The Value Line Mutual Fund Survey

Buy Low, Sell High, Don’t Panic

During the week of October 27th– 31st, the Dow Jones Industrial Average continued its record-breaking volatility, but this time recording one of the biggest one-day gains, a 10.88% gain on October 28th, which followed another 11.08% record-breaking gain on October 13th. Even with the recent gains, the Dow is still more than 34% off its 2007 highs.

Congress passed a $700 billion rescue package to make direct purchases of bank stock and take on bad assets as a way of funding financial institutions to start lending again. Other countries, led by England, are moving forward with similar bank bailout plans. In turn, banks are being asked to make commitments to lend to business.

The International Monetary Fund (IMF), keeping in step with major countries, will offer as much as $100 billion in a new kind of loan to other countries, whose governments may need help in supporting their economies. Normally, the IMF demands that countries make sharp budget cuts or interest rate increases as a condition to making such loans. Such demands often deepen their economic downturns and make IMF loans unpopular. The IMF is not making such demands with its current loans.

The Fed has also lowered overnight openmarket rates by another half point. This second rate cut in October now brings the rate to 1%, the lowest since 1958. This reduction was accompanied by cuts in China and Norway, with several other central banks expected to follow.

The Fed also began buying commercial paper, three-month short-term corporate debt, from corporations. As of Thursday, October 30th, this amounted to about $145 billion. The liquidity the Fed provided has allowed rates on 30-day commercial paper to drop dramatically from over 5% to 2%.

Finally, the U.S. Treasury and the Federal Deposit Insurance Corporation are considering a plan that may provide around $500 billion in guarantees for troubled mortgages. Final details have yet to be announced, but three million people could be moved into more- affordable mortgages. It is estimated that more than seven million homeowners may default on their mortgages between now and 2010.

In summary, it appears that governments around the world are willing to help in many significant ways to keep our economies as healthy as possible.

For subscribers, it is clear that there is so much new information to comprehend and analyze. Using the Value Line Mutual Fund Survey and picking funds Ranked 1 and 2 should provide you with a good amount of comfort during these turbulent times. This week, I spoke to Rich from New England. Remember, Rich is married with children, and is almost 60 years young. He has participated in a 401(k) since about 1980, and has seen his account reach a peak about two years ago, and has watched it drop in value since. Of course, his greatest decline was within the last few weeks. He still contributes to it through payroll deduction, although he is uncomfortable since his contributions are offset by the decline in value of his funds. This profile could easily fit many current subscribers.

This time he didn’t call me, I called him. He was much less stressed, and felt that the Fed, Treasury, and foreign governments were doing all in their power to prevent the economy from freezing up. He had not yet put more money into his funds, but hopes to by yearend. I offer that all subscribers consider this same strategy, especially if you plan to start withdrawing beginning in 10 years. Also, all subscribers should make sure you know where you currently are, because, if your stock funds decline in value, your money market funds represent a greater percentage of your total assets.

I suggest taking about 20% of your cash and put it into the funds categories you already own. Then, with the balance of the cash you want to invest, perhaps another 20%, pick a time frame, such as six months from when you put in your first 20% cash, and buy again. If the funds are higher, you will buy less, if they are lower, you will buy more. This would be a form of dollar-cost-averaging. Also, be on the lookout for possible new funds Ranked 1 or 2, where the upside potential is far greater than lower-ranked funds.

Robert J. Adamski