Opportunity Investing Opportunity Investing How to Profit When Stocks Advance, Stocks Decline, Inflation Runs Rampant, Prices Fall, Oil Prices Hit the Roof, . . . and Every Time in Between Gerald Appel An Imprint of PEARSON EDUCATION Upper Saddle River, NJ • New York • London • San Francisco Toronto • Sydney • Tokyo • Singapore • Hong Kong • Cape Town Madrid • Paris • Milan • Munich • Amsterdam www.ftpress.com Vice President, Editor-in-Chief: Tim Moore Executive Editor: Jim Boyd Editorial Assistant: Susie Abraham Development Editor: Russ Hall Associate Editor-in-Chief and Director of Marketing: Amy Neidlinger Cover Designer: Alan Clements Managing Editor: Gina Kanouse Project Editor: Christy Hackerd Copy Editor: Keith Cline Indexer: Larry Sweazy Compositor: Moore Media, Inc. Manufacturing Buyer: Dan Uhrig © 2007 by Pearson Education, Inc. 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Library of Congress Cataloging-in-Publication Data Appel, Gerald. Opportunity investing : how to profit when stocks advance, stocks decline, inflation runs rampant, prices fall, oil prices hit the roof, . . . and every time in between / Gerald Appel. p. cm. ISBN 0-13-172129-1 (hardback : alk. paper) 1. Investments. 2. Speculation. I. Title. HG4521.A655 2006 332.63’2--dc22 2006009655 This book is dedicated to my grandchildren—Emily, Caroline, and Alexandra—and to all children across the globe. May they grow up in an ever-better and peaceful world. This page intentionally left blank C ONTENTS Acknowledgments xvii Introduction: New Opportunities xix Chapter 1: The Myth of Buy and Hold 1 Variable Rates of Return from Stocks 3 Speculative Bubbles Are Often Followed by Years of Below-Average Investment Performance 5 The Moral of the Story—Be a Flexible, Opportunistic Investor 6 Growth Targets—“The Magic 20” 7 Growth Target Zone 8 Active as Opposed to Passive Management of Assets 9 Diversification—A Major Key to Successful Investing 10 Geographic Diversification in the Developing Global Economy 10 Diversifying Geographically in Foreign Bond Markets as well as in Domestic Income Investments 12 Sector Diversification for Smoother Performance and Risk Reduction 13 Income Investing—Time Diversification 16 Creating a Bond Time Ladder 17 Year-by-Year Management of the Bond Ladder 18 Increasing Returns from the Stock Market while Reducing Risk 19 vii viii OPPORTUNITYINVESTING Useful Market Mood Indicators That You Can Maintain and Use in Just a Few Minutes Each Week 20 Illustrations of Mood Indicators 20 Relationships of Price Movements on NASDAQ and the New York Stock Exchange 23 How to Identify Periods When NASDAQ Is the Stronger Market Area 25 General Suggestions 28 Chapter 2: Putting Together a Winning Portfolio 29 Which Investments Have Paid Off the Best? 30 Life May Not Be So Predictable After All 31 The Moral of the Story 31 And Perhaps Most Important 32 The Best Places to Put Your Money in Recent Decades 32 Implications for Mutual Fund Selection 33 Mutual Funds Provide Excellent Vehicles for Your Diversification Program 34 Benefits of Using Mutual Funds for Both Financial- and Nonfinancial-Based Investing 34 Mutual Fund Selections for All Seasons 35 Periods of Rising Interest Rates 35 Periods of Falling Interest Rates 36 A Quick and Dirty Way to Determine Trends in Interest Rates 37 Summing Up 38 Creating and Measuring the Performance of Well-Balanced Diversified Investment Portfolios 38 The Basic Portfolio Mix 39 Summing Up 41 Income Investing 41 Diversification Certainly Does Appear to Help the Cause! 44 Upping the Ante! Increasing Returns and Reducing Risk through Active Management of Your Diversified Portfolio 45 CONTENTS ix Employing Mutual Funds to Carry Out Sector Diversification 46 The Selection of Specific Mutual Funds 47 Comparing Performance—The Diversified Portfolio, Buy and Hold, Versus the Vanguard Standard & Poor’s 500 Index Fund 48 Rebalancing the Portfolio to Improve Returns 49 An Object in Motion Tends to Stay in Motion 49 The Basic Procedure for Rebalancing Your Sector Portfolio 50 Year-by-Year Comparative Results 52 A Final Thought 54 Chapter 3: Selecting Mutual Funds Most Likely to Succeed 57 Myths and Merits of Morningstar 58 A Quick and Dirty Checklist to Locate the Best Mutual Funds 60 Expense Ratios and Portfolio Turnover— the Lower the Better 60 No-Load Funds Are Likely to Outperform Load Funds 61 Verify That Your Brokerage House Is Giving You the Best Deal, Not Just Upping Its Own Commission 62 As a General Rule, the Lower the Fund Volatility, the Better 63 With Excellent Market Timing, Some Higher-Velocity Vehicles in Your Portfolio Might Prove Advantageous 64 Continuity of Management Is Important 64 Putting Together and Maintaining a Mutual Fund Portfolio for Long-Term, Tax-Favored Holding Periods 66 The TPS Strategy: Selecting Mutual Funds That Qualify for the “One-in-a-Thousand Club” 66 Managing Your Buy and Hold Portfolio 73 Putting Together and Maintaining a Portfolio of Strong Mutual Funds for Intermediate-Term Investment 74