield corporate fund and the high yield municipal bond fund.

However, some recent new additions to my list have included the Loomis Sayles Bond fund, which has actually beaten the stock market averages over the past 15 years with annualized returns of 11.3 percent.

Fidelity Floating Rate High Income invests in commercial bank loans and has a yield today of 6.2 percent. Morningstar lists 23 similar mutual funds that participate in bank loans. As a general rule, these bond funds offer protection against the downside when combined with a stock portfolio. The fact that they entail more risk than CDs or money markets should not rule them out for a portion of a portfolio.

It may also be comforting to know that the S&P 500 companies receive roughly one-third of their revenue from overseas sales. If the dollar drops in value, which is pretty certain at this point, these sales will only increase unless we manage to trigger a recession world-wide.

In the meantime, dividends paid per share enjoy some inertia and have historically held up well during market downdrafts. Collectively, they represent one-quarter of the total gains of the stock market over long periods of time.

If you harbor concerns about what the invisible hand of economic forces might be reaching for next, bonds and big companies offer a natural alternative to Ambien, that ever-popular prescription sleeping pill.

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