John Wasik

CHICAGO, May 11 (Reuters) – You may be smitten with the
Facebook story and debating whether or not to buy stock
when the company goes public. But if you haven’t studied the
history of IPOs, you may be jumping into the purchase with
unrealistic expectations and flawed biases.

While many of those allocated shares early on will likely
prosper – or be able to sell quickly at a profit after an
immediate run-up – the rest of us might not fare as well.

The company may raise up to $10.6 billion, an amount that
would beat the debuts of tech giant Google Inc while
giving it a total stock market value that exceeds Amazon.com
. Facebook has indicated an initial public offering
(IPO) per-share range of $28 to $35, pegging the potential value
of the company at $77 billion to $96 billion.

But when an IPO scores big on its first day, data shows
that’s not a leading indicator as to how it performs in the
future.

“With the exception of IPOs from 1999-2000, there is no
reliable relation between first-day returns and the subsequent
three-year return,” says Jay Ritter, a professor of finance at
the University of Florida who has been studying IPO results and
updates a database on their performance.

Even if Facebook soars immediately to a market cap of $150
billion or more, there are warning signs ahead, says Ritter:
“further upside potential is severely limited.”

And if Facebook grows significantly over time, like Apple
? Just based on the historical record of IPOs, there are
no guarantees.

Looking at three-year buy-and-hold periods, and comparing
them to the larger market, IPO investors made a meager
market-adjusted total return of 2 percent from 2001-2010,
reports Ritter.

Going back even further, the buy-and-holders did much worse
with IPOs when compared to the larger market, as measured by the
S&P 500 index including dividends and capital gains. They lost
almost 32 percent from 1999-2000; dropped 34 percent from
1995-1998; and declined almost 23 percent from 1980-1989.
Remember, these were the golden-fleece days of IPOs, which
peaked at 675 offerings in 1996. All told, IPO holders lost
about 20 percent in market-adjusted returns from 1980 through
2010, Ritter found.

That then brings us into the realm of behavioral economics,
an emerging science that examines how irrational and
overconfident we can be. We all love a good story – especially
about the stocks that we buy. That hard-wired predilection,
though, may prevent us from analyzing past history and accepting
the reality that many tech stocks are duds down the road
(Pets.com ring a bell?).

I asked Prof. Daniel Kahneman, Nobel laureate in economics
and author of the classic “Thinking Fast and Slow” about how
investors should regard a new stock like Facebook. While he
declined to predict how the company will fare, he suggested
looking at the histories of previous stock offerings and their
competitors.

In his research, Prof. Kahneman, one of the godfathers of
behavioral economics, has discovered that not only do investors
tend to be overconfident about their investment choices, they
make decisions too quickly based on intuition, which is often
wrong. We may fixate upon a number – such as a stock price – and
“anchor” it in our minds as something that’s obtainable, even
though it may be unrealistic. Then we may fool ourselves into
thinking that we can predict how well a stock or the general
market may do. On top of that, most of us are born optimists.

“People don’t know the boundaries of their expertise,”
Kahneman said. “We live in a subjective world and can’t separate
what we can forecast from what we can’t.”

To make our decision making even more complicated, a part of
our brains Kahneman calls “System One” creates a “coherent” view
of an event that suppresses any ambiguities or other
interpretations.

In the case of Facebook, the story of a Harvard undergrad
creating a tech colossus has a satisfactory sweetness to it.
There’s no question that Facebook is one of the most-anticipated
public offerings in recent memory. With 900 million signed up to
the service and growing – I’m an avid user – it’s undeniably one
of the most powerful and addictive forms of social media on the
planet. Founder Mark Zuckerberg may be our era’s Alexander
Graham Bell.

But what about the competition? Can the company sustain its
growth and gain advertising? Skepticism often gets sidetracked
when System One is ruling.

Ultimately, though, despite their magical powers, tech
stocks are subject to the laws of supply and demand, earnings,
competition and ever-fickle market sentiment. If we can look
ourselves in the mirror and admit that, then having honest face
time with a Facebook purchase may erase some future worry lines.

CHICAGO, May 7 (Reuters) – If this weekend’s elections in
France and Greece do nothing else then they should remind
investors that these are individual countries, despite being
members of the euro zone. The 17 current countries in the
currency bloc might have thrown in their lot together in an
economic sense, but for investing purposes, you don’t want to
treat the members – and surrounding countries that are waiting
to join – as a single entity.

I break up the continent into four distinct blocks that have
nothing to do with geography, but instead with economic risk
profile and political dynamics.

JUST LIKE US

I consider Portugal, Ireland, Italy, Greece and Spain to be
“Yankee” Europe. Although their fiscal problems are all slightly
different from each other, these countries all over-borrowed or
got nailed by a housing bubble, emulating American missteps.
Most have imposed devastating austerity measures that are
roiling their political systems and triggered double-digit
unemployment. Their short-term prognosis has been sour.

Investors have been selling shares of Yankee Europe of late.
Spain has led the list of losers with a 14.4 percent loss in the
iShares MSCI Spain Index Fund. Italy hasn’t been hit as
hard, with a 0.36 percent loss in the iShares MSCI Italy Index
exchange-traded fund. All returns are year-to-date
through April 30, compiled by Lipper, a Thomson Reuters company.

The one exception in the Yankee group could be Ireland,
where there’s a hint of a turnaround. The iShares MSCI Ireland
Capped Investable Index, rose 17.4 percent in the
period. Several Irish-based companies such as Elan, a
biotech firm, have growth prospects in global markets, so the
Emerald Isle is worth watching as a rebound candidate.

JUST SLIGHTLY BETTER

Middle Earth Europe – Belgium, the Czech Republic, Denmark,
the Netherlands, Portugal, Slovenia and the UK – includes some
countries that are in recession, but not in such dire straights.
Nearly all have felt the pinch. Will Greece be their bellwether?
Greeks repudiated the center-right’s agenda in Sunday’s
parliamentary elections, so it’s not known if the country will
adhere to its previous bailout measures. Possibly more countries
will follow.

DOING OK

Prudent Europe, on the other hand, is relatively stable and
didn’t get embroiled in overleveraging to the extent that Yankee
Europe did. Led by Germany, which has insisted on austerity
measures for its sicker euro zone neighbors, these countries
include Finland, Norway, Sweden and Switzerland. They’ve not
only held their extensive social safety nets together, they
managed their economies fairly well and created strong export
businesses.

Germany, not surprisingly, has led the pack, with a 17
percent return in the iShares MSCI Germany Index fund.
Other considerations include the Global X FTSE Norway 30 ETF
, up 14 percent; the iShares MSCI Sweden Index,
up 12.5 percent, or the iShares MSCI Switzerland Index,
up 9.2 percent. If you just wanted to stick with the
northern-most – and perhaps healthiest – members of this group,
then the Global X FTSE Nordic Region ETF would be a
worthy choice. It rose 15.3 percent.

ON THE WAY UP

The fourth region on my modified European map is the New
Kids from the Bloc – emerging markets that would include former
Soviet bloc countries like Poland, Bulgaria, Slovakia and
Romania. As many of the companies from these countries have
little history operating in a capitalist environment, they are
much less established than corporations based in Western Europe
and much higher risk for now. They’re bundled in ETFs such as
the iShares Eastern Europe 10/40 USD fund.

None of these countries, though, can be viewed as insulated
from the general fiscal anxieties of the euro zone or the world
economy at large. A deepening recession in Europe or a
double-dip recession in the U.S. (unlikely at this point)
doesn’t bode well, even for prudent Europe. In addition, China’s
economic health impacts Europe, and since European politics are
often as complex as a Samuel Beckett play, last year’s winners
may not hold up.

Yet with political tides turning against European
governments that imposed austerity, it’s hard to tell how euro
zone countries will fare in the near future. Will they take hard
turns away from center-right agendas and start pushing growth
measures? Will the euro zone come apart? It’s still too soon to
tell, but you can still find some decent companies if you’re
willing to be patient and invest for the long term.

CHICAGO, May 4 (Reuters) – Troubles may dog the euro zone,
but in the U.S., stocks are on an ascent, with the S&P 500 up
about 12 percent in the first quarter. Apart from employment and
housing, there’s plenty of evidence that the U.S. is in a meek
recovery, which means that most of the hot money for short-term,
high-yield investments may be headed in the wrong direction.

Some $70 billion flowed into bond mutual and exchange-traded
funds from the start of the year through April 25, according to
Lipper, a Thomson Reuters company. That’s 10 times the amount
invested in large-company stock growth funds over those several
months, during which the exodus from stock funds was the largest
since 1996, according to EPFR Global. (More details here:).

This signals to me that either investors who were burned by
the 2008 financial crisis are still staying away from stocks, or
they don’t believe the stock rally is sustainable. That would
explain the continued retreat into corporate junk bond funds,
emerging market debt, U.S. mortgage securities,
intermediate-maturity bonds and all other forms of bonds.

Solely from a diversification perspective, these income
investors were doing the right thing. Yet, if interest rates
rise when the U.S. economy heats up even more, they are sitting
ducks for losses, as the value of many of these bond funds will
fall.

While the Federal Reserve said recently it doesn’t expect to
raise interest rates until 2014, there are signs that its policy
could change. In its April 25 Open Market Committee report, Fed
governors noted that “the economy has been expanding moderately.
Labor market conditions have improved in recent months; the
unemployment rate has declined but remains elevated. Household
spending and business fixed investment have continued to
advance.” (More details here:)

Only one Fed governor – Jeff Lacker – voted against the
current low-interest-rate stance. The statement said Lacker
“does not anticipate that economic conditions are likely to
warrant exceptionally low levels of the federal funds rate
through late 2014.”

It’s a good idea to give Lacker the benefit of a doubt if
you’re interested in not succumbing to the lemming effect, but
should you be concerned about inflation now?

RISKS

In the last five years, if we’ve learned anything, it’s that
big institutions like the Fed can be blindsided by tsunamis in
the credit markets. It’s probably too soon to fret, but
long-term it’s something to watch: Inflation still could pick
up.

One way to counter interest-rate risk is to ladder a bond
portfolio with single bonds. Stagger maturities from short-term
Treasury Bills or municipals to 10-year bonds. As the
shorter-term bills mature, replace them with similar maturities.
That way, you’ll capture any increased yields of newer issues.

As long as you’re buying and holding U.S. Treasury bonds to
maturity – and Congress doesn’t default on them – you won’t have
to worry about default, credit or interest-rate risk. You can
buy them directly through Treasury.gov.

The Treasury also offers I-bonds and Treasury Inflation
Protected Securities that pay a premium to standard Treasury
yields when the Consumer Price Index rises. These bonds can
offset losses in conventional bond funds – if you choose to hold
onto them.

Cash kept in federally-insured money-market deposit accounts
for bills and short-term needs is a still a safe haven, although
the yields are awful. You can find competitive yields on
certificates of deposit at bankrate.com, although “competitive”
these days tends to equate with paltry.

Should you want to take some more risk with a small part of
your income portfolio, consider the SPDR Barclays Capital High
Yield Bond ETF, currently yielding 7.3 percent or the
iShares J.P. Morgan USD Emerging Markets bond fund,
yielding about 4.7 percent.

It’s also a good time to look at the average duration of
your portfolio. This is a measure of how much money you’ll lose
if interest rates rise 1 percentage point. Your highest-duration
funds tend to be in longer-maturity bonds. If you’re concerned
about this kind of risk, then make adjustments now while
interest rates are relatively flat. The worst time to make a
move is when you see the edge of the bond promontory looming.

CHICAGO (Reuters) – The worst advice on emerging markets is to go out and buy the best-performing funds or countries of last year. In most cases, the hot money has come and gone and you can’t buy yesterday’s gains. But you can invest in a wide basket of developing countries to build a more robust portfolio foundation.

That’s not to say that emerging markets aren’t worthwhile. For global investors in the past decade, it’s been accepted wisdom that investing in the BRIC countries of Brazil, Russia, India and China is the basis of a strong strategy. While that’s still somewhat true, it’s not monolithic. Russia has had its setbacks and India is slowing down. China’s economy has increasingly raised the concern of international analysts.

But what’s left? Jim O’Neill, the chairman of Goldman Sachs Asset Management who coined the BRIC acronym a decade ago, suggests expanding your horizons to include Bangladesh, Egypt, Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines, South Korea, Turkey and Vietnam.

Global wealth seems to be moving to locales that have not been traditionally seen as bastions. While London and New York are still holding their own, high-net-worth individuals are investing in off-the-beaten track cities like Nairobi, Jakarta, Vancouver, Tel Aviv, Kiev and Cape Town. That’s according to a recent Wealth Report prepared by Knight Frank and Citi, which tracked global residential and commercial property hotspots (link.reuters.com/jav87s).

Countries that have benefited from money moving from first-tier developed nations into emerging economies include Thailand, Colombia, Indonesia, Malaysia and Singapore. According to an analysis by Lipper, a Thomson Reuters company, exchange-traded funds that invested in those countries easily trounced the BRIC strategy over the past three years through April 20.

Single-country targeted funds include the iShares MSCI Thailand Investable Market Index ETF, which led the pack of emerging markets ETFs with a 47-percent three-year return, Lipper found. The Global X FTSE Colombia 20 and Market Vectors Indonesia Index returned 42 percent and 41 percent, respectively, for the period.

How did these developing countries compare with a BRIC fund such as the Guggenheim BRIC fund. The exchange-traded fund returned a respectable 18 percent for the period, although it was less than half of the performance of the high flyers. Broader, more conservative portfolios make more sense. Consider the PowerShares FTSE RAFI Emerging Markets Portfolio if you want to slightly underweight China, which dominates most ETFs specializing in emerging markets. The WisdomTree Emerging Markets Equity ETF has more than three quarters of its holdings in Latin America and Greater Asia.

O’Neill insists that the BRICs are still headed for explosive growth long term. In terms of relative GDP growth and size, “China produces another India every 18 months or another Italy every 15 months,” O’Neill said at a meeting of the Chicago Council on Global Affairs on April 26. O’Neill’s likely right about BRIC growth – if current trends continue.

But a global economic retrenchment is still possible, especially when you watch the debilitating euro zone austerity measures and the inability of the U.S. Congress to cut its growing budget deficit. And China is actually one possible weakening link in the BRIC strategy. The world’s most populous country is still on track to become the world’s largest economy in the next two decades or so, but its ascent may not be a clean, straight line.

A recent report by BlackRock, Inc., which manages more than $3 trillion in assets, suggests that China may encounter some rough patches, although it didn’t predict how these gremlins will slow the burgeoning Chinese economy (link.reuters.com/hav87s).

BlackRock’s analysts pointed to China’s real estate slump as the “biggest threat to economic growth and confidence in 2012.” The firm said research from the Peterson Institute showed that real estate accounted for some 40 percent of urban household wealth in 2010 – double what it had been in 1997.

Did China overbuild and create a bubble? The BlackRock report isn’t definitive, although it noted “we struggle to find a precedent in history where the bursting of the bubble did not lead to financial distress.” The researchers also highlighted other red flags such as an explosion in credit growth, its undervalued currency relative to the dollar and the slow move toward a consumption economy.

Slower global economic growth, though, remains the major roadblock to BRIC countries. Energy-rich Russia felt a big pinch as its gross domestic product growth rate slowed to 3.2 percent year-over-year in March, down from 4.8 percent in February.

Brazil, which is still expanding due to its natural resource wealth, recently cut benchmark interest rates in an attempt to revive its sluggish economy, which once was keeping pace with China’s 7-percent-plus rate. India is faring even worse with the credit ratings agency Standard and Poor’s downgrading India from “stable to negative” in light of the country’s growing deficit and diminishing growth.

So to truly internationalize and balance your portfolio, you need to move beyond the BRIC strategy to find robust growth in smaller, overlooked countries. A broader-based approach, which is what I employ in my portfolio, will net you more growth.

(Editing by Beth Pinsker Gladstone and Andrew Hay)

CHICAGO, APRIL 30 (Reuters) – The worst advice on emerging
markets is to go out and buy the best-performing funds or
countries of last year. In most cases, the hot money has come
and gone and you can’t buy yesterday’s gains. But you can invest
in a wide basket of developing countries to build a more robust
portfolio foundation.

That’s not to say that emerging markets aren’t worthwhile.
For global investors in the past decade, it’s been accepted
wisdom that investing in the BRIC countries of Brazil, Russia,
India and China is the basis of a strong strategy. While that’s
still somewhat true, it’s not monolithic. Russia has had its
setbacks and India is slowing down. China’s economy has
increasingly raised the concern of international analysts.

But what’s left? Jim O’Neill, the chairman of Goldman Sachs
Asset Management who coined the BRIC acronym a decade ago,
suggests expanding your horizons to include Bangladesh, Egypt,
Indonesia, Iran, Mexico, Nigeria, Pakistan, the Philippines,
South Korea, Turkey and Vietnam.

Global wealth seems to be moving to locales that have not
been traditionally seen as bastions. While London and New York
are still holding their own, high-net-worth individuals are
investing in off-the-beaten track cities like Nairobi, Jakarta,
Vancouver, Tel Aviv, Kiev and Cape Town. That’s according to a
recent Wealth Report prepared by Knight Frank and Citi, which
tracked global residential and commercial property hotspots ().

Countries that have benefited from money moving from
first-tier developed nations into emerging economies include
Thailand, Colombia, Indonesia, Malaysia and Singapore. According
to an analysis by Lipper, a Thomson Reuters company,
exchange-traded funds that invested in those countries easily
trounced the BRIC strategy over the past three years through
April 20.

Single-country targeted funds include the iShares MSCI
Thailand Investable Market Index ETF, which led the pack
of emerging markets ETFs with a 47-percent three-year return,
Lipper found. The Global X FTSE Colombia 20 and Market
Vectors Indonesia Index returned 42 percent and 41
percent, respectively, for the period.

How did these developing countries compare with a BRIC fund
such as the Guggenheim BRIC fund. The exchange-traded
fund returned a respectable 18 percent for the period, although
it was less than half of the performance of the high flyers.
Broader, more conservative portfolios make more sense. Consider
the PowerShares FTSE RAFI Emerging Markets Portfolio if
you want to slightly underweight China, which dominates most
ETFs specializing in emerging markets. The WisdomTree Emerging
Markets Equity ETF has more than three quarters of its
holdings in Latin America and Greater Asia.

O’Neill insists that the BRICs are still headed for
explosive growth long term. In terms of relative GDP growth and
size, “China produces another India every 18 months or another
Italy every 15 months,” O’Neill said at a meeting of the Chicago
Council on Global Affairs on April 26. O’Neill’s likely right
about BRIC growth – if current trends continue.

But a global economic retrenchment is still possible,
especially when you watch the debilitating euro zone austerity
measures and the inability of the U.S. Congress to cut its
growing budget deficit. And China is actually one possible
weakening link in the BRIC strategy. The world’s most populous
country is still on track to become the world’s largest economy
in the next two decades or so, but its ascent may not be a
clean, straight line.

A recent report by BlackRock, Inc., which manages
more than $3 trillion in assets, suggests that China may
encounter some rough patches, although it didn’t predict how
these gremlins will slow the burgeoning Chinese economy ().

BlackRock’s analysts pointed to China’s real estate slump as
the “biggest threat to economic growth and confidence in 2012.”
The firm said research from the Peterson Institute showed that
real estate accounted for some 40 percent of urban household
wealth in 2010 – double what it had been in 1997.

Did China overbuild and create a bubble? The BlackRock
report isn’t definitive, although it noted “we struggle to find
a precedent in history where the bursting of the bubble did not
lead to financial distress.” The researchers also highlighted
other red flags such as an explosion in credit growth, its
undervalued currency relative to the dollar and the slow move
toward a consumption economy.

Slower global economic growth, though, remains the major
roadblock to BRIC countries. Energy-rich Russia felt a big pinch
as its gross domestic product growth rate slowed to 3.2 percent
year-over-year in March, down from 4.8 percent in February.

Brazil, which is still expanding due to its natural resource
wealth, recently cut benchmark interest rates in an attempt to
revive its sluggish economy, which once was keeping pace with
China’s 7-percent-plus rate. India is faring even worse with the
credit ratings agency Standard and Poor’s downgrading India from
“stable to negative” in light of the country’s growing deficit
and diminishing growth.

So to truly internationalize and balance your portfolio, you
need to move beyond the BRIC strategy to find robust growth in
smaller, overlooked countries. A broader-based approach, which
is what I employ in my portfolio, will net you more growth.

CHICAGO, April 27 (Reuters) – Ugly duckling stocks are
surprises in small packages that turn into great performing
swans later on down the road. Nearly every large company started
out as a “small cap,” which generally refers to a stock with
under $1 billion in market capitalization. Most small companies
do unsexy things such as make pumps or generic drugs. You’ll
rarely hear them touted by big-name analysts or firms.

When business and economic cycles favor them, though, small
caps soar relative to big-cap stocks, especially because they
are usually priced at a bargain. Over the past three years
through April 25, for example, the Vanguard S&P 500 Fund
rose 19.4 percent. In contrast, the DFA US Small Cap
Value fund climbed 22.7 percent ().
Note: The DFA fund, representing an index of small companies,
is only available through investment advisers.

Long-term, exhibiting what investment analysts call “the
small company effect,” these pint-sized stocks produced a
compound annual growth rate of almost 12 percent from 1925
through 2011, according to Ibbotson Associates’ 2012 Classic
Yearbook (). That compares to
about 10 percent for the S&P 500 index of large stocks,
typically over $2 billion, and about 6 percent for long-term
government bonds. Small caps are generally stocks from $300
million to $2 billion in market capitalization; mid-caps from $2
billion to $10 billion; and large caps from $10 billion on up.
Much of the small-company/value effect has been documented by
academics Kenneth French, Eugene Fama and Rolf Banz
().

Small-cap companies are rarely in the spotlight. Companies
like Lifepoint Hospitals, Westlake Chemical and
Esterline Technologies, for example, are unlikely to
steal the headlines from Exxon-Mobil and AT&T.

Do small caps always outperform large caps? No, there are
periods of time when small caps waddle along and fall on their
face – witness 2008 – but they eventually pick themselves up
again and prove their mettle. Most recently, when euro zone
anxieties jolted the market again on April 23, the S&P Small Cap
Index fell 1.6 percent in a day, compared to 0.8 percent for the
S&P 500.

Overall, small caps tend to be more volatile and pay fewer
dividends than their big brothers, so buying individual issues
always entails much more risk. Younger companies are also often
struggling to become consistently profitable.

The best way to hold small caps is through index funds,
which hold hundreds of them at low cost. Consider the Guggenheim
S&P SmallCap Pure Value ETF, which attempts to replicate
the S&P SmallCap 600 Pure Value Index. Another consideration is
the relatively new Bridgeway Omni Small-Cap Value Fund
, which follows the Russell 2000 Value Index. Want more
exposure to small-cap companies overseas? Look at the iShares
MSCI Emerging Markets Small Cap Index, which focuses on
small companies in developing countries.

When adding a small-cap fund to your portfolio, it’s best to
hold it for at least a decade, preferably longer. They should
never dominate your portfolio if you can’t afford to take much
market risk. That means if you’re retiring soon or need money
for a short-term goal such as a home down payment, don’t put
your money in a small-cap.

My wife and I, for example, are long-term investors, and we
have small-cap value funds in our core individual retirement
account portfolio. We won’t need the money for at least two
decades, so we don’t trade these funds, we just let them grow.
They are not a part of our daughters’ college-savings funds,
which we’ll begin to tap within a few years.

Small caps may get you where you need to be over time, but
they may run in a number of different directions over short
periods of time. So be mindful that swiftness and smallness are
not the same thing as safety.

CHICAGO (Reuters) – As Apple announces its 2012 second fiscal quarter earnings on Tuesday, some analysts think the stock price could hit $1,000 and the company reach $1 trillion in market capitalization. I have no idea where Apple’s price is going or what’s in its secretive product pipeline, but I suspect that even with strong recent earnings, it will eventually fall from the tree it’s on now.

What troubles me most are stunning similarities to other Wall Street darlings of the past and the ignorance of risk that owning a single stock carries. All former stars have tumbled once they fell out of investor favor – often when their profits were still robust. Here are five cautions worth considering:

1. THE MIGHTY FALL

The trajectory usually looks like this: A company with a stellar “story” is declared magnificent and graces the covers of business magazines. Expectations build, and share prices climb to lofty levels. Then the bottom drops out. This happened to any number of companies in the past decade or so – Intel (INTC.O: Quote, Profile, Research), Cisco (CSCO.O: Quote, Profile, Research), Microsoft (MSFT.O: Quote, Profile, Research), etc. Although some analysts still believe Apple is undervalued and could rise higher, that observation doesn’t always translate into a linear ascent, nor does it eliminate other risk factors.

Far too many investors buy in at extravagant valuations and typically hang on when prices fall and the companies are no longer in the spotlight. You can only remain a star for so long in the 24/7 cyber-infotainment world.

2. INVINCIBLE LEADERS LEAVE

General Electric (GE.N: Quote, Profile, Research) CEO Jack Welch owned business headlines in 1999, when he was crowned “manager of the century” by Fortune magazine. Under his stewardship, from 1981 to 2000, GE revenue soared from $28 billion to $130 billion.

Despite creating a diversified conglomerate of businesses from financial services to appliances, though, the company became less popular with investors by the dawn of the 21st century, and the stock price fell by more than half. GE now trades around $19 a share. Did the loss of their uber-leader cause the fall, or did investors simply want another superstar company to adopt? How will Apple fare in the less charismatic, post-Jobs era?

3. TORTOISES SURVIVE

Sure, Apple has some great products now, but you can’t deny the brutal global competition it faces. Remember the “must-have” phone titans of the past such as Nokia (NOK1V.HE: Quote, Profile, Research), Research in Motion (RIM.TO: Quote, Profile, Research) and Motorola (MMI.N: Quote, Profile, Research)? The more visible the technology, the more volatile it is. In 1972 a group of highfliers called the “Nifty 50″ dominated business pages. These “one-decision” stocks included Xerox (XRX.N: Quote, Profile, Research) and Polaroid.

Which companies of that era best survived technological shifts and the dismal late-’70s/early-’80s bear market? Consumer brands and pharmaceuticals were the best performers after the 1972 peak. They included decidedly unglamorous companies such as Gillette (acquired by Procter & Gamble (PG.N: Quote, Profile, Research) in 2005), Coca-Cola (KO.N: Quote, Profile, Research) and Johnson & Johnson (JNJ.N: Quote, Profile, Research). People still buy lots of soft drinks and other consumer and medical goods. As for Xerox and Polaroid, does anybody ever mention them anymore? While both companies seeded mini-revolutions, the world moved on.

4. BEWARE THE POISON FRUIT

Whether it’s an earnings disappointment, botched product or failure to outpace the competition, Apple will not be immune to worms in the future. Since it’s one of the largest constituents of the S&P 500 index, investors from Beijing to Boston are watching it closely, perhaps too closely. Expectations are major drivers of stock prices, but they can evaporate at the speed of light.

5. THE EXPECTATION CLIFF IS STEEP

Because of its gargantuan market cap – roughly larger than the entire gross domestic product of prosperous Switzerland (2011) – Apple has gained a demanding global audience. Does that mean its stock is less risky because so many people own it? The opposite is true. There’s a lot of downside that few cheerleaders talk about. It can plummet when market sentiment reverses.

Don’t mistake my observations on Apple as sourness about the stock. It may do very well and exceed expectations in the short term, although I’m always chary of the outsized risk of loading up on a single issue.

“Great companies are priced to perfection,” Larry Swedroe, author of “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” told me recently. “So there is little room for any upside surprise. If everything goes as expected, you get low returns (because of the low-risk premium). On the other hand, if almost anything goes wrong, the risk premium might rise sharply, and the stock could fall dramatically.”

How do you avoid buying stocks when they may be vastly overpriced? Consider a basket of equally weighted stocks like the Guggenheim S&P 500 Equal Weight ETF (RSP.P: Quote, Profile, Research) that spread out market risk. The PowerShares FTSE RAFI US 1000 portfolio (PRF.P: Quote, Profile, Research) takes a more fundamental approach by buying more bargain-priced stocks with dividends.

It’s always important to put every stock you own into perspective and get a more enlightened view on how best to allocate risk in your portfolio. The idea that any one company, industry or even country can indefinitely sweeten your portfolio is still rotten to the core.

(Editing by Beth Pinsker Gladstone and Prudence Crowther)

CHICAGO (Reuters) – As Apple announces its 2012 second fiscal quarter earnings on Tuesday, some analysts think the stock price could hit $1,000 and the company reach $1 trillion in market capitalization. I have no idea where Apple’s price is going or what’s in its secretive product pipeline, but I suspect that even with strong recent earnings, it will eventually fall from the tree it’s on now.

What troubles me most are stunning similarities to other Wall Street darlings of the past and the ignorance of risk that owning a single stock carries. All former stars have tumbled once they fell out of investor favor – often when their profits were still robust. Here are five cautions worth considering:

1. THE MIGHTY FALL

The trajectory usually looks like this: A company with a stellar “story” is declared magnificent and graces the covers of business magazines. Expectations build, and share prices climb to lofty levels. Then the bottom drops out. This happened to any number of companies in the past decade or so – Intel, Cisco, Microsoft, etc. Although some analysts still believe Apple is undervalued and could rise higher, that observation doesn’t always translate into a linear ascent, nor does it eliminate other risk factors.

Far too many investors buy in at extravagant valuations and typically hang on when prices fall and the companies are no longer in the spotlight. You can only remain a star for so long in the 24/7 cyber-infotainment world.

2. INVINCIBLE LEADERS LEAVE

General Electric CEO Jack Welch owned business headlines in 1999, when he was crowned “manager of the century” by Fortune magazine. Under his stewardship, from 1981 to 2000, GE revenue soared from $28 billion to $130 billion.

Despite creating a diversified conglomerate of businesses from financial services to appliances, though, the company became less popular with investors by the dawn of the 21st century, and the stock price fell by more than half. GE now trades around $19 a share. Did the loss of their uber-leader cause the fall, or did investors simply want another superstar company to adopt? How will Apple fare in the less charismatic, post-Jobs era?

3. TORTOISES SURVIVE

Sure, Apple has some great products now, but you can’t deny the brutal global competition it faces. Remember the “must-have” phone titans of the past such as Nokia, Research in Motion and Motorola? The more visible the technology, the more volatile it is. In 1972 a group of highfliers called the “Nifty 50″ dominated business pages. These “one-decision” stocks included Xerox and Polaroid.

Which companies of that era best survived technological shifts and the dismal late-’70s/early-’80s bear market? Consumer brands and pharmaceuticals were the best performers after the 1972 peak. They included decidedly unglamorous companies such as Gillette (acquired by Procter & Gamble in 2005), Coca-Cola and Johnson & Johnson. People still buy lots of soft drinks and other consumer and medical goods. As for Xerox and Polaroid, does anybody ever mention them anymore? While both companies seeded mini-revolutions, the world moved on.

4. BEWARE THE POISON FRUIT

Whether it’s an earnings disappointment, botched product or failure to outpace the competition, Apple will not be immune to worms in the future. Since it’s one of the largest constituents of the S&P 500 index, investors from Beijing to Boston are watching it closely, perhaps too closely. Expectations are major drivers of stock prices, but they can evaporate at the speed of light.

5. THE EXPECTATION CLIFF IS STEEP

Because of its gargantuan market cap – roughly larger than the entire gross domestic product of prosperous Switzerland (2011) – Apple has gained a demanding global audience. Does that mean its stock is less risky because so many people own it? The opposite is true. There’s a lot of downside that few cheerleaders talk about. It can plummet when market sentiment reverses.

Don’t mistake my observations on Apple as sourness about the stock. It may do very well and exceed expectations in the short term, although I’m always chary of the outsized risk of loading up on a single issue.

“Great companies are priced to perfection,” Larry Swedroe, author of “Investment Mistakes Even Smart Investors Make and How to Avoid Them,” told me recently. “So there is little room for any upside surprise. If everything goes as expected, you get low returns (because of the low-risk premium). On the other hand, if almost anything goes wrong, the risk premium might rise sharply, and the stock could fall dramatically.”

How do you avoid buying stocks when they may be vastly overpriced? Consider a basket of equally weighted stocks like the Guggenheim S&P 500 Equal Weight ETF that spread out market risk. The PowerShares FTSE RAFI US 1000 portfolio takes a more fundamental approach by buying more bargain-priced stocks with dividends.

It’s always important to put every stock you own into perspective and get a more enlightened view on how best to allocate risk in your portfolio. The idea that any one company, industry or even country can indefinitely sweeten your portfolio is still rotten to the core.

(The author is a Reuters columnist. The opinions expressed are his own.)

(Editing by Beth Pinsker Gladstone and Prudence Crowther)

CHICAGO, April 20 (Reuters) – By now you’re probably seasick
of hearing about the 100th anniversary of the Titanic tragedy
and the myriad analyses of why it sunk and what it means. Yet
for some of us who felt compelled to see the James Cameron movie
again – and got suckered into paying for a disappointing 3D -
we’re still looking for metaphors and analogies.

Few Titanic buffs look at how J.P. Morgan, the principal
investor in the Titanic, fared after the disaster in 1912.
Morgan was a financial emperor at the time, controlling the
Titanic’s parent company, White Star Line, as part of an attempt
to monopolize North Atlantic shipping through a trust of other
shippers he owned.

Morgan set up the White Star Line as a British-crewed
company to side-step U.S. antitrust laws. The banker, who had
canceled his trip aboard the Titanic, died in 1913. (It was said
that the ship was doomed by the ghosts of the eight Irish men
who died building it, according to my wife, who grew up a few
blocks away from where the ship was built in Belfast).

What later submerged Morgan’s shipping trust was that it was
over leveraged as it tried to control an already volatile
business that took a huge hit when World War One started in
1914. Ultimately, Morgan’s monopoly attempt failed, and his
International Mercantile Marine Co went into receivership a few
years after the Titanic sank. Like most other attempts to corner
a commodity or industry, it was an “all in” bet that
over-concentrated risk. It was the equivalent of borrowing money
to invest your entire portfolio in dot-com stocks in 1999.

Managers of the reorganized International Mercantile, which
became United States Lines during World War Two, though,
apparently hadn’t learned the lesson of spending big on mammoth
ships or outdated technologies. The company built and launched
the SS United States in 1952, the largest passenger ship built
in the United States at the time, just before the airline
industry was starting its long run to dominate long-distance
travel.

It’s more instructive to look at two of the survivors of
Morgan’s legacy, namely General Electric Co and U.S.
Steel Corp. Both companies were consolidations of smaller
companies, employed huge economies of scale and are still very
much in business after more than a century. What kept these
goliaths in business over the years? Adapting to changing
markets, technologies and diversifying their sources of income.

U.S. Steel began its life in 1901 as the largest business
enterprise ever created. General Electric was a merger of Thomas
Edison’s holdings and another company. Neither corporation made
sexy products like tablet computers or smartphones. What makes
them survivors is that they produce things that are
indispensable in modern life. Steel is a global commodity in
ever-greater demand. Electrical equipment such as transformers
and generators are still needed to make power, which is needed
in every mature and developing country.

Even though these companies have weathered intense storms
over the years, a basic rule of corporate survivorship is to
make something or provide a service that’s a virtual staple,
improve your process over time, generate cash and hold onto
dearly to market share.

Some of the least-glamorous companies, surprisingly, have
also been around for a century or more: Colgate-Palmolive,
Procter & Gamble and Church & Dwight. Who would
have ever thought that you could consistently make money
initially only producing toothpaste, consumer staples and baking
soda?

What also binds these old-timers together is the fact
they’ve been paying dividends for more than a century. They’ve
enriched shareholders and grown dividend payments over the
years. Want to find more boring companies like this? Consider
the Vanguard Dividend Appreciation ETF or the PowerShares
Dividend Achievers Portfolio.

Often the best way to avoid financial icebergs is to be
hedge disasters, don’t increase your vulnerability to them. Be
aware that markets will forever be volatile. Don’t over-invest
in one stock, industry or country. If you have most of your
wealth in your employer’s stock, that’s one huge iceberg. The
worst events are those you can’t see coming, although you can
always prepare for them.

CHICAGO, April 16 (Reuters) – Got travel or mountain
climbing on your bucket list? How about taking up the guitar? If
you really want to live life to the fullest in your remaining
days, then what you should also add to those goals is a list of
your investment priorities and adjusting your risk accordingly.

This idea doesn’t come from a cheesy Hollywood movie, but
rather from the study of behavioral portfolio theory put forward
by Nobel Prize-winner Harry Markowitz and leading behavioral
economics expert and finance professor and author Meir Statman
(). They theorize that if investors
divide their portfolios into mental account layers measured by
risk, they can counter nervous investment errors.

This is how it works: let’s say you have a $1 million
portfolio. You can divide it up into different-sized buckets
with goals for items like college savings and retirement. For
example:

* The largest bucket, or sub-account, would be for
retirement. Assume that about $800,000 is in this bucket for an
event that’s 15 years away. Ultimately, you would like to build
this to $2 million.

* Saving for college? Earmark $150,000 for a goal that’s
three years away, eventually totaling $180,000 when your student
matriculates.

* Want to fund a bequest for your alma mater or your
favorite charity? Put aside $50,000 for a goal that’s 25 years
away.

If all of these goals were equal – and they are not – you
might leave them in one portfolio. However, you want to take
much less risk with the college fund than with the bequest goal
that is 25 years away.

By marking each bucket high, low or medium risk, you’ve
identified some prospective allocations in this behavioral
approach. In this case, risk is roughly equivalent to the time
you have to save for each goal. The shorter the time horizon,
the lower the risk you can assign to the bucket.

The short-term bucket should be invested mostly in bonds or
cash equivalents in which you cannot lose principal. This is
your most secure bucket and it’s for goals such as saving for a
down payment on a home or a car, or to set aside money for a
known expenditure like property taxes. Don’t expect much, if
any, return on these funds. Federally-insured money-market
accounts, Treasury bills and certificates of deposit are
probably the safest assets.

The medium-term bucket can be for major emergency expenses
such as unemployment and out-of-pocket medical expenses. I keep
that money in a short-maturity bond fund. It’s not
principal-protected, but it pays a somewhat higher return than a
money-market fund.

A medium-term bucket is also a good place for college
savings. For the biggest chunk of college funds for my two
daughters, for example, I have money set aside in automatically
age-adjusted 529 savings plans. As they get older, the fund
company shifts more money from stocks into bonds. I like this
approach because the accounts are rebalanced every year, so I
don’t fret about market risk. All I worry about is putting
enough money in to cover soaring education bills.

Your longer-term goals can be weighted more heavily toward
stocks and alternative vehicles. Again, you can choose an
automatic approach through a target-date maturity fund that
ratchets down stock-market risk as you age, balance your own
portfolio of low-cost exchange-traded funds or hire a fiduciary
adviser to select passive funds for you (the most expensive
route).

As you create your bucket list, don’t get tripped up by
things like projected or “desired” returns. Guess on the
conservative side – less than 4 percent for bonds and 6 percent
for stocks.

It’s also important not to try to overthink your decisions.
Be flexible and try different scenarios. Use allocation engines
to guide you through determining a comfortable portfolio mix.
For some good calculators, see websites like those of Yahoo
Finance, TIAA-CREF or T. Rowe Price.

Any comprehensive financial planner who works on a fee-only
basis (no commissions) will be able to fine-tune your strategy
if your needs are complex. Brokers and insurance agents should
be avoided.

If you do this right, you’ll be able to see a range of
investing possibilities that you may not see today. There is no
one right way to go about this, but if it is done with care, you
can avoid a leaky investing bucket.