Q & A - Portfolio For Bear Market

Date: Friday 09th 2008f May 2008 02:37:49 PM

Q & A - Portfolio For Bear Market - 10/02/2007

By: Hari Wibowo

Name: Claudius

Website: N/A

Date posted: Fri, Jan 12, 2007 08:10 PM

Question: Hi, i would like to diversify my portfolio to protect myself
against the bear market. I am not sure whether to purchase blue chips or mutual
funds or ADR stocks. Is there any recommendation(s) on which is the better choice
given the current situation?

Answer:

Hi, Claudius. Buying mutual funds certainly has certain advantages and disadvantages. In the plus side, mutual fund can give you diversification, and professionally managed porftolio. On the other hand, mutual fund does have cost and it may not outperform the broader market. Further, you will be charged management fee even if your fund lost its value. We feel that the cost of owning mutual fund outweighs the benefits.

Let's move on to blue chips stock. What is the definition of blue chips stock? How about the companies listed as Fortune 100? Let's see. We can just buy 30 of the largest company in the US (the so-called Fortune 30) and forget about them, correct? Let's use the list from 2006 Fortune 30 list and compare for the broader market.

Company	Return (Ytd) (As of Oct 2nd 2007)
Exxon Mobil Corp.	+ 26.49 %
Walmart Stores Inc.	- 5.04 %
General Motors Corp.	+ 26.78 %
Chevron Corp.	+ 34.25 %
Ford Motor Co.	+ 12.52 %
Conoco Phillips	+ 27.58 %
General Electric Co.	+ 13.03 %
Citigroup Inc.	- 11.98 %
American Intl Group Inc.	- 4.18 %
Intl Business Machine	+ 23.87 %
Hewlett Packard	+ 22.17 %
Bank of America	+ 0 %
Berkshire Hathaway	+ 9.10 %
Home Depot	- 16.83 %
Valero Energy	+ 35.41 %
McKesson	+ 14.03 %
JP Morgan Chase	- 3.05 %
Verizon Comm.	+ 24.28 %
Cardinal Health	- 2.74 %
Altria Group	+ 11.20 %
Kroger	+ 25.00 %
Marathon Oil	- 5.90 %
Procter & Gamble	+ 11.04 %
Dell	+ 6.98 %
Boeing	+ 21.14 %
Amerisource Bergen	+ 0 %
Costco Wholesale	+ 16.92 %
Target	+ 14.29 %
Morgan Stanley	- 2.84 %
AVERAGE	+ 11.16 %

Year to date, the 30 biggest companies in the Fortune list, gave you a 11.16% return. Not bad. However, when we compare it with stock market index such as Dow Jones (+ 14.22 % ), S& P 500 (+ 10.44 %) and Nasdaq 100 (+ 20.06%), the big 30 isn't giving you so big return after all. Furthermore, if you are a small investor, there will be numerous commissions incurred by buying 30 different companies in the fortune list.

Then, you may ask if we can narrow down the list to say 5-6 companies in the fortune list. That is good start. The problem being if you choose a Home Depot (- 16.83 %) instead of Exxon Mobil (+ 26.49 %) then you are out of luck.

ADR (American Depository Receipt) meanwhile has returned quite well mainly to the weaker dollar. ADR is too wide to be covered as a whole but most of the big ADR are having a good year so far such as Nokia (+84.2 %). This doesn't mean that buying ADR is the best way to protect yourself from the bear market. It is just that they are performing better than the US counterparts this year.

As for the bear market, there is no absolute way to shield portfolio. There is always a possibility that your portfolio will lose money in any given time. However, for a rule of thumb, buying 5-10 mixed of different companies will give you enough diversification to withstand the up and down of the stock market with less cost. One of the ten stocks can be an index fund such as Dow Jones Industrial Average (DIA), S&P 500 (SPY) or the more aggressive Nasdaq 100 (QQQQ).

Hari - Novice Investing

END

Hmm, I am confused. And I have questions

I'm fine, thanks. Bring me back to main page

Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities.

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