Global Financial Crisis

The recent stock market gyrations have been nerve racking! The causes are many: wild foreign currency fluctuations, economic slowdown in Japan and Southeast Asia, market turmoil in Russia and Latin America, presidential impeachment hearings, and a projected slowdown in the U.S. economy. We are probably at the beginning of a prolonged bear (down) stock market. I believe that the market will test the recent lows of 7500, breaking below that level.

In July when the Dow Jones Industrial Average peaked at 9412, the price-earnings ratio reached a high of 24 and dividend yields slumped to 1.5 percent. The market was very “pricey” then with one of the highest P/E ratios and the lowest dividend yields in market history. The recent market correction lowered the P/E ratio to 20 and raised the dividend yield to almost 2 percent. However, the market is still very high compared to average valuations. For the past seven decades the market had an average P/E ratio of 14 and an average dividend yield of about 4.5 percent.

Unless the percentage of stocks in your portfolio is above your “comfort level,” I advocate holding your equity for the long-term. If you are accumulating stocks on a dollar-cost-averaging basis, I recommend that you continue with periodic purchases. For more ideas, check the return slip for my article on “How to Survive a Bear Market.”

Roth IRA

Everyone who has earned income in 1998 should consider putting $2,000 into the newly created Roth IRAs. Why? Because funds so invested will grow tax-free AND will not be taxed when they are withdrawn (if held for at least five years and you are over 59 years old).

Also, existing Individual Retirement Accounts can be converted into Roth IRAs, but only after taxes are paid on the withdrawal amounts. The latter conversion is very complex and you should seek professional help in making that kind of a decision. Younger persons especially should do a Roth IRA – because Social Security won’t be worth much for them when they retire. Why, this Roth thing is so great, I think Senator Roth (Delaware) should be elected President!

Education IRA

You may contribute up to $500 a year to an Education IRA for any child under the age of 18. The funds will grow tax-deferred, and distributions are also tax-free if they are used to pay for educational expenses like tuition, books and supplies at an institution of higher learning before the child reaches the age of 30.

Professional Management: You need help with your investments if you don’t enjoy doing it yourself, if your results are mediocre or if your portfolio has grown beyond your abilities. To learn more about professional investment management, call Charles Schwab & Co. (1-888-889-4970) and request their complimentary guide, Making the Move to Professional Investment Management. If you have over $100,000 in assets, we invite you to explore a relationship with a professional money manager.

Smart Money Tips

“Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.” (Warren Buffet)

Employ the services of a “fee-only” financial planner. They are more likely to be objective as they do not earn commissions on the investments they recommend. To obtain a list in your area, call the National Association of Personal Financial Advisors at 1-800-366-2732.

Take out a lower-interest home-equity or margin account loan to pay off higher interest credit card debt. Furthermore, that new interest charge may be tax deductible.

It is not hard to meet expenses – they are everywhere. Warning: don’t live beyond your means – only the government can do that!

If you are on the Internet, say hello to George Marotta via email or visit our Marotta Asset Management Inc. web site at: www.emarotta.com .

Rebalancing Your Portfolio

Periodically, investors should review their portfolios with a view toward rebalancing the assets. I recommend doing this every six months.

Let’s assume that your original strategy was to have 25 percent in US stocks and 25 percent in foreign stocks. Then over six months, a rising US stock market took your stocks to 30 percent of your portfolio and a falling foreign stock market has lowered the value of that category to 20 percent. Rebalancing would have you sell 5 percent of US stocks and buy 5 percent of foreign stocks.

Rebalancing, in effect, forces one to take some profits out of the winners at high prices and invest them in other categories at lower prices.

Cruise with George in 1999

George Marotta is a professional lecturer and investment seminar leader on board cruise ships. George lectured on three cruises in 1998 (two in Europe and one on the West Coast of North America). For 1999, he is planning four cruises: in the Balkans, the Mediterranean, the Caribbean and Alaska.

It is fun to cruise. You unpack your bag once and enjoy for one or two weeks. It is even more fun to cruise with a group of people who have common interests in learning about investments and sharing ideas with others. Indicate your interests on the return slip and we will keep you informed regarding future cruises.

Leisure time

Over the next decade, American families will double their spending on entertainment and communications, which has come to be viewed as something between a constitutional right and a utility.

The typical household will spend $4,200 in 2007 in this category, compared to $1,900 in 1997. Soring about 26 percent a year the Internet will show the fastest growth. Other growth areas will be cable and satellite television. In this regard, I have one company stock and one mutual fund in my “must buy” recommendation list. Email George Marotta to learn about these opportunities.

Best Book

A good book on personal finance is Jane Bryant Quinn’s “Making the Most of Your Money”.

If you buy it online from Amazon.com, you can save money and have it delivered to your door in two days. While you are at it, join me in owning some equity in the company itself!

Eight Principles for Successful Investing

These common-sense rules are followed by successful investors. If you have a question on any of these, email George Marotta.

Have a plan. Decide on a strategy in advance: how much will you allocate to stocks, bonds, and money market. Use no-load, low-expense mutual funds whenever possible to build your portfolio. Invest more in common stocks when you’re young. Start investing as soon as possible. The power of compounding will work for you.

Diversify your portfolio. Invest in different asset classes – stocks, bonds, and cash. Invest regularly. Invest on a dollar-cost-averaging basis over the long term and you will reduce the impact of short-term market gyrations.

Maintain a long-term perspective. The best discipline is staying invested as market conditions change. Market timing doesn’t work. If you are out of the market for a small percentage of the best advances, your performance will be mediocre.

Invest in individual stocks. Use a buy and hold strategy when purchasing common stocks. One dollar invested in the stock market in 1801 has grown to $561,264 as of August 31, 1998, adjusted for inflation.

Keep some cash in your portfolio. To meet current needs and emergencies, keep liquid funds to meet at least three to six months’ worth of expenses.

Know what you’re buying. Makes sure you understand the potential risks and rewards associated with each of your investments.

Contrary Investing

Contrary investing is buying when everyone else is selling. When most others are avoiding a certain category of stocks, it could be a good time to go “bottom fishing.” Currently, several categories fit that bill: Japan, emerging-markets, Southeast Asia, Latin America, Russia, gold and oil shares.

Regarding Japan, the Nikkei average soared to over 39,000 in 1989 and is now at 14,000 after an eight year downward spiral. The emerging-market countries suffered a crisis of huge proportions and their stocks have lost over half their value over the past two years. Similarly, gold has lost its luster and has been in the doghouse for a long time.

Oil was $40 a barrel during the Iraq-Kuwait war; it now sells for $15. When Japan and the world economy gets going again, oil will advance in price.

I believe this is a good time to buy and hold these stocks for eventual recovery.

Invest in Health

I have (correctly) advised all of my more senior clients to have adequate investments in the health-care industry. Health-care spending will grow to 16 percent of the nation’s gross domestic product by 2007 ($2.1 trillion), compared to 13 percent in 1996.

Also, Americans are expected to spend $171 billion for prescription drugs in 2007 – up from $62 billion in 1996. Common stocks in this industry have been among the best growth stocks of this decade, and I believe they will continue to do well in the future. To learn about George’s favorite fund in this industry, email George Marotta.

Hoover Tour

The next tour of the Hoover Institution at Stanford University conducted by Research Fellow George Marotta will be on Tuesday, December 1, 1998 from 2 to 4 p.m. If you wish to participate, email George Marotta to reserve a space.