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Cash on the Barrelhead

Neil George
Neil George
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As you change your calendar for a new year, you don't need to change your method of maintaining your portfolio. The key to 2005 is being realistic in how and where you put your cash to work.

It's that time again, when the world of banks, brokers and financial media comes out with their bevy of prognostications.

Some will tell you how they see things for the next year, just like they do every year. A few will pitch you the idea that stocks will be limited by nothing but blue skies. Others will rollout their gloomy calls for financial storms that will force you to seek shelter in gold or other schemes.

But why should anything change for our portfolios just because we've turned another year? Rather than get whipped in a frenzy, continue to look at the facts and focus on what's really working for you, both in 2004 and spankin-new 2005.

Over the last 12 months, investing hasn't been easy. With few exceptions that rarely come (e.g., during the late 1990s), investing is always a hard job. You can't just toss a few bucks here or there and hope it will seed a successful portfolio.

Doom or boom, the results have been mixed. If you went and loaded up on gold stocks in 2004, this past holiday season was grim, with a loss of about 9 percent.

If you loaded up on the stocks of the S&P 500's major companies, you received a 9 percent reward, although not without a lot of ups and downs along the way. And for investors who took the middle ground and invested in the US Treasury market, the intermediate group of bonds netted a reasonable return of more than 4 percent.

But in Personal Finance, we aren't doing our job unless we provide a realistic route for your investments. One of our core underlying recommendations--in our Growth Portfolio Cash Cows--has continued to please us.

If you followed our recommendations and took positions in these Cash Cows, including Pimco Strategic Global Government, Morgan Stanley Global Opportunity, Templeton Global Income and Templeton Emerging Markets, you've earned nearly 15 percent.

Two Ways To Make Money

There are two simple concepts for investing in any stock, bond or fund: First, you can make money, come what may in the economy or markets, by getting paid dividends and interest. Second, you can make some money by getting other investors to bid up the prices of the stocks, bonds and funds you own.

It's that simple. You don't need prognostications for 2005.

We don't see much changing for the months to come that will dramatically threaten our core recommendations and hindering our dividends and better returns with fewer risks.

That's why, when you look at our longer-term investment holdings in the Growth and Income Portfolios, we don't change much of what we recommend. It may be exciting to speculate on what could be, but that's for a very small portion of our portfolios. We limit our best-educated conjectures to the Growth Portfolio's Nibblers section.

For your serious cash that you can't afford to throw around, stick with what we know best.

Our investments continue to plod along. Although there are others that could be more profitable now and again, we'd rather focus on keeping the checks coming in and, over the longer haul, watch underpriced, productive companies achieve better values.

Risks & Rewards

In 2005, we'll continue to watch the basic risks to our investments. Inflation is No.1, as it's always out there. Food and petrol go up and down--often wildly--but, the core long-run rate of price increases has remained and will remain under control at around 2 percent.

The realistic view is straightforward. We aren't a market or economy on our own. Instead, there are ample surpluses of labor and companies around the world that have to compete to provide the goods and services all of us purchase.

Sure, we have some challenges along the way, such as with prescription drugs. But on a local and global scale, inflation isn't here. And it isn't threatening us on a broad basis.

There are other risks we've been detailing in past issues of Personal Finance. They range from environmental issues to the need to improve infrastructure around the world. But most of these are reasons for more investment and development, rather than limits to US and global growth.

The biggest threat to our investments is the unknown, particularly behind the shadows of the markets. Unknown facts and misleading information is always with us in the markets.

Although no one is immune to avarice and deception, getting paid monthly, quarterly and yearly provides you with a realistic means of avoiding much of what threatens so many investors in the markets. It also works to counter the known risks, including inflation.

Milking The Cows

The base of our Growth Portfolio is comprised of the four aforementioned bond closed-end funds. They're still for investors who need price appreciation and regularly arriving checks. In addition, they best represent how we capitalize on assets that do both.

Each of the four are structured in a similar fashion. They're funds that have a finite amount of capital with stock shares traded on the New York Stock Exchange.

Unlike the usual mutual fund that will take in more cash or return what's left to investors, these companies are just like any operating industry that can only raise more capital by registering to sell more shares.

Investors buy or sell shares based on what the market prices them at day after day. Some days folks are willing to pay more than what the assets and liabilities tally out at--some days less. This is referred to as the premium or discount and is similar to other companies' price-to-book ratio. Like company stocks that trade above or below their net valuation, our bond investment companies do the same.

All of these funds have been climbing in price and value. Along the way, investors are still getting paid reasonable dividends, tracked in Cash Cows section of the Growth Portfolio. The average of these dividends is at a bit more than 6.5 percent.

We have each of these funds in the Growth Portfolio for specific reasons. Pimco owns a core group of bonds, primarily of the US government, with short to intermediate maturities. Then it's able to efficiently invest through contracts with major banks to buy and hold investments that gain from improving bond markets in other nations outside the US.

The Templeton funds invest directly in short to intermediate bonds of both first-tier and emerging governments. And Morgan Stanley fund follows a similar, but more aggressive, buying strategy of comparable bonds.

Bonds aren't all alike, and they don't move in step. This is why longer-term US Treasuries or T-bills go up or down while bonds of other markets can move in entirely opposite directions.

We invest in these four because of the ease of accessing the best bonds without having to go directly to local markets. Each investment companies' management follows our way of realistically picking bonds that will gain more investor interest, pushing up prices and generating solid yields for shareholders along the way.

The proof is always in the facts. Over the past several years, as prognostications have come and gone--telling you whether bonds are good or bad news--our four investment companies keep plodding along.

That's why we own them and why we'll continue to do so, as long as they sustain our justification to invest. They'll do that by driving up their stock prices, while paying us into 2005 and beyond.

Neil George will be available for questions until Monday, January 10. Don't miss this chance to ask your questions using the below form.

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