Edwin Mays of Mays Group Advisors tells MoneyShow.com’s Kate Stalter that investors are best served by avoiding the stocks and funds that seem hot or glamorous at any given moment. Instead, he tells us the seven funds he uses to construct a solid structure for growth, protection, and exposure to global regions.
Kate Stalter: Today we’re speaking with Edwin Mays, and he is with the Mays Group Investment Advisors in Princeton, New Jersey.Thank you so much for joining us today.
Edwin Mays: Well, thank you for having me, Kate.
Kate Stalter: I wanted to ask you about your current take on the market and what you think it’s important that individual investors know about these days?
Edwin Mays: Well, the current market conditions are extremely volatile and this is reflected in the recent rise in the uncertainty index. Plus, we have the lowest consumer confidence ratings since early 2009 when the economy was stuck in recession.
We have problems in Libya, public sector layoffs, debt issues in Europe, and the United States. All of this contributes to a collective anxiety for investors, and it’s unlikely that we’ll feel any sense of relative calm in the near-term. I say relative calm, because there’s always a real or perceived threat on the investment horizon. So predicting the date and location of the next big event that moves the market, a Katrina or terrorist event for example, simply isn’t possible a year or even six months prior to the episode.
So, given this reality, the most important thing for an individual investor to be aware of is the importance of developing an investment plan. A plan that incorporates simple investing truths, such as that portfolio management is the tail and investor behavior is the dog. Investors who believe their financial fate is subject to the vagaries of the market often feel victimized and, in return, tend to invest emotionally. But investors who create a long-term investment plan, a real plan that has dollar-specific goals, investing and withdrawal schedules, and a diverse portfolio structure, these investors are less likely to invest emotionally and thus, more likely to achieve their stated goals by following the rules of their plan.
Kate Stalter: Good advice. Well, given all of that, what do you see as some of the asset classes or global regions or sectors that investors should be taking a look at these days?
Edwin Mays: Well, since my focus revolves around setting up portfolios for long-term investors, typically people looking for retirement and retirement funds that should last like 30 years, we have to look at the macro economy for the next five to 50 years.
The best way that I can illustrate what we found is to imagine a college football stadium that seats 100,000 people. At the beginning of the game, 40,000 people rush to get hot dogs. So, what’s the effect of this rush from the 40,000 people? The bun maker must increase production, which requires more wheat for flour. The additional buns require more ovens in which to cook them. The ovens require more sources of heat. The additional buns need transport to the stadium, which requires fuel, roads, and bridges.
Now, when looking at all of this, if we replaced the stadium with the global economy and the fans that were in the stadium with the world’s current population of seven billion people, 40% of that seven billion are from China and India. These folks are tired of sitting in the nosebleed seats. They want to be sitting on the choice rows of the stadium. They want to be able to have great views, and based on their current growth rates, they’ll be able to sit there soon.
So, all this means that the BRIC nations, those nations in the developing world where per-capita consumption is growing rapidly, they’re a very small slice. A small percentage of growth equates to very large numbers of additional products that are required to meet demand. That’s whether these are hot dogs, televisions, cell phones, or anything else.
The BRIC nations, commodities, oil, agriculture, coal, gas, infrastructure materials, metals, and mining–particularly the precious metals and rare earth elements in the developing world–these are sectors, industries, and regions which I see showing growth right now and for the long-term.
Kate Stalter: Let’s take a look at the flip side of that then. Any sectors or regions that you believe individual investors should really avoid at this moment?
Edwin Mays: This is where having a specific plan is extremely important, because the plan can provide some guidance as to when specific holdings should be sold, exchanged, or never purchased in the first place.
But overall, since we create diversified portfolios for the long-term, we’re usually not overly concerned about areas that may be showing weakness at the present time, especially if that weakness is found in developed countries like the US and the UK.
But depending on an investor’s plan outline, investing during periods of weakness can be quite profitable in the long-term. An example of a weak area: Europe right now is currently the only region in the world with bad net consumption and this is a challenge which will remain serious, due to complex interplay between the countries’ various economies. But despite those trends, the majority of people investing for retirement should still have a portion of their portfolios allocated in Europe, because they’re still able to meet the demands of both the developed and the developing world.
Again, this is where the investor’s plan is extremely important, because it can also act as a buffer to which sectors and industries should be avoided. I ask clients in our first meeting if there are any areas where they’d like to avoid investing in. Some want to avoid tobacco or alcohol, for example. Others may hold strong political or ethical views and want to avoid specific firms that they believe harm the social fabric, or the environment, or a specific group.
But in general, we won’t invest in regions that have a high probability of governmental turnover, political and/or social strife, such as countries and companies in parts of Africa, the Middle East, and Indonesia.
Having said that, yes, there are some areas of the world, but for the most part for long-term investors, if you stay with your plan, you should be safe.
Kate Stalter: Edwin, tell me about some of the investment vehicles that you are currently using to meet clients’ objectives.
Edwin Mays: Well, we use ETFs, exchange traded funds, as a staple, because compared to mutual funds, ETFs have lower turnovers, which help minimize tax issues. So, for many mutual fund investors, they can have quite a surprise come tax season based on the turnover that they might find in their mutual funds.
Also, compared to the mutual funds, the 12(b)-1 fees and expense ratios, ETFs have much lower overall costs, which can have large benefits in terms of total long-term return. Study after study suggests that actively managed funds rarely beat their underlying index and the choice is simple.
I’ll get to the specifics of which ETFs that we utilize. We start off by putting up a portfolio much the same way that someone looks at building a home. On the ground floor, we use the RevenueShares Navellier Overall A-100 Fund (RWV). This fund is constructed using an eight-factored model that give stocks a letter grade, so the top 100 A-rated stocks are included and ranked by revenue annually on September 1st, and then rebalanced on the first day of each calendar quarter. They use the revenues because it’s a fundamental that’s very difficult to hide or manipulate.
Now we got to the four walls, the four walls of the building. We spoke earlier about the BRIC nations: Brazil, Russia, India, and China. We use the SPDR S&P 40 BRIC ETF (BIK). That seeks to replicate the total return of the BRIC 40 Index. Then we also use the EFA, the iShares Morgan Stanley EAFE Index Fund (EFA). That seeks to provide investment results from the European, Australasian, and Far Eastern markets.
Using that, coupled with the BRIC nations, we basically have the entire world covered. We have on the floor, the S&P 500, represented with the Navellier Index. With the EFA and the BRIC nations, we basically cover the entire world.
So, the only two things remaining for the walls are commodities and infrastructure. For commodities, we use the Deutsche Bank Commodity Index Tracking Fund (DBC). That’s composed of futures contracts of 14 of the most heavily traded and important physical commodities in the world. Then lastly, the PowerShares Emerging Market Infrastructure Portfolio (PXR), and that’s based on the S-Network Emerging Infrastructure Builders Index. These industries include construction and engineering, machinery, diversified metals and mining, heavy electrical equipment, industrial machinery, and steel.
Finally there is the roof. Most investors typically start off with the roof, the type of stocks and funds and ETFs that are normally in the news. They’re the sexy items. But we utilize something that’s pretty boring. The Vanguard Inflation-Protected Securities Fund (DIPSX). Now, this fund is designed to potentially protect investors from inflation by investing in a security that provides a real return. They invest in bonds, they’re backed by the full faith and credit of the federal government, and its principal is adjusted quarterly, based on inflation. So that’s the boring side.
The exciting side is the SPDR Gold Trust (GLD). Now, the objective of this ETF is to reflect the price of gold bullion. Gold has always been a hedge against inflation, as governments can’t increase the supply of gold as they can paper currency, so as the value of the US dollar declines, the potential for the price of gold rises. So that’s a basic portfolio that we would put together.
Disclaimer: Edwin Mays is a Registered Representative of The Investment Center, Inc. Bedminster, NJ, Member FINRA/SIPC. The Investment Center, Inc. is not Affiliated with Mays Group Investment Advisors. Branch office is located at 125 Carter Road, Princeton, NJ 08540 and can be reached at (609) 512-1655.
I want to emphasise that the views expressed today are my own and do not necessarily represent the views of my broker/dealer, The Investment Center, Inc. or my Registered Investment Advisor, IC Advisory Services, Inc.
The Investment Center, Inc. and IC Advisory Services, Inc. strongly recommends that potential investors meet with a financial professional to evaluate their circumstances, financial goals and risk tolerance prior to making any investment decision.
The Investment Center, Inc. and IC Advisory Services, Inc. does not forecast future economic environments and cannot comment on how it might do in any future economic scenario. There may be economic times where all investments are unfavorable and depreciate in value. The investment return and principal value of an investment will fluctuate, thus an investor's shares, when redeemed, may be worth more or less than their original cost. The Investment Center, Inc. and IC Advisory Services, Inc. makes no predictions, representations, or warranties herein as to future performance. Future performance is difficult to predict and such predictions are beyond the control of The Investment Center, Inc. and IC Advisory Services, Inc.