Sunday Morning Coffee

There was an article in Barron's about Frontier investing. I have talked about this but have not used that term before. Frontier refers to countries that are lower down on the development ladder than emerging markets. Countries in the category, per the article, include Vietnam, Pakistan, Mauritius (which looks somewhat like New Zealand to me), Romania, most of the African continent and a few others.

I first wrote about this idea a year and a half ago. A benefit to investing in this type of country is a reasonable chance of not correlating to other countries and global economic cycles. I have referred to this in past posts as countries in their own worlds. For example Vietnam has a GDP growth rate of 8%, moderate inflation, and a total market cap that is smaller than most mid cap stocks. On the down side is potential corruption, an economy that is too small, there was the potential execution of a trader who allegedly committed fraud and more. I would think that all of the frontier markets have long lists of pluses and minuses.

I think the idea of owning one of the countries, after a lot of study, can add value to a diversified portfolio. Think small weight here, like maybe 1%-1.5%.

TomK, thank you for sharing your allocation model.

A reader asked about my performance YTD. This will seem strange but there may be a compliance issue with writing exact numbers but not saying them, like in a video. I don't get it either. I will say that generic portfolio I keep on Yahoo, which is an equity-only sample (plenty of other caveats), is slightly ahead of the S&P 500. If I think of it I will give the number in the next video which will be next weekend but the lead is not much.

Reader, T left an insightful, almost Zen-like comment about diversification. He called it holistic diversification. He was talking about diversity in your life. Hopefully we all try to do more than one thing but chances are we can all do a better job at this than we do now.

RW left some useful thoughts about risk adjusted returns, questioning whether the returns of the last five or ten years have been worth owning equities and opining that most investors are not in touch with how much risk they are taking. This can be difficult to emotionally quantify. Ten years ago to the day the S&P 500 closed at 704. Today it is at 1364. So the market is up 93%. If it had made the same 93% without all of the trauma and drama at the turn of the century I think many investors would feel differently. While I can't disagree with RW's point I do think perspective makes the decision for the individual. However it is pretty tough to make the case for equities over the last five years.

Ryan asked whether I use bonds or bond funds and he asks whether I prefer the TIP ETF or a TIP OEF from Vanguard. I use both bonds and bond funds. I use individual issues for treasuries (I was more of a buyer when yields were still in the fives), and munis (only a few clients need munis). I also buy individual issues for preferred stocks. I use funds for most everything else including the TIP ETF. It is not perfect but I do prefer it to any OEF. Ryan says he would be adding money at some interval so I am surprised when he says there would be a commission to by the OEF version. Maybe your broker offers something similar that has no transaction fee?

I was rather struck by the unusual vitriol on the Saturday Cavuto show. The topic was politics. To hear Charles Payne tell it the dems have no redeeming qualities whatsoever and to hear Gregg Hymowitz tell it the republicans have no redeeming qualities whatsoever. I worded each description identically so as to be fair and balanced. Politics don't evoke any emotion out of me at all, I can't relate.

A couple of dems have said they are willing to let the tax cuts expire. Couldn't the dems win now and then lose in 2008 making this moot? Dems wanting the cuts to expire say that the markets and economy did fine in the mid 1990's without these cuts, so they can be allowed to expire. The republicans say the tax cuts boosted the economy, created jobs and had some other benefits. Isn't it obvious that in the 1990's the economy and the market did not need the stimulus? Isn't it also obvious that in 2002/2003 the economy and the market did need the stimulus?

If at some point there is a tax change, good or bad we will need to make portfolio changes. We have a while before this is upon us. I for one do not want my knickers to be perpetually twisted until 2010.