Archives for January 2007

(This is the third in my series of Model Portfolio Comparisons.)

All About Asset Allocation (my review) is written by Richard Ferri, CFA, who is also the president of his own investment advisory service. If you are interested in learning more about how each asset class interacts with one another, I definitely recommend this book. Here are two model portfolios for younger investor, one simple and one more complex.

“Early Saver” Model Portfolio – Basic

Asset Allocation for 70% Stocks/30% Bonds ratio
40% Total US Stock Market
20% Total International Stock Market
10% REIT
30% Intermediate-Term Bonds

“Early Saver” Model Portfolio – Slice-and-Dice
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What do all these asset classes in the model portfolio comparisons mean, anyways? Total Market? Large-Cap? Value? One big hurdle is that there are no set definitions for any of these classes, and each individual mutual fund can and will use it’s own interpretation. But let’s try anyways, starting with equities.

Market capitalization
Often simply referred to as “cap”, this is the company’s value as determined by multiplying the number of outstanding shares of stock by the current market price for one share.

Total US Stock Market
While the definition seems self-explanatory, there a bunch of different benchmarks used to track the entire domestic stock market on a cap-weighted basis. These all try to represent the roughly 5,000 companies currently being publicly-traded on major domestic stock exchanges.

Total International Stock Market
This theoretically includes all publicly-traded companies headquartered outside the US. As of 2005 this was over 20,000 companies, and tracking all of them is no easy feat.

The international stock market is further broken down into Developed and Emerging markets based on per-capita GDP and the maturity of the country’s stock markets. Examples of developed markets include Canada, Australia, Germany, Japan, and the United Kingdom. Examples of emerging markets include Russia, China, South Africa, and Turkey.

Further dividing both domestic and international markets are size and style considerations.

Size Classifications – Large Cap / Mid Cap / Small Cap / Micro Cap
These are tough to define, as they change over time and people rarely agree completely anyways. Here’s how they look graphically as percentages of the market cap in their geographic area:¹

By total value, here’s roughly how they break down:²
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The Motley Fool used to be a great resource for investing, espousing index funds and low-cost investing, but it is gradually becoming just a factory that churns out stock tip newsletters. Last January, they made some Stock Predictions for 2006.

Read the predictions first, or at least skim the excerpts below. Which do you agree with?

#1: Shares of Google will fall in 2006

Wall Street didn’t want to buy into Google when it went public at $85, but now that the stock trades five times higher that that, bears are hard to come by. The humbled market mavens have responded with higher price targets, but gravity always seems to be just a disappointing quarter away.

#2: Both XM and Sirius will close out 2006 higher

Just as your cable bills creep higher every year, XM and Sirius will likely be charging more in the future. Tack on premium offerings and next-generation receivers that will blow the earnings potential through the roof — by allowing for everything from digital downloads to immediate responses to sponsored pitches — and I really believe that in five to 10 years, a lot of the bears will be licking their self-inflicted wounds for missing this obvious play into a promising duopoly.

#3: TiVo will bounce back

I’m expecting TiVo shares to bounce back dramatically, possibly even into the double digits. I still believe that TiVo — rich in brand, patents, and daydreams — will find a way to matter in a form that investors will find attractive. Cool companies never die without a fight.

#4: Six Flags will be one of the top stocks of 2006

With shares of Six Flags trading in the double digits for the first time in nearly four years, the market seems to be willing to give Dan Snyder and ESPN prodigy Mark Shapiro better than a fighting chance to turn the regional amusement-park operator around.

The stock may have tripled since bottoming out last year, but that doesn’t mean the value of the company has tripled. This is an important distinction to make. Because the company’s balance sheet is packing $2.1 billion in debt, the enterprise value of Six Flags has actually risen by just a little better than 50% to $3.5 billion. That’s the beauty of leverage in a turnaround situation: The stock can double here in 2006, growing sixfold in two years, yet the company’s enterprise value will have only doubled in that time.

Now, if you tracked these stocks this year you may already know which were right…
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