What the experts say

What the experts say

The perils of chasing returns

This month, investors will be paying close attention to the year-end performance rankings, said Mark Hulbert in The New York Times. “It’s not clear, however, that anyone should change their portfolios because of them.” An investor who annually shifts his portfolio to mimic that of the top investment newsletter portfolio, for instance, can actually lose money over the long term. “Over the almost 17 years from 1991 through November 2007, this annually updated all-star portfolio would have had awful losses—amounting to an annualized decline of 24.2 percent.” Some academic studies suggest that following the year-end leaders may not be such a bad strategy for picking mutual funds. But chasing returns can add undue risk to your portfolio. “The bottom line is this: Read the lists of top performers as much as you like, but unless you are a risk taker, don’t rely on them for your investments.”

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Financials tighten purse strings

In recent years, financial companies have been among the most generous when it comes to stock buybacks and dividend payments, said Scott Patterson in The Wall Street Journal. But lately the sector has been slammed by the subprime mortgage mess. “Those financial firms are likely to be stingier in 2008, even as the overall picture for buybacks and dividends remains bright.” (Technology and energy firms are expected to keep swallowing up their own stocks and handing out cash to shareholders.) Fewer buybacks could further hurt financial stocks. “Buybacks shrank the overall supply of shares in the past few years, helping to squeeze the market higher like a tube of toothpaste.” Meanwhile, Washington Mutual, Fannie Mae, and Freddie Mac have cut dividends. Analysts predict that other industry giants will do the same.

The cost of raising kids

A child is priceless—but the average cost of raising a child to age 21 is a whopping $338,000, said Lauren Young in BusinessWeek. “Just keeping a roof over junior’s head will cost nearly $105,000 through age 18. Food will eat up $41,400, and health care will set you back $17,400 over 18 years.” Then there are the major, predictable costs, such as summer camps and, of course, college. The best way to save for these is to create a separate savings plan for each big-ticket cost. “Most Americans don’t do that,” says Dan Yu, a certified financial planner in New York. An excellent way to keep a lid on smaller expenses is to eat out less. Not only is cooking cheaper, you’ll spend time together and accumulate leftovers.