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Expect Less In the Financial Markets

- Alan Lavine and Gail Liberman

Those high double-digit stock returns of the 1990s are a thing of the past.

Going forward, we must learn to expect less, says Steve Savage, editor of the No-Load Analyst, an Orinda, Calif.-based newsletter.

There are a few reasons we are making less in the financial markets.

Interest rates are lower than they have been at the start of previous bull markets.

"Returns from bonds will be less than in most bull markets," Savage says. "And the prices of stocks in relation to their earnings will not rise as much due to low rates today. Plus if interest rates rise, stock prices could get hurt."

Even though stocks are performing poorly, they are still considered overvalued based on future corporate earnings. That indicates there is less upside potential.

Dividend yields on stocks also are low. In the past, more than 40 percent of the return on the stock market was due to reinvested dividends. Now that dividends are lower, less is being reinvested. So returns could be lower.

So what the heck are we supposed to do?

Savage says it's best to be a contrarian investor. Go with the investments that are beaten down.

He believes high-yield bonds, which yield around 11 percent, should do well as the economy strengthens. Your best bet is to stick with a high-yield bond fund that owns hundreds of bonds. It is less risky than buying an individual bond. One high-yield bond fund he likes is Northeast Investors Trust.

Savage also favors real estate. Real estate stock funds have been one of the best-performing groups over the past couple of years. He expects them to continue to do well. They are still undervalued compared with the S&P 500. One real estate stock fund he favors is Columbia Real Estate Fund.

Other areas of opportunity include small-company and mid-size company stocks. Along those lines, he likes Longleaf Partners Fund and Longleaf Partners Small Cap Fund.

There also are good values overseas. Many European stocks are cheaper than stocks in the United States, yet they have similar earnings. Overseas funds he recommends include Oakmark International, Artisan International and Harbor International Growth.


Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).

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