February 2002 Issue 30
Sharp Investing
over the recent difficult years
Is your 401k that were made during the good
years. There are many types of
risk, some more prominent in
www.sharpinvestments.com
really safe? 401ks than in other investment
portfolios. You can take control
of your own retirement by
By Daniel R. Sharp, Ph.D. defining the risk factors in order
of importance to a 401k and
then taking action to minimize
your overall risk over the long
Part one of a two part series run.
Inside this Issue The risks, in order, are:
You and you alone are
1 Is your 401k really safe? ultimately responsible for
the various types of risk
1.
2.
Diversification risk
Risk of not meeting goals
Investing in Foreign inherent in your defined 3. Market risk
1 Markets: Necessary or
Hype?
contribution plan. This 4. Risk of fraud
article provides a
Free Seminars – All New
2 Topics for Spring!
strategy to minimize the
various risks while still
Are you between jobs creating wealth for your
3 and wondering what to
do about your 401k?
retirement. continued on page 2
Recent headlines (Enron
debacle, tech stock crash) have Investing in
highlighted the importance of
Sharp Investing is a quarterly reviewing your 401k in order to Foreign Markets:
publication focused on
investor education. For a
minimize the various types of
risks that can exist in your
Necessary or
subscription, contact us at:
portfolio. Over 40 million
American workers have a 401k,
Hype?
13160 SW Butner Road
and for most, this is the primary
Beaverton, OR 97005 Conventional wisdom holds that
source of retirement funds.
10-20% of any investment
There was a period of time, from
Phone 503-520-5000 portfolio should be allocated to
about 1995 to 1998, in which
or 888-760-9046 foreign-based companies. An
most 401ks did very well. As a
investor hopes to diversify away
result, many investors became
Fax 503-520-0530 from a weak U.S. economy or
complacent, inadvertently
capitalize on a strong, fast
putting themselves needlessly
Dsharp@Sharpinvestments.com growing foreign economy by
into risky situations that resulted
direct investment in companies
in losing most of the returns
continued on page 3
Creating Wealth through Value Investing
February 2002 company, and often you are
A 401k plan must offer a encouraged to buy company
Is your 401k safe? continued from page 1
minimum of three investment stock on an after-tax basis via
By far the greatest risk in choices, one of which has to a discount to the current
most investors 401k plans is be a “safe” choice, such as a market price, and so
a lack of diversification. This money market or another minimizing the amount of
risk is so important and often guaranteed interest fund. company stock in your 401k is
ignored that the remainder of Many times one of the other usually a prudent idea. Just
this article (Part One) will limited choices is stock in the ask Enron employees if they
discuss diversification. employer’s company. In many wish they had minimized the
Want your quarterly issue of cases, companies match amount of company stock in
Sharp Investing via email? employee contributions their 401k’s. Those that did
through stock, and this match were not hurt nearly as bad as
Drop us an email at our can eventually skew the bulk those that held a high
website: of a 401k into the same percentage of company stock.
www. sharpinvestments.com company that employs you. No matter how glowingly
or The average 401k plan has management describes their
Fax us the Page Three profile 39% of investment allocated outlook for your company, one
with your name and email to the employer’s stock. should never hold more than
filled out. Your regular income already 20% of assets in any one
depends on this single company if you have the ability
to diversify.
The Verdict is In!
The S&P was down over 13% in 2001 Many companies require that
The NASDAQ was down over 20% in 2001 you hold their stock, but
Value based investing was UP over 15% in 2001! investors should check with
their plan administrators to see
Try one of our free one-hour seminars: if they are allowed to diversify
some or all of the company
Thurs Feb 21 7 pm stock. In extreme cases,
Building a Portfolio in some company retirement
a Slowing Economy 13160 SW
Limited Seating – plans can force you to hold
Butner Road Please call almost 100% of your assets in
Thurs Mar 14 7 pm 503-520-5000 ext. 3 company stock, but taking
Is your 401k Really Barnes for your reservation advantage of an opportunity to
Road
Safe? diversify is almost always a
Murray good idea. Sometimes this
Blvd can be done immediately, or
Tues Apr 23 7 pm
26
Reverse Engineering upon reaching a magic age
Retirement with the company (55 in a lot
Butner Road of cases), or by prudently
Cedar
13160 SW Butner Hills
rolling your 401k assets into a
Road Walker
Blvd self-directed IRA upon leaving
Beaverton, OR Road employment or retiring. I can’t
217
97005 think of a single company that
is so safe and secure that I
would want most of my
Investing styles run in three to five year cycles. We are only in year two of retirement assets tied up in it.
a strong value cycle. Over long periods of time no strategy has produced
better returns than investing in undervalued companies. Learn why and
what it can mean for you! In the next segment, we will
Presented by explore the other three risk
Daniel R. Sharp, Ph.D. sources to your 401k and offer
Registered Investment Advisor strategies to neutralize
unnecessary risk on your way
to creating wealth. $
2 www.sharpinvestments.com
Sharp Investing
market is the place to be. When
Foreign Investing ..continued from page 2
things are not as strong
from other countries or buying domestically, the effects felt
Did you know that in around the world are
funds that specialize in the
ownership of foreign stocks or the 10 days after inescapable and there is no
that specialize in a particular September 11th, an avoiding the reverberations by
foreign economy. This seems to event that occurred in investing in foreign markets.
make sense until the track record the U.S., against the
of foreign investment is studied. Because of a combination of our
Looking at the last 31 years U.S., and intended to size, economic strength,
(about as far back as data on disrupt the U.S. stock relatively low tax structure,
foreign investing is available) it capitalist system, and most
market and economy – importantly, freedom to pursue
can be seen that over the long-
run, the stock of U.S.-based
that only one foreign economic prosperity, there is no
companies have provided about market (Switzerland) better environment for
50% greater total returns than the did any better than the corporations to profit than in the
stock of foreign-based United States of America.
U.S. stock market?
companies. In addition to
providing lower returns, foreign However, there are occasional
There is a reason why the periods when the U.S. economy
companies are more expensive
theoretical benefits from foreign is doing well and certain foreign
investments. Most investors will
investing do not match up with economies may be growing
use mutual funds for their
the actual historical results. even faster than the U.S. for a
international investing, but foreign
When the U.S. economy is short length of time. There are
funds have the very highest
doing well, the U.S. stock two ways to capitalize on these
expense ratio of any group of
funds – mainly due to the high
cost of research necessary in continued on page 4
following companies and
economies that lie overseas. Are you between jobs and wondering what to do
about your 401k?
History also shows that foreign We can help you determine whether you should leave your 401k with your
stock markets are very highly previous employer, roll the 401k to your new employer, or roll your 401k to a
correlated to U.S. stock markets, self-directed IRA, and most importantly, when to make these moves. Analysis
just as the economies around the of the companies or funds, the levels at which they were purchased, and their future
world are highly dependent on prospects and reasonable expectations can all be beneficial in getting you back on a
the U.S. economy. With the steady path to creating wealth. A complimentary investment consultation can be
increasing globalization of many arranged at your convenience in person or over the phone. Fax or mail us your
current account statement and our Portfolio Managers will discuss your goals & risk
large U.S. companies over the
tolerances, and analyze your portfolio.
past 20 years, the world economy
and the U.S. economy are
inextricably tied together. As the For a free consultation, please call 503-520-5000 or
U.S. goes, so goes the world. 888-760-9046
What this means is that investors or fill in the information below and fax to 503-520-0530
pick up virtually no diversification
*******************************************************************
benefits from foreign investing.
Please contact me for an appointment…
You cannot escape a poor U.S.
Name: _____________________
economy by foreign investing. ! …this month
You also cannot escape a short- ! …in 3 months
Phone: ____________________
term U.S. panic by taking safe ! …in 6 months
haven in foreign markets. Email: _____________________
Sharp Investing 3
February 2002
PRSRT STD
U.S. Postage
PAID
Portland, OR
Permit #3300
13160 SW Butner Road
Beaverton, OR 97005
Value Investing: The purchase of companies, through the stock market, for less than their economic
value due to temporary unpopularity (lack of investor demand). This is the opposite of growth
investing, which is buying companies at a premium in the hope that other investors continue to push
their prices higher and higher regardless of what the business is actually worth.
Foreign Investing …continued from page 3 This allows an investor to evaluate funds. A better way to approach
a foreign company on a familiar foreign investing is to evaluate
strong economies. The easiest yardstick as opposed to having to ADR’s like any other domestic
way to profit is to target U.S.- become a student of a particular company, and invest in a foreign
based multinational corporations country’s accounting system just to company if it meets the same
that derive a significant portion of understand the financials of the criteria you apply to a domestic
their revenue from the economy company you are interested in. company. If you are interested
in question. The second method in pursuing investment in a
is to use ADR’s (American Neither of these strategies to particular company, use ADR’s
Depository Receipts) to invest in provide exposure to foreign-based or Fortune 500 domestic
other-nation-based, multinational economies will diversify your companies to gain your
corporations that also derive portfolio any more than any other international exposure, but
significant revenue from the stock, but they will allow you to always keep in mind that no
foreign economy targeted. There enjoy potentially strong returns other stock market in the world
are over 800 ADR stocks that temporarily generated by the has performed better than the
trade on the New York Stock foreign economy without the high U.S. market over the long haul,
Exchange and can be purchased cost of international fund investing. and there is no hiding from the
as easily as a domestic stock. occasionally weak U.S.
ADR stocks are required to Foreign investing does not economy. $
provide standard GAAP enhance diversification, and
accounting financials to the SEC, neither are returns enhanced in
just as a domestic company. general via investment in foreign
4 www.sharpinvestments.com