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#1: thoughts on energy and emerging market investments

Posted on 2006-02-23 11:01:44 by screenaccount

Hello. New investor here. In a recent post, I mentioned that I was
interested in investing some of my retirement money in the energy and
emerging market sectors. Some of the replies I received indicated that
those areas might be too risky for retirement investing.

I was curious about that, though, and I had two potentially naive
questions:

1) Will there always be a (growing?) demand for energy, and hence an
energy market?
2) Is it all but assured that the currently emerging and established
markets of the world are going to level out and equalize, at least a
bit, such that the emerging markets strengthen and the established
markets weaken accordingly? Not tomorrow, of course, but definitely in
the long-term?

If those thoughts are accurate, wouldn't those sectors then make for
good long-term investments? They'll definitely fluctuate a bunch over
the years, but wouldn't the long-term average growth be expected to be
exceptional?

I'm new to all this, and I don't have an economics degree, so I may be
totally misunderstanding the situation.

Thanks for any advice on the matter,
Mike

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#2: Re: thoughts on energy and emerging market investments

Posted on 2006-02-23 14:10:50 by John

In article &lt;<a href="mailto:1140662231.304279.253000&#64;o13g2000cwo.googlegroups.com" target="_blank">1140662231.304279.253000&#64;o13g2000cwo.googlegroups.com</a>&gt;,
&quot;<a href="mailto:screenaccount&#64;gmail.com" target="_blank">screenaccount&#64;gmail.com</a>&quot; &lt;<a href="mailto:screenaccount&#64;gmail.com" target="_blank">screenaccount&#64;gmail.com</a>&gt; wrote:

&gt; Hello. New investor here. In a recent post, I mentioned that I was
&gt; interested in investing some of my retirement money in the energy and
&gt; emerging market sectors. Some of the replies I received indicated that
&gt; those areas might be too risky for retirement investing.

Each person has their own risk tolerance level. For a new
investor, I would think that the tolerance should be a little
lower until they build some experience. Retirement money should
be a bit more conservative, unless you are willing to take the
risk of blowing up and then having to fight the neighborhood
dogs and cats for table scraps that are pulled out of dumpsters.

A diversified portfolio should have some exposure to
international markets. But keep in mind that most US large
cap companies are heavily multi-national, so you already get
a pretty good international exposure from the large caps. From
there, you have to be careful not to get over exposed
internationally by adding in an emerging markets fund or
international fund.

Energy has had boom and bust periods. Just look at what
happened to Texas in the 1990's. That doesn't make sense
with growing energy demands, so there must be far more to
it than just growing energy demand.

-john-

--
============================================================ ==========
John A. Weeks III 952-432-2708 <a href="mailto:john&#64;johnweeks.com" target="_blank">john&#64;johnweeks.com</a>
Newave Communications <a href="http://www.johnweeks.com" target="_blank">http://www.johnweeks.com</a>
============================================================ ==========

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#3: Re: thoughts on energy and emerging market investments

Posted on 2006-02-23 15:15:45 by Andy

<a href="mailto:screenaccount&#64;gmail.com" target="_blank">screenaccount&#64;gmail.com</a> wrote:

&gt; 1) Will there always be a (growing?) demand for energy, and hence an
&gt; energy market?

Well sure there will probably always be a growing demand for energy
(though historical data shows that energy demand grows much slower than
GDP because there is a strong long term trend towards increasing energy
efficiency), but does that necessarily mean that the energy companies
you invest in today will always be highly profitable, especially in the
long run? Maybe there will be some technological innovation that
level's off energy demand. Maybe China will erupt in civil war (they
currently have thousands of small violent uprisings a year on the local
level) and the loss of their demand will cause oil prices to drop.
Maybe a leading company will have an accounting scandel and collapse
overnight. Maybe all the oil producing nations will nationalize their
oil industries. Here is the scenario I would worry about: there is a
big chunk of potential revenue represented by the difference between
the cost of producing oil and what people are willing to pay for fuel.
Right now the governments of the producing nations and the consuming
nations (at least the US government) let the oil companies keep a very
large chunk of that revenue, but they could decide at any time to take
over a larger share of the spoils by raising taxes on production or
consumption, and in fact the more profitable the oil companies are the
more attractive this will seem to the governments involved. With the
US deficit growing, and the boomers heading for retirement, I would not
expect the US government to be passing over many potential revenue
sources in the long term.

I am not predicting that any of these scenarios will come true, I am
just pointing out that history is full of surprises and there is no
such thing as a long term sure thing prediction about sector
profitability.

&gt; 2) Is it all but assured that the currently emerging and established
&gt; markets of the world are going to level out and equalize, at least a
&gt; bit, such that the emerging markets strengthen and the established
&gt; markets weaken accordingly? Not tomorrow, of course, but definitely in
&gt; the long-term?

That sure sounds like a reasonable assumption, but as I said above,
history is full of surprises.

&gt; If those thoughts are accurate, wouldn't those sectors then make for
&gt; good long-term investments? They'll definitely fluctuate a bunch over
&gt; the years, but wouldn't the long-term average growth be expected to be
&gt; exceptional?

Investing based on predictions about future events is gambling, and
there is nothing wrong with gambling, just recognize that things might
not turn out like you are expecting. I personally think that for
retirement investing purposes one should invest in broad index funds on
the theory that you will do about as good as everyone else, and
certainly no worse. Do you really want your retirement finances
depending on your skills as an amateur economist?

Thanks,

Andy

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#4: Re: thoughts on energy and emerging market investments

Posted on 2006-02-23 18:01:28 by Ron Peterson

<a href="mailto:screenaccount&#64;gmail.com" target="_blank">screenaccount&#64;gmail.com</a> wrote:

&gt; 1) Will there always be a (growing?) demand for energy, and hence an
&gt; energy market?

Yes, but the entire energy market won't have extremely high growth and
high return on investment. So, you will have to pick and choose. I
think that the oil, gas, and refining stocks show the most promise now
(e.g COP, VLO)

&gt; 2) Is it all but assured that the currently emerging and established
&gt; markets of the world are going to level out and equalize, at least a
&gt; bit, such that the emerging markets strengthen and the established
&gt; markets weaken accordingly? Not tomorrow, of course, but definitely in
&gt; the long-term?

Yes, so buy some exchange traded funds in the foreign markets. (e.g.
EWY, EWO)

&gt; If those thoughts are accurate, wouldn't those sectors then make for
&gt; good long-term investments? They'll definitely fluctuate a bunch over
&gt; the years, but wouldn't the long-term average growth be expected to be
&gt; exceptional?

It pays to diversify over a number of different sectors by areas of the
world and by products produced. You will want to have 10-30 different
funds and stocks to take care of stock market variations. Too many
stocks gets to be hard to manage.

&gt; I'm new to all this, and I don't have an economics degree, so I may be
&gt; totally misunderstanding the situation.

Having a Nobel prize in economics doesn't guarantee good investing
skills.

Investing involves owning companies that are making a profit and will
continue to make profits.

--
Ron

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#5: Re: thoughts on energy and emerging market investments

Posted on 2006-02-23 23:06:13 by noreplysoccer

If you have 20+ years to retire and are willing to take some risk, I
see no issue with using these sectors (energy and emerging markets).

I would set up a Roth IRA with a fund family. I like T Rowe Price.
others might be Fidelity or Vanguard. Contribute $500/month for 8
months of the year. When the IRA limit increases in a couple of years,
contribute $500/month for 10 months.

Use 1-3 core funds like equity income (PRFDX) or capital appreciation
(PRWCX). Both are conservative core stock funds. Maybe add a fund
like New Horizons for small cap exposure. Putting $150/month into each
of these will start to build up the core portfolio.

Then put $50/month into an energy fund. or emerging markets. I like
PRIDX (International Discovery), but I'm sure there are others one
could find to fit the need/want. They have an Emerging Markets fund
and an Energy fund (plus financials, healthcare and technology).

At T Rowe Price this will cost you about $40/year ($10/year/fund) until
each account gets to $10,000, or total value is $50,000 for all funds.
Please note I own all funds above (plus PRMGX and PREMX). I do not
work for TRP, but I do like their fund selection (all no load), asset
builder ($50 opens the account) and performance. Good customer service
each time I call as well. I have slightly less than $50,000, so I am
still paying fees, but this is the last year I expect to pay fees for
most of my accounts.

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#6: Re: thoughts on energy and emerging market investments

Posted on 2006-02-24 11:02:27 by screenaccount

jIM wrote:
&gt; If you have 20+ years to retire and are willing to take some risk, I
&gt; see no issue with using these sectors (energy and emerging markets).
&gt;
&gt; I would set up a Roth IRA with a fund family. I like T Rowe Price.
&gt; others might be Fidelity or Vanguard. Contribute $500/month for 8
&gt; months of the year. When the IRA limit increases in a couple of years,
&gt; contribute $500/month for 10 months.

Well, the only problem there is that, after school loan payments,
high-priced rent, and 401K contributions, I have only about $150/month
to put into an IRA, and that's going into a Vanguard Total Retirement
fund. I might be able to bump up my contributions a bit, but not by
much. With regard to the investments in the energy/emerging markets,
then, I was thinking of rolling over $11K I have in a 401k from my
previous employer, and then just letting it sit for the most part...

Mike

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#7: Re: thoughts on energy and emerging market investments

Posted on 2006-02-24 16:23:30 by noreplysoccer

If 11k is going to sit, I would choose one fund for $10,000 and a
second fund for $1000.

If using TRP (and this is not a requirement, just a data point for
you), the $10,000 investment should not have fees. An S&amp;P 500 index
fund would work, a large cap (value) fund might work here too.

Use the $1000 in International or small caps or energy or emerging
markets as you see fit. This would have fees of $10 per year until
this fund had $10,000 in it.

There might be some merit to re-allocating 401k to Roth IRA (meaning
contribute less to 401k to max out the Roth). This may reduce the fees
of the Roth if there is more money in it. Who is the custodian of the
Roth? What are their account minimums and fees? Might also be merit
to putting old 401k to a Rollover IRA, then the rollover IRA converted
to a Roth to get enough money in the Roth to avoid fees. This assumes
you can pay the taxes on the conversion with other funds.

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#8: Re: thoughts on energy and emerging market investments

Posted on 2006-02-24 22:32:26 by Tad Borek

<a href="mailto:screenaccount&#64;gmail.com" target="_blank">screenaccount&#64;gmail.com</a> wrote:
&gt; 1) Will there always be a (growing?) demand for energy, and hence an
&gt; energy market?
&gt; 2) Is it all but assured that the currently emerging and established
&gt; markets of the world are going to level out and equalize, at least a
&gt; bit, such that the emerging markets strengthen and the established
&gt; markets weaken accordingly? Not tomorrow, of course, but definitely in
&gt; the long-term?
&gt;
&gt; If those thoughts are accurate, wouldn't those sectors then make for
&gt; good long-term investments? They'll definitely fluctuate a bunch over
&gt; the years, but wouldn't the long-term average growth be expected to be
&gt; exceptional?


Sure, the basic narrative sounds logical, but &quot;exceptional&quot; is the tough
part, especially for the energy sector. Let's start with the assumption
that if you can identify an exceptional sector of US industry, it would
make sense to put extra money in that. If you can't you should just buy
something that includes investments in ALL industries, like say a &quot;Total
Market&quot; stock index fund. After all every industry is in business for a
profit, right?

So go back to your #1...why not substitute in for &quot;energy&quot; any of the
following: Food, Prescription Drugs, Water, Velcro, ATMs, car tires, tax
accountants. There will always be growing demand for these things too,
right? So why not buy relevant sector funds or stocks in companies that
produce those things? Why pick a basket of energy stocks over, you know,
conagra, merck, pepsi, dupont, bofa, goodyear, daimler, hrblock? (NO
these are absolutely NOT investment suggestions, just making the point!)

Going beyond that though - let's say energy earnings are going to grow
faster than average, faster than these other industries, over the long
term - just assume that it's known by you to be true. OK, if YOU know
that why wouldn't the thousands of people who spend their entire day
analyzing the energy industry know that? And why wouldn't they keep
buying energy stocks until their prices rose enough that the expected
future returns were just &quot;average&quot;? Imagine Company A is at $10/share
and everyone suddenly finds out its projected earnings are going to be
double the prior expectation. Imagine people start buying and it goes to
$15, $18, $20, $50, ($100, $400...) - at what point is it still a good
investment? Not forever, right?

That's the trick really...it's not enough for an industry to grow, it
needs to grow _more than is currently expected_. So a concentrated
investment in energy is a statement that you think your judgment is
better than that of the collective market of investors, regarding the
future earnings potential of the energy sector, vs. the average stock.
Maybe so, but is that the bet you want to make? Banks make money too! -
for example.

Emerging market stocks are different because they're an asset class
(jargon for &quot;category of investment&quot;, essentially) rather than an
industry sector within an asset class (which is what energy is). They
are generally considered riskier than most other asset classes, not only
because they have gone up and down a lot in value from year to year
(&quot;volatility&quot;), but also because there are some risks present that you
don't get when buying, say, stock in IBM. By definition, these are
stocks in developing economies that have less stability and perhaps
weaker legal and regulatory systems than we have in the United States.
Even the stock markets themselves aren't as reliable. It costs more to
trade, the local currency probably isn't as stable, and in some cases
even the government isn't necessarily stable. There are some anecdotal
examples of some monumental blow-ups. Again, these are risks you don't
really take on when buying IBM or a basket of US stocks - or at least,
not nearly to the same degree.

Does that mean you should avoid emerging markets? Not necessarily but if
you buy them, be aware of the risks associated with the investment and
make it an informed choice. Among professional investors it's often
considered something you add a little of, but don't go overboard on
(with larger investments towards international stocks of developed
countries, which don't have the same risks as emerging-markets stocks).
Sure the upside potential seems to be there but it comes with risks you
just don't take on in other investments.

And irrespective of whether you're talking energy or emerging mkts or
individual stocks, always keep in mind that the less diversified you
are, the more risk you're taking on - meaning that while your upside may
be higher, it's also more likely you'll end up with lousy results.
There's something to be said for a bland, broadly diversified portfolio
that mixes US &amp; foreign stocks, bonds, cash, with no concentrated bets.

-Tad

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#9: Re: thoughts on energy and emerging market investments

Posted on 2006-02-25 11:02:54 by screenaccount

Wow, thanks for all that info. Definitely stuff I hadn't yet
considered.

Mike


Tad Borek wrote:
&gt; Sure, the basic narrative sounds logical, but &quot;exceptional&quot; is the tough
&gt; part, especially for the energy sector. Let's start with the assumption
&gt; that if you can identify an exceptional sector of US industry, it would
&gt; make sense to put extra money in that. If you can't you should just buy
&gt; something that includes investments in ALL industries, like say a &quot;Total
&gt; Market&quot; stock index fund. After all every industry is in business for a
&gt; profit, right?
&gt;
&gt; So go back to your #1...why not substitute in for &quot;energy&quot; any of the
&gt; following: Food, Prescription Drugs, Water, Velcro, ATMs, car tires, tax
&gt; accountants. There will always be growing demand for these things too,
&gt; right? So why not buy relevant sector funds or stocks in companies that
&gt; produce those things? Why pick a basket of energy stocks over, you know,
&gt; conagra, merck, pepsi, dupont, bofa, goodyear, daimler, hrblock? (NO
&gt; these are absolutely NOT investment suggestions, just making the point!)
&gt;
&gt; Going beyond that though - let's say energy earnings are going to grow
&gt; faster than average, faster than these other industries, over the long
&gt; term - just assume that it's known by you to be true. OK, if YOU know
&gt; that why wouldn't the thousands of people who spend their entire day
&gt; analyzing the energy industry know that? And why wouldn't they keep
&gt; buying energy stocks until their prices rose enough that the expected
&gt; future returns were just &quot;average&quot;? Imagine Company A is at $10/share
&gt; and everyone suddenly finds out its projected earnings are going to be
&gt; double the prior expectation. Imagine people start buying and it goes to
&gt; $15, $18, $20, $50, ($100, $400...) - at what point is it still a good
&gt; investment? Not forever, right?
&gt;
&gt; That's the trick really...it's not enough for an industry to grow, it
&gt; needs to grow _more than is currently expected_. So a concentrated
&gt; investment in energy is a statement that you think your judgment is
&gt; better than that of the collective market of investors, regarding the
&gt; future earnings potential of the energy sector, vs. the average stock.
&gt; Maybe so, but is that the bet you want to make? Banks make money too! -
&gt; for example.
&gt;
&gt; Emerging market stocks are different because they're an asset class
&gt; (jargon for &quot;category of investment&quot;, essentially) rather than an
&gt; industry sector within an asset class (which is what energy is). They
&gt; are generally considered riskier than most other asset classes, not only
&gt; because they have gone up and down a lot in value from year to year
&gt; (&quot;volatility&quot;), but also because there are some risks present that you
&gt; don't get when buying, say, stock in IBM. By definition, these are
&gt; stocks in developing economies that have less stability and perhaps
&gt; weaker legal and regulatory systems than we have in the United States.
&gt; Even the stock markets themselves aren't as reliable. It costs more to
&gt; trade, the local currency probably isn't as stable, and in some cases
&gt; even the government isn't necessarily stable. There are some anecdotal
&gt; examples of some monumental blow-ups. Again, these are risks you don't
&gt; really take on when buying IBM or a basket of US stocks - or at least,
&gt; not nearly to the same degree.
&gt;
&gt; Does that mean you should avoid emerging markets? Not necessarily but if
&gt; you buy them, be aware of the risks associated with the investment and
&gt; make it an informed choice. Among professional investors it's often
&gt; considered something you add a little of, but don't go overboard on
&gt; (with larger investments towards international stocks of developed
&gt; countries, which don't have the same risks as emerging-markets stocks).
&gt; Sure the upside potential seems to be there but it comes with risks you
&gt; just don't take on in other investments.
&gt;
&gt; And irrespective of whether you're talking energy or emerging mkts or
&gt; individual stocks, always keep in mind that the less diversified you
&gt; are, the more risk you're taking on - meaning that while your upside may
&gt; be higher, it's also more likely you'll end up with lousy results.
&gt; There's something to be said for a bland, broadly diversified portfolio
&gt; that mixes US &amp; foreign stocks, bonds, cash, with no concentrated bets.
&gt;
&gt; -Tad


======================================= MODERATOR'S COMMENT:
Please trim the post to which you are responding. &quot;Trim&quot; means that except for a few lines to add context, the previous post is deleted.

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#10: Re: thoughts on energy and emerging market investments

Posted on 2006-02-25 11:03:49 by screenaccount

jIM wrote:
&gt; If 11k is going to sit, I would choose one fund for $10,000 and a
&gt; second fund for $1000.

Oh, I hadn't considered that strategy. I think I'll look into that.
Thanks.

Mike

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#11: Re: thoughts on energy and emerging market investments

Posted on 2006-02-28 12:43:03 by dumbstruck

Both energy and emerging mkt uptrends are getting long in the tooth, so
maybe not the best time to plunge deep. I much prefer emerging mkt,
although maybe bitter because I misplayed the uranium mkt recently and
was about the only person to lose there rather than win big.

Energy has such regular cycles of boom and bust that it seems more of a
gamble than an investment. Sure, you can expect eventual uptrend, but
it may be in companies you don't expect. There are alternative
technologies that are just waiting for oil to get a little higher so
they can profitably substitute - part of the reason Saudi's
counterintuitively push OPEC to keep pumping and moderate the price
rises.

Emerging markets can and will have violent setbacks. But it seems less
cyclical than an upward (whip)saw tooth pattern. Unless your timing is
unusually bad they can have such payback that you may weather the bad
parts. This is where the world economy has the most leverage and is
shaking the rust out the system. Although shrill newscasts concentrate
on bad 3rd world news, it's amazing what good things are happening in
formerly poor and dysfunctional economies, now becoming healthy.

Also, I would include east European mkts which are wealthier, but
emerging relative to their region. I like to go deep into these
markets, but balance it with something. Besides domestic and foreign
stock, it used to be bonds were a wonderful counterbalance. Recently
they have had poor prospects that some pretty good conservative hedging
mutual fund alternatives have popped up. Especially the long/short
variety, which in March will appear in their own new Morningstar
category - look for them! Press pundits hate them, but some have
excellant record thru the recent crash, etc.

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