Columnist Optimistic About Mutual Funds Economy

May 28, 2002
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GRAND RAPIDS — Anything can happen to an individual stock, so holding onto just one -- even the greatest blue chip stock -- is a big risk for the long term, whether it be a fabulous gain or a shocking loss.

Diversification through a mutual fund is the better way to go.

That was the message Jane Bryant Quinn, a leading personal finance and investment adviser and syndicated columnist with The Washington Post Writers Group, drove home at last week’s Economic Club of Grand Rapids luncheon at the Amway Grand Plaza.

Investors often don’t know a lot about the sales, inventories, profits and management track records of the companies in which they’re shareholders. They’re not aware of the competitive landscape in which those companies operate

Many people were astonished to hear that Lucent Technology’s management was a mess, and by the time they read it in the papers, the stock was down 80 percent, Quinn said.

“As investors you remember your winners and forget your losers,” she observed. “You do not average the two together. Consequently, you have no idea how well you have nationally performed in the long run compared to the market as a whole.

“If you’re in this game for money over the long term, that’s what well diversified mutual funds are for.”

In recent years, prudent investment styles haven’t been very fashionable. Everybody wants to talk about stocks, but not mutual funds.

Quinn said she doesn’t know what stocks are going to lead the next wave up. But she does know that mutual funds are smart holdings for everybody, including CEOs. Energy stocks are hot now, too, as are some of the utilities, financial retailers, construction and steel stocks — all of the stocks that were nearly forgotten in the fervor over the Intels and Ciscos. 

History has shown that the stocks valued and sought after in one decade aren’t necessarily the same in another, Quinn stressed. There’s no telling which of today’s famous companies, no matter how well they’re trading, will actually be a worthwhile investment 10 years from now.

Every generation seems to have a different attitude towards stocks, she observed.

The Depression generation never trusted stocks. The inflation generation was spooked into skittishness. The “Dow” generation — anyone who came of age since the early 1980s — has only known a market that seemed to go upwards without end. The youngest investors believe only U.S. tech stocks have a real future.

Much of the pessimism about the economy today centers on the tech wreck and the fear it’s going to bring down the whole market, just as it did in Japan, Quinn said.

But America is not Japan; America’s financial system is much sounder; its markets more flexible; and its political system much more responsive, Quinn emphasized. 

Today’s economy is more efficient and productive and less controlled than in earlier decades, and that’s a great trend that remains in place, she pointed out.

“I’m simply not concerned about this mild downturn like so many other people seem to be. Maybe the total business recovery comes at the end of the year, or maybe two months earlier or three months later.

“The exact timing is not material. What is material is that it’s not anything serious. It’s simply a slowdown,” Quinn said. 

America’s saving grace is that the old economy continues to be the economy, with industries such as manufacturing and financial services carrying the ball.

Granted, some big banks are going to loose a lot of money on their telecom loans. More dot coms are going to go bust, and a lot of disappointed investors are never going to get their money back on the techs, she said. But that’s the bubble.

Both business and investors have to look out for the unforeseen economic turns. People have to be as wise in their personal investments as they are in their businesses in planning for the unexpected. 

California’s electrical power shortage, for example, was an unforeseen that will slow the country’s economic growth until more power comes online. Californians are going to “pay through the nose for their botched deregulation plan,” Quinn added, and higher wholesale energy prices are going to impact the whole country as a result.

A foghorn of the country’s strong economic growth of the past several years has been the end of the federal deficit and the pay down of the national debt.

Quinn said she’s worried about the deficit issue because upcoming tax cuts likely won’t be offset by lower spending. Tax cuts now could mean an unexpected return to government deficit operating spending later, which, in turn, could spook bottom market interest rates higher and usher in a period of weak growth, she said.

According to Quinn, there are two important reasons to pay down the national debt. One is the baby boom generation, the oldest of which will begin to retire in seven years and will begin to go on Medicare in 10 years.

“How are we going to take care of all of this? We’re going to borrow,” Quinn said. “If we take down the federal debt today we can borrow it back when we need it and keep the debt still at a manageable level. It’s sort of like cleaning up your credit card in preparation for something big you want to buy.”

The second reason relates to the need for national savings.

“As a nation we’re not saving as much and we should be,” Quinn cautioned. “We’ve been spending more than we earn and letting the stock market create savings for us. The older a population gets, the less saving it does, because older people begin cashing in their savings to live on.”

Another economic issue is the huge spurt in capital spending of recent years that has been funded, in part, from federal budget surpluses.

When the government pays off Treasury, it returns Treasury securities. Money from Treasury securities goes into corporate bonds, then finds its way into the stock market wherever people choose to invest it, Quinn explained. So by reducing the federal debt, money moves from the government sector into the private sector.

“The national debt belongs to taxpayers too, so under my proposal for solving this problem, we all get the biggest tax cut that we want, but it’s packaged with our personal piece of the federal debt.

“Then we can pay it back on our own schedule without letting the government do it for us and, by law, permit us to leave our piece of the federal debt to our kids,” she joked.  

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