MONEY Warren Buffett

Inside Buffett’s Brain

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Warren Buffett Ben Baker—Redux

Math-minded researchers are attempting to distill the mind of the world's greatest investor. Even if they fall short of replicating Warren Buffett's craft—and they will—there are good lessons here about what it takes to beat the market.

Warren Buffett isn’t merely a great investor. He’s also the great investor you think you can learn from, and maybe even copy (at least a little).

Buffett explains his approach in a way that makes it sound so head-smackingly simple. The smart investor, he wrote back in 1984, says, “If a business is worth a dollar and I can buy it for 40¢, something good may happen to me.” This is particularly true if you add an eye for quality.

Buying good businesses at bargain prices — that sounds like something you could do. Or hire a fund manager to do for you, if you could find one with a fraction of Buffett’s ability to spot a great deal. Of course, the numbers say otherwise. The vast majority of U.S. stock funds fail to beat their benchmarks over a 15-year period.

Buffett’s long-run record makes him a wild outlier. Since 1965 the underlying value of his holding company, Berkshire Hathaway, which owns publicly traded stocks such as Coca-Cola THE COCA COLA CO. KO -0.0117% and American Express AMERICAN EXPRESS CO. AXP 0.035% , as well as private subsidiaries like insurance giant Geico, has grown at an annualized 19.7%. During the same period the S&P 500 grew at a 9.8% rate.

Buffett is “a very unexplained guy,” says Lasse Heje Pedersen of Copenhagen Business School in Denmark. But instead of chalking up Buffett’s success to what Pedersen calls Fingerspitzengefühl—German for an intuitive touch—the professor is out to explain the man through math. His research is part of a push among both academics and money managers to quantify the ingredients of investment success. The not-so-subtle hint: It may be possible to build, in essence, a Buffett-bot portfolio. No Oracle required.

In an attention-getting paper, Pedersen and two co-­authors from the Greenwich, Conn., hedge fund manager AQR claim to have constructed a systematic method that doesn’t just match Buffett, but beats him (Pedersen also works for AQR). This is no knock on the man or his talents, they say. Just the opposite: It proves he’s not winging it. Meanwhile, other economists say they have pinned down a simpler quantitative way to at least get at the “good business” part of Buffett’s edge.

A dive into this quest to decode Buffett, 83, certainly can teach you a lot—about Buffett’s investing and your own. Yet this story isn’t just about what makes one genius tick. It’s also about how Wall Street is using modern financial research, especially the hunt for characteristics that predict higher returns, to sell you mutual and ­exchange-traded funds. If you wonder how the world’s greatest investing mind can be distilled to a simple formula, you’re right to be skeptical. That’s one message even Buffett himself (who declined to comment for this story) would most likely endorse.

The Buffett equation starts with value, but not “bargains”

The AQR authors say a big part of “the secret behind Buffett’s success is the fact that he buys safe, high-quality, value stocks.” Hardly a surprise, since Buffett has been called the “ultimate value investor.” But the truth is that Buffett is no classic bargain hunter. Can an equation replicate this fact?

In his Berkshire shareholder letters, Buffett often writes about the influence of Ben Graham, his professor at Columbia. Graham is considered the father of value investing, a discipline that focuses on buying a stock when it is cheap relative to some measure of the company’s worth. Graham especially liked to look at book value, or assets minus debt. It’s what an owner would theoretically get to keep after selling all of a company’s property.

Economists have come to back this idea up. In the 1990s, Eugene Fama and Kenneth French showed that stocks that were cheap vs. book provided higher returns than old economic models predicted. (Fama shared the Nobel Prize for economics in 2013.)

Buffett certainly buys his share of textbook value plays: Last year Berkshire snapped up the beaten-down stock of Canadian energy producer Suncor SUNCOR ENERGY SU -0.6001% at a price that was just a little above its book value per share. (The typical S&P 500 stock trades at 2.6 times book.) But since 1928, a value tilt would have brought investors only an extra percentage point or so per year. There’s more to Buffett than the bargain bin.

Buffett says so himself. He likes to cite the maxim of his longtime business partner, Charlie Munger: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” In his 2000 shareholder letter, Buffett wrote that measures including price/book ratios “have nothing to do with valuation except to the extent they provide clues to the amount and timing of cash flows into and from the business.” A stock being cheap relative to assets helps give you what Graham called “a margin of safety,” but what you really want a piece of isn’t a company’s property but the profits it is expected to produce over time.

Those anticipated earnings are part of what Buffett calls a company’s “intrinsic value.” Estimating that requires making a smart guess about the future of profits, which Buffett does by trying to understand what drives a company’s business. His arguments (at least his public ones) for why he likes a stock usually involve a straightforward story and are arguably a bit squishy on the numbers. Coca-Cola has a great brand, he says, and has customers who are happy to drink five cans a day.

“The best buys have been when the numbers almost tell you not to,” he said to a business school class in 1998. “Then you feel strongly about the product and not just the fact that you are getting a used cigar butt cheap.” Some economists, though, think there may be a way to get the numbers themselves to tell the story.

Predicting wonderfulness

Since the discovery of the value effect, as well as a similar edge for small companies, academics have looked for other market “anomalies” that might explain why some stocks outperform. The AQR team thinks that a trait it calls “quality” might explain another part of Buffett’s success. Their gauge of quality is a complex one that combines 21 measures, including profits, dividend payouts, and growth, but a lot of it certainly rhymes with what Buffett has said about the importance of future cash flows.

A better Buffett

There may be a far simpler way to get at this. Last year the University of Rochester’s Robert Novy-Marx published an article in the influential Journal of Financial Economics arguing that something called a company’s “gross profitability” can help explain long-run returns. He says a theoretical portfolio of big companies with a high combined score on value and profits would have beaten the market by an annualized 3.1 percentage points from 1963 through 2012.

Novy-Marx’s gross-profit measure is sales minus the cost of goods sold, divided by assets. That is different from the earnings figures most investors watch. It doesn’t count things like a company’s spending on advertising or a host of accounting adjustments, which might be important to Wall Street analysts trying to grasp the inner workings of a single company. “I view gross profits as a measure that is hard to manipulate and a better measure of the true economic profitability of a firm,” Novy-Marx says.

In a recent working paper he also suggests that gross profits may be an indicator a company has a quality prized by Buffett: a wide economic “moat.” Businesses with this trait (say, Coke’s brand) enjoy a competitive advantage that helps them defend their high profits against the competition.

Recently Fama and French confirmed that a profit measure similar to Novy-Marx’s also seemed to work. All of which adds to the case that Buffett’s value-plus-quality formula makes sense. But it doesn’t exactly describe what’s in the Berkshire portfolio.

A risky take on safety

AQR believes that there’s one more anomaly that Buffett exploits: safety. Here again, though, Buffett relies on a very particular kind of safety. Stocks that fall less in downturns—“low beta” is the ­jargon—are likely to be underpriced, says AQR. It has to do with investors’ reluctance to use borrowed money, or leverage in Wall Street parlance. When they want to increase potential returns, most investors don’t turn to leverage to amp up their market exposure. Instead, they buy riskier, “high beta” equities. That drives up the valuations on shares of high­fliers, giving cheaper, low-beta stocks an edge.

It’s unlikely Buffett ever asks what a stock’s beta is. (He often pokes fun at beta and other Greek-letter notions.) Still, he does tend to shy away from many of the glamour stocks bulls love. He famously avoided, for example, the Internet bubble of the late 1990s. “A fermenting industry is much like our attitude toward space exploration: We applaud the endeavor but prefer to skip the ride,” he wrote in 1996.

Don’t mistake Berkshire Hathaway for a safe stock, though. From the summer of 1998 through early 2000, Pedersen and company note, Berkshire shares fell 44% while the market rose 32%. What explains that? First, low beta doesn’t mean an investment won’t lose money—just that it won’t fall sharply in step with the market. (Gold, for example, is volatile but has a low beta to stocks.) Second, Berkshire concentrates on a fairly small group of stocks with big bets on certain industries, such as insurance. So if one sector stumbles, it has a large effect on the entire company.

Then there’s leverage, which Buffett isn’t afraid of. The AQR team says Buffett is a smart user of other people’s money, which increases Berkshire’s gains but can also magnify losses. This part of Buffett’s advantage also happens to be the one that would be hardest to replicate.

A big chunk of the Berkshire portfolio is in insurers it wholly owns. As Buffett has explained, this is an excellent source of cheap leverage. Insurers enjoy a “float”—they take in premiums every month but pay out only when someone crashes a car, gets flooded, or dies. For Berkshire, says AQR, this historically turned out to be like getting a loan for 2.2%, vs. the more than 5% the U.S. government had to pay on Treasuries over the same period.

Buffett was able to combine this cheap debt with another unique advantage: Even in down periods no one ever forced him to sell stock at fire-sale prices. Fund managers, on the other hand, face that risk all the time, and the ones who use borrowed juice have to worry about being hit by a cash crunch in a bad market. To simulate Buffett’s strategy in a far more diversified portfolio, the AQR model levers up 3.7 to 1, vs. Berkshire’s 1.6 to 1. As it turns out, it’s easier to build a Buffett portfolio in theory than to run a company like Berkshire in real life.

And Pedersen admits that quants can only hope to say what it looks like Buffett did. They can’t describe how his neural wetware figured it all out. “People say, ‘That’s not how Buffett does it,’ ” says Pedersen. “We agree. We don’t think that’s how he looks at it.” When Buffett bought Burlington Northern Santa Fe outright a few years ago, he was making an entrepreneurial bet on rising oil prices, reasoning that trains use less fuel than trucks. Great story. Hard to stick into a quantitative model.

1 Exp Buffett

Here come the robofunds

Finding factors that beat the market isn’t just an academic exercise. There is a huge rush to create funds exploiting one or another stock market anomaly. AQR, for instance, has launched funds using both low-volatility and high-­quality screens. Dimen­sional Funds, which runs low-cost index-like portfol­ios, has added a profitability tilt to some funds. (Novy-Marx recently began consulting for Dimensional.)

A trio of researchers at Duke has counted up to 315 new factors that have supposedly been discovered by academics, with over 200 popping up just in the past decade. They can’t all work—and the Duke team says that it is statistically likely that most of them won’t. What those factors all have in common is that they were discovered by looking backward.

Winning with Warren

As Joel Dickson, an investment strategist for the index fund giant Vanguard, says, “Predicting the future is a lot harder than predicting the past.” A cynic can easily mine past data for patterns. To dramatize that effect, Dickson put together data showing you could double the market’s return just by picking S&P 500 stocks with tickers starting with the right letters of the alphabet. If you like Buffett, try the WARREN stock portfolio above—click the image above to enlarge. (It “works” largely because holding stocks in equal proportion means a bigger bet on smaller companies, which happen to have had a good run.)

“Data mining is hugely pernicious, and the incentives to do it are high,” acknowledges Novy-Marx. He says profitability is nonetheless an unusually strong effect and simple enough that it’s not easy to game. Pedersen, likewise, says the safety factor is grounded in theory going back to the 1960s. In the end, though, you can never know whether what worked in the past will keep working in the future.

So what do you do with all this? Samuel Lee, an ETF strategist at Morningstar, says some of these new factors look promising. He has even called this a “come-to-Buffett moment” for academic finance. But he says it’s important to go in with modest expectations. Strategies that have had success are likely to look more average over time, especially once they are publicized and people trade on them. “Your main protection is just to keep fees low,” he says. “You can’t pay up for these factor tilts.” He says a factor-based fund charging as little as 0.70% of assets per year could easily see most of its performance advantage consumed by fees.

The quest to replicate Buffett’s strategies may be an attempt to improve the chances of success for active management. In the end, though, it helps illustrate how hard it is for most professional managers to truly outperform. Put simply, “Should a value manager be getting credit for having a value tilt in a value market?” asks Dickson, rhetorically. Likewise, if a combo of value, profits, and safety can explain a lot of what even the most dazzling managers do, and if it gets easier to simply add more of those elements with low-cost index funds, the fees of 1% or more that many active funds charge are hard to justify.

In short, it may not be worth it for you to try to find the next great money manager. This is a point that Buffett himself has made time and again. In a 1975 letter to Washington Post CEO Katharine Graham, he wrote, “If above-average performance is to be their yardstick, the vast majority of investment managers must fail. Will a few succeed—due to either chance or skill? Of course. For some intermediate period of years a few are bound to look better than average due to chance—just as would be the case if 1,000 ‘coin managers’ engaged in a coin-flipping contest.”

Of all the investment insights that Buffett has laid out over the years, perhaps the most widely useful one is found in his latest Berkshire shareholder letter. There, he says, his will leaves instructions for his trustees to invest in an S&P 500 index fund.

MONEY financial advisers

Why I Talk Philanthropy with Clients

A financial adviser who once kept mum about her philanthropic investments explains why she isn't shy about them now.

I never used to bring up with clients the subject of philanthropy.

Since 2005, my husband and I had been personally investing in “high social-impact investments,” but I hadn’t been talking about them with the people who came to me for my financial planning services.

Philanthropy was too personal of a topic. Whether clients donated money or not was their private matter.

And, as a financial adviser, I certainly wasn’t going to recommend any investments that earned such negligible returns–say, only 0.5% annually–no matter how much good these investments did in the world.

Then, in 2009, someone hired me to help her outline a thoughtful approach to philanthropy. That invitation tipped off a series of conversations about what she wanted. We went far beyond talking about identifying charities, how much to give, and the pros and cons of establishing a donor advised fund.

These discussions made me realize that I had been holding out on my clients. I saw that I had been making a decision for them about whether or not they wanted to invest in something with low returns but a high social impact. In doing so, I was denying them the deeply meaningful connection that I personally experienced.

I learned then, all over again and in a new light, what I already knew to be true: My obligation as an adviser is to hear what my clients want, to explore their options with them, and to help them implement the decisions they deem best. Sometimes that decision is to allocate a defined portion of an investment portfolio to high-impact investments.

A few years and many conversations later, I’ve learned to let go of the label “philanthropy.” Fundamentally, the conversation is about what people want to do with their money, and sometimes that means investing a clearly defined portion of the portfolio purely for social impact.

That may mean making a peer-to-peer loan, investing via a grassroots organization that supports local farmers, or being a seed investor in a local start-up. It might be an intentional decision to re-route a portion of the dollars clients had been donating to charities and instead choosing investments which lend those dollars to people who need access to capital.

Interesting in talking about this type of philanthropy with your clients? Here are two useful resources for finding high social-impact investments:

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Jennifer Lazarus is a certified financial planner and the founder of Lazarus Financial Planning, an independent, fee-only firm specializing in the financial planning needs of socially responsible investors in their 20s to 50s. She most enjoys helping people reach a place of empowerment and financial calm.

MONEY financial advisers

The Investing Client Who Wouldn’t Let Me Invest

What do you do when someone hires you to invest her portfolio — and then won't let you invest her portfolio? For starters, you send her 80 reports over 13 months.

My client finally spoke the words I thought I would never hear: “I would really like to get those trades in gear,” she said.

It had been 13 months since she opened her account with my investment advisory firm. In all that time, she would not agree to any major changes in her portfolio. Faced with big decisions, she wanted to discuss them. She couldn’t focus on them. She had to research them. She put us off. No trades.

Essentially, she was paying us fees for a job she wouldn’t let us do.

Was it an issue of control? I didn’t think so. A successful architect, she came to us because, she said, her portfolio was getting too big to handle. She wanted to hand it off.

She’d done pretty well investing on her own. Her portfolio was reasonably diversified. But when we asked her why she chose this or why she held that, it became clear she saw patterns that weren’t there.

If a fund performed well for five years, then fell off the charts for the next three years, she believed it would do well again, and she would wait—even if that meant years of underperformance. If her fund was a winner, no other fund should be considered—not even ones that had less risk, charged lower expenses, or performed better. Everything she held, she loved.

No amount of analytics, discussion…nothing would change that. Of course, I didn’t figure this out, and I worked hard to change her mind. I pumped out charts and sent copies of articles. We’d meet, exchange emails, and talk time and again about portfolio constructions. I’m not exaggerating: I sent her more than 80 reports as part of my effort.

I should have seen what was going on: She was uncomfortable. She was wary about making changes—about going headlong into new asset classes or new funds. She handled complex building projects every day, down to the nuts and bolts. But she kept saying she couldn’t get her mind around all these investing ideas that were so new to her. She was in a bit over her head, and she didn’t like that at all.

I eventually told her that was what investing is like. If you have a reasonably diversified portfolio, something will always be your favorite and something will always be the dog you wish would wander off. She just had to get used to being uncomfortable with the market—but comfortable with me as I steered her through it.

One day, she decided she was. And then she said we could make the trades I had wanted to make for a year.

Behavioral economists would see my client’s reluctance to trade as an extreme example of projecting the past into the future. That’s one of the ways that the intuitive human mind works. Another intuitive leap people make is to think that if they’ve been right once, they will be right again. That’s why clients so often ask why they should have to sell a winner. It’s their intuition. Intuition, though, isn’t a great tool for managing portfolios.

In all this, I gained a healthy respect for the mental gymnastics it took for this new client to become a good client. The ushering-in process can be hard. I should have paid more attention to what she was going through to reach me, rather than to what I was doing to reach her.

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Harriet J. Brackey, CFP, is the co-chief investment officer of KR Financial Services, a South Florida registered investment advisory firm that manages more than $330 million. She does financial planning and manages clients’ portfolios. Previously, she was an award-winning journalist covering Wall Street, with stints at Business Week, USA Today, The Miami Herald and Nightly Business Report.

MONEY Financial Planning

Serving a Client, Even After His Death

What's true financial planning? Helping someone achieve his hopes and dreams, even if he's no longer alive.

Ron was in his 70s when he first came in to ask about engaging my services. He said, “My wife is upset. She’s lost faith in my ability to run our finances.”

He handed me the latest statement of his retirement portfolio. I had a pretty good idea of what I was about to read. It was October 2002. The stock market was at a low after the Internet bubble. Portfolios I was seeing from potential clients were down as much as 80%, especially those with heavy investments in technology and dot-com startups.

To make matters worse, many of those with large losses had panicked and jumped out of the market, basically locking in their losses for a lifetime. I feared that was the case here, but I was wrong. Ron had actually done well. He had a broad diversification of small to large companies, with a nice smattering of international stocks.

I told him, “Ron, you have done a great job of managing this portfolio. We can certainly lower the volatility by broadening the assets, but I couldn’t have done better on the equity portion.”

Ron looked at me in disbelief. “Really?” And then he began to cry. No one had ever affirmed his investing skills before.

Ron and his wife Ruth did become clients. Ron was relieved to turn over responsibility for their investments. Over the years, I helped them with their estate planning, helped them shop for insurance, and made sure that they had enough cash flow to live comfortably. In one memorable meeting, we discussed their ability to continue to live independently; that conversation resulted in their decision to move to an assisted-living center.

When I met with Ron and Ruth in the summer of 2008, the economy had once again started turning downward. At that time, stocks were down about 15%. Because Ron and Ruth’s portfolio was broadly diversified, it was doing better than that.

Ron, now in his 80s, mentioned that a recurring kidney infection was zapping his strength. When Ruth left the room briefly, he told me, “I don’t think I’m going to make it through this sickness. I want you to take good care of my wife.”

I was a bit taken aback by this. Still, I assured him that if he were to die I would certainly take good care of Ruth.

A month later, Ruth called to tell me Ron had passed away. He had recovered from the kidney infection, but had died from a sudden heart attack. I was shocked, and I immediately recalled his prediction in our last conversation.

Ruth and I continued working together. Every time we met, it seemed that Ron was present. As her portfolio recovered from the crash of 2008-2009, I would often say, “Ron would be pleased.” I felt a special sense of mission and a deep satisfaction that I was upholding my promise to him.

A few months ago, at age 92, Ruth was diagnosed with Alzheimer’s. Her children moved her to an appropriate facility, and I never saw her again.

Recently, Ruth died. Her children asked me to liquidate her account and distribute the proceeds in accordance with her will. I did so with some sadness. My role in Ron and Ruth’s life was over.

I recently told this story to a friend, who said, “You’ve just described real financial planning.”

Indeed. Financial planning is about far more than asset allocation, investment returns, and estate planning. It’s about being the torch holder for clients’ hopes, dreams, and well-being. It’s about a relationship that can even extend beyond a client’s lifetime.

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Rick Kahler is president of Kahler Financial Group, a fee-only financial planning firm. His work and research regarding the integration of financial planning and psychology has been featured or cited in scores of broadcast media, periodicals and books. He is a co-author of four books on financial planning and therapy. He is a faculty member at Golden Gate University and the president of the Financial Therapy Association.

MONEY Investing

Thinking About Becoming a Landlord? Avoid These 6 Rookie Mistakes

For Rent sign
Zachary Zavislak

Putting your property up for rent can be tricky. Here’s how to sidestep six of the most common blunders.

Ever considered becoming a landlord? There are plenty of reasons you might. For some, it’s the temptation to scoop up a cheap property before the last of the deals vanish. Or maybe you’re like the 39% of homebuyers who told real estate firm Redfin that they’re interested in renting out their old place. Then there’s the lure of steadily escalating rents. The cost of renting the typical single-family home or apartment rose 4.5% in the past year, and spiked by more than 10% in the hottest areas, according to Trulia.

Becoming a landlord can be a profitable move, but learning the ropes requires some effort; it’s easy to take a misstep and end up in the red. “It’s not a passive investment, like putting your money in a mutual fund,” says Robert Cain, founder of landlord resource site Rental Property Reporter. Below, six slip-ups frequently made by newbie landlords, and strategies that will help you avoid making the same mistakes.

No. 1: Underestimating costs

You’ll most likely account for your insurance, taxes, and if you have one, mortgage. But you might miss expenses such as water, garbage, gardening, and regular repair and upkeep tasks. Even riskier, you may fail to put aside a large enough pot for unexpected expenses and big-ticket items. “Mom-and-pop investors tend to skimp on reserve and emergency funds,” says John Yoegel, author of Perfect Phrases for Landlords and Property Managers.

For a realistic estimate, plan for annual costs (not including your mortgage) to run at least 35% to ­ 45% of your yearly rental income, says Leonard Baron, who runs the real estate investor website ­ProfessorBaron.com. When calculating future income, it’s a good rule of thumb to include only 10 or 11 months of payments per year. After all, whenever a tenant moves out, you’ll still be stuck with expenses.

Parsing Rising Rents

No. 2: Breaking the law

Tenant and landlord laws vary from state to state and even city to city. For example, in some areas, you can require a month-to-month tenant to move out within 15 days, while in others you must give him 60 days’ notice. Yet when real estate site Zillow quizzed landlords on basic rental laws, the average respondent missed at least half the questions. One easy way to avoid getting into legal hot water: Never buy generic lease or other tenant forms, which don’t account for local laws, from a general real estate site or a big-box store, says Cain. To get the skinny on what’s permitted in your town, talk to your local or state landlord or apartment owners association. These groups usually cost at least $50 to join.

You know that federal law prohibits you from denying a rental to someone based on race, religion, or gender. Keep in mind that it also means that you can’t advertise a place as perfect for female roommates or specify no kids. You may, however, include a cap on the total number of occupants or ban pets.

No. 3: Skimping on vetting prospective tenants

When you’re looking for a good renter, it’s not enough to trust your instincts, or even to go on a referral from a friend. “Landlords get in trouble when they are in a hurry to find tenants and when they feel sorry for someone,” says Cain.

Never rent your property without checking the prospective tenant’s credit, confirming the source and amount of income, and checking in with the current and previous landlords, he says. Look for income to run at least 2½ times annual rent. Sites such as E-Renter.com and MySmartMove.com provide credit and background details for around $25.

No. 4: Ignoring renters insurance policies

Landlord policies cover the structure of the home, your appliances, and liability in case of injuries or property damage. Not on this list? The tenant’s stuff. You may think that’s not your problem, but Michael Corbett of Trulia warns that renting to one of the 65% of tenants who lack a policy can cause problems if something goes wrong. “Tenants lash out when they realize they aren’t being compensated,” he says.

In places where it’s legal, such as California, he recommends requiring that renters purchase a policy (go to your local landlord association to check the law in your state). This may shrink your pool of potential tenants, but is likely to increase the odds that you end up with someone responsible. If that’s not an option, be sure to explain to your tenant that you are not covering his things, and suggest he buy his own insurance.

No. 5: Failing to check out the property regularly

Don’t count on your renter to tell you about problems. “A tenant will complain about an inconvenience, such as plumbing issues, but not necessarily something like broken rain gutters that can produce major problems down the road,” says Yoegel. What begins as a dripping pipe or watermark on the ceiling can quickly swell into a multi-­thousand-dollar repair if left unaddressed. “Water damage is a big one,” says Corbett. “It can be outrageously expensive to fix.”

While you must respect your tenant’s privacy and cannot legally enter the residence without advance notice, you should find a way to take a regular look at the property. One solution: Add a clause to the lease specifying that you or your property manager will inspect the home at least every six months. It’s also a good idea to drive by the place once a week or so to look for exterior trouble spots. Finally, swing by anytime work is being done; you can verify that the job goes as you see fit and take a quick glance around for other potential issues.

No. 6: Going DIY at tax time

The tax treatment of rental properties is nothing like that of your home, and keeping it all straight is nearly impossible for novice landlords. The rules of depreciation are a prime example. The IRS requires that you take a deduction for wear and tear on the property each year. However, “the rules say depreciation is ‘allowed’ or ‘allowable,’ so people assume it’s optional,” says Cindy Hockenberry of the National Association of Tax Professionals. If you don’t claim the deduction for depreciation, you’ll miss a yearly tax break. Then, when you sell, the IRS requires you to retroactively depreciate the home, and that’s likely to leave you with a larger-than- expected tax bill. Not tricky enough? Starting this year the government “complicated” the regulations about what types of repairs you can deduct annually, says Hockenberry.

The bottom line? Get a professional’s help—at least for the first year or two until you fully understand the rules. And don’t forget to keep receipts for everything: You can deduct all the costs involved in managing your property, including the mileage for all those drop-bys.

MONEY A Pick From A Pro

For Lions Gate, The Hunger Games is Only the Appetizer

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Jennifer Lawrence stars as Katniss Everdeen in The Hunger Games: Catching Fire Murray Close—Lionsgate

So says Federated Investors' Lawrence Creatura. The studio's next challenge: parlaying its hits into franchises for years to come.

The Pro: Lawrence Creatura, co-manager of the Federated Clover Small Value fund

The Fund: Federated Clover Small Value invests in shares of undervalued small- and medium-sized U.S. companies. Under Creatura, the fund has beaten more than 70% over the past 15 years.

The Pick: Lions Gate LIONS GATE ENTERTAINMENT CORP. LGF -0.0312%

The Case: Lions Gate has gone from a bit player in Hollywood — a decade ago it was mostly known for small, independent films such as Dogville and Monster’s Ball — to the king of the young-adult heroine blockbuster.

The film and TV production company purchased Summit Entertainment, which included the Twilight franchise and library rights, in 2012. Throw in The Hunger Games and Divergent, its newest franchise, and you have potentially more than 10 films and dozens of branding opportunities going forward.

In television, Lions Gate also has big hits on its hands such as Netflix’s Orange is the New Black and AMC’s Mad Men. Such shows have helped the production company increase revenue by 66% since 2011.

There is a downside, though, to hitting the big time: Investors constantly want to see big results. And when the company announced late last week that revenues had fallen in the recently ended quarter and fiscal year, the stock lost more than 10% of its value in a day.

Nevermind the fact that in its most recent fiscal year, Lions Gate had only 13 wide release films compared to 19 in the prior year — and that the most recent quarter only included about 10 days worth of Divergent’s box-office.

Federated’s Creatura says investors misunderstand the nature of Lions Gate’s business. “They think it’s a hit-driven volatile business,” he says, “when it has a portfolio of evergreen property which will produce dependable cash flows for years and years and years to come.”

These are franchises such as Twilight, The Hunger Games, and Divergent, which just started filming its sequel.

The Hits Go On
Lions Gate’s dive into young adult franchise films gives the company a seemingly endless number of movies to produce. “The first Hunger Games starts with the 74th annual Hunger Games — what happened to the first 73?” asks Creatura.

And if Lions Gate decides to make 73 prequels, there’s reason to think they’ll be profitable. The most recent Hunger Games, for instance, took home more than $860 million in theaters, per BoxOfficeMojo.com, and cost $130 million. Divergent made more than $266 million and cost just $85 million.

Not only are Lions Gate films profitable, they generate a ton of so-called free cash flow, which is the amount of money left after paying all the bills and making all necessary investments in the business. (See the chart below.)

Lions Gate Free Cash Flow Yield
Lions Gate’s free cash flow yield beats that of rival Dreamworks Animation

Relative Value
Lions Gate is a play on fast growth. But that doesn’t mean the stock is necessarily expensive, says Creatura. Lions Gate’s price/earnings ratio based on estimated profits, for instance, is 20.3. That’s not considered cheap, but compare that to the 33.3 P/E for Dreamworks Animation. Plus the company’s earnings are expected to grow 17% annually for the next five years.

“The stock is not expensive if you consider the likelihood and longevity of future cash flow,” says Creatura. “These properties are evergreen – they can be reused and reformed again and again.”

Box office risks
While Lions Gate may have valuable franchises in the canon, there is a limit to what one brand can get you. Is Lions Gate more than The Hunger Games?

Divergent did perform well, but took in about a third of the box office of the first The Hunger Games film. Ender’s Game, another book based on a young adult novel (although this one featuring a male lead), failed to develop an audience and only made $125 million worldwide –limiting it’s potential for a viable franchise.

Ender’s Game wasn’t the blockbuster that some believe it could have been and that hurt the perception of the stock,” says Creatura.

MONEY College

Are You Ahead of Your Peers on College Savings?

140529_FF_529_1
Happy 529 Day! Sarina Finkelstein/bravo1954—Getty Images

A new report shows that 529 accounts are growing, but that investors are shying away from stocks.

Americans have a record high college savings level of more than $230 billion, and are adding to that at a rate of about $700 million more every month in 2014, some recent studies have show.

That sounds like a lot of money—until you consider that there are more than 82 million Americans under the age of 20. So overall Americans have saved just $2,800 per youngster, and the average amount set aside annually per kid divides out to just a hair over 100 bucks.

But in a special report issued on May 29 in honor of 529 Day, Morningstar pointed out some hopeful news. At least Americans are paying less to have their college savings invested in 529 plans. The fund companies with the lowest fees now have the biggest market share, Morningstar says.

Plus, competition is forcing most 529 managers to cut their fees, says Kathryn Spica, a senior analyst at Morningstar and author of the report.

Related: College Savings Cheat Sheet: It’s As Easy As 5-2-9

That’s good for investors, since research shows that low-fee funds tend to outperform more expensive competitors over the long term.

“There are a lot of positive signs,” Spica says.

However, Morningstar also found that investors have lately been opting for more conservative investment options. And that’s not a positive for everyone.

529safetyb
SOURCE: Morningstar

Protecting assets when your children are older—or when stock valuations are high, as they are today—is sensible.

But parents saving for younger children, who thus have many years to ride out stock market corrections, would do better to invest aggressively. As the Morningstar report showed, the average 529 conservative allocation tallied an annual return of 8.4% a year from 2008 through 2013. More aggressive funds have risen faster—about 14.4% a year over the same period.

Related: How much do you need to save for college?

Additionally, in a 2012 paper, Vanguard found that over 18 years, investors who start out aggressively and smoothly taper down their equity holdings are likely to end up with significantly higher college savings. (See especially Fig. 4.) Investing $1,000 a year aggressively early on results in an average balance of $40,000 after 18 years, versus $27,000 for conservative investors.

James Dahle, a Salt Lake City area emergency physician who has started 15 529s—for his three children and 12 nieces and nephews—says that one of the main advantages of 529 plans is that investments can grow tax-free. So investors who put their 529 savings in, say, bonds, which won’t grow very much, lose out on one of the biggest advantages. “The more you earn, the more you save on taxes,” says Dahle, who blogs about his investments at WhiteCoatInvestor.com.

MONEY early retirement

I Retired At 50—Here’s How

It is possible to retire early—if you live below your means and stick to a detailed budget. You can even splurge once in a while on things that really matter to you.

What does it take to retire early, or to retire at all? How much do you need to save before you can make the leap? And once you’re retired, how will you manage your investments for reliable income?

Almost everybody faces these questions eventually. If you’re thinking about them sooner than later, then you’re ahead of the game. Those with successful careers and a taste for simple living have the best options. That was my situation: Instead of climbing further up the corporate ladder, or inflating my lifestyle, I retired at age 50.

How did I do it? I was fortunate to grow up in a military family where I learned integrity, economy, and the value of hard work. In college I earned an engineering degree, discovered personal computers, and taught myself to program. Eventually I started my own small software company, which I merged with another, and helped grow into a larger company.

But I’m not a dot-com millionaire. I didn’t become financially independent from selling a business or flipping real estate or trading hot stocks. I did it the traditional way: hard work, frugality, prudent investing, and patience. Financial independence was a slow process: I began serious saving and investing in my mid-30′s—maxing out my retirement contributions, invested raises and bonuses—and ultimately it paid off in early retirement.

Along the way, I had the help of some wise financial mentors, and my wife Caroline, who, like me, has always been happy living below our means. We ignore what other people are buying, and splurge in the few areas that matter to us. I track our expenses and keep a detailed budget. We can number on one hand the times we didn’t pay off credit card balances in the same month, and it’s been decades since we had a car loan. We paid off our house early too. Even when it might make economic “sense” to borrow, we don’t, favoring the simplicity and security of living debt-free.

In my investment portfolio, I also focus on simplicity and accountability. After some early detours, I’ve resisted the urge to pick stocks or chase the latest hot idea. The bulk of our portfolio now consists of just 10 holdings (all low-cost mutual funds or ETFs) in just two accounts. I’ve tracked our net worth for many years, and calculated our overall portfolio return each year, so I would understand if we were going in the right direction, and why or why not.

At heart, I’m still an engineer. When it comes to managing money, my top priorities are simplicity, reliability, and safety. Now my mission is to help others get on track to financial freedom, through my blog and other writing about personal finance. Whatever your starting point—whether you’re just leaving school, working to get out of debt, or building your retirement savings—you can reach financial independence sooner by using the principles I’ll discuss here.

In the months ahead I’ll be drawing on my experience plus some of the latest research to explore strategies for saving, investing, and retiring earlier. My favorite topics include saving big, cheap travel, passive index investing, retirement calculators, and early retirement lifestyles. You’ll get my best tips and lessons learned—first-hand knowledge for becoming financially independent and retiring sooner in the real-world. So stay tuned!

__________________________________________

Darrow Kirkpatrick is a software engineer and author who lived frugally, invested successfully, and retired in 2011 at age 50. Now he writes regularly about saving, investing, and retiring on his blog CanIRetireYet.com. This column will appear monthly.

More from Darrow Kirkpatrick:

The One Retirement Question You Must Get Right

How to Figure Out Your Real Cost of Living in Retirement

4 Secrets of Financial Freedom

MONEY

Are Stocks Overpriced?

James Montier (L) says stock returns won't keep up with inflation over the next seven years. Richard Bernstein (R) thinks the five-year-old bull market has several more years to run. Photos: joe pugliese

Facing a stock market that has doubled in price over the past five years—and with memories of the last market collapse still vivid—you can’t help but wonder: Is another disaster lurking around the corner?

Holding vastly different opinions are two strategists with decades of insight and experience. Richard Bernstein, former chief investment strategist at Merrill Lynch, now an adviser to funds for Eaton Vance, is bullish. James Montier, who helps manage $117 billion at GMO — itself an adviser to two Wells Fargo funds — is bearish.

Both make strong arguments — ones that may challenge your view of today’s investing climate.

THE BULL: RICHARD BERNSTEIN

Are stocks overpriced?

The market is priced roughly at fair value. You have to look at valuations in light of inflation. Our firm uses sophisticated models for that, but a rule of thumb is that the price/earnings multiple and the inflation rate should add up to less than 20.

Inflation is now at about 1.5%. The P/E for stocks in the Standard & Poor’s 500, as we speak, is about 17, based on trailing earnings. So a little below 20, or roughly fair value.

Related: American Airline employees locked out of 401(k) funds — here’s why

Stocks are not cheap, but that doesn’t mean the bull market is over. Pension funds in the U.S. have their lowest equity allocations in 40 years. Wall Street strategists recommend an underweight of equities. I’ve found, over three decades, that the consensus asset allocation is a very reliable contrary indicator of where the market is headed.

A version of the P/E that carries a lot of weight now is the one championed by Yale’s Robert Shiller. By that measure, based on 10 years of earnings, P/Es are very high.

In the past, when these high Shiller P/Es signaled an overpriced market, we’ve had much higher rates of inflation than we do now.

Related: Tools to make your money grow

When interest rates and inflation decrease, P/Es tend to expand. When rates or inflation rise, P/Es contract. The theory is that inflation eats away at a company’s future value, for several reasons. Earnings might rise, but inflation-adjusted earnings might not. Earnings quality tends to decline, in part because you’re simply paying off debt with cheaper dollars. And overall investor confidence tends to deteriorate. So you have to adjust for inflation, but professor Shiller doesn’t.

If you do adjust for lower inflation, it predicts normal returns — about 8% to 9% a year. We look at more than valuation, though. For example, sentiment is still attractive. We actually think you’re going to get above-average returns — say, 10% to 15% a year over the next several years.

Two years? Five years?

I think we’re halfway through one of the biggest bull markets of our careers. The stock market has been up for the same reason it always goes up in an early-cycle environment. Expectations are extremely low, monetary and fiscal policies kick in, and the economy begins to grow. That’s what happens every cycle, and it happened this cycle too.

Now we are entering a mid-cycle phase in which you get the tug of war between rising rates — a bearish sign — and unanticipated improvement in the economy — a bullish sign. Sentiment isn’t exactly ebullient, and the economy keeps improving.

Related: How to get in trouble in your 401(k)

But when your readership believes there’s no risk in equities, the bull market is almost over. And in the kiss of death, the yield curve inverts, meaning that long-term interest rates drop below short-term rates. In other words, people are so desperate to lock in long-term rates that they pay more for them than for short-term rates.

Watching for an inverted yield curve will keep you out of trouble. That simple little indicator suggests the bond markets are beginning to expect significantly weaker growth. Generally this occurs before the stock market begins to anticipate slower growth. And we haven’t seen it yet.

You’ve noted that a classic sign of a bubble is increased use of borrowed money to invest. Margin buying of stocks is at a record high.

Nobody knows how much of that is long — betting that stocks will rise — and how much of it is short — betting stocks will fall. In the past, when individuals played a greater role in the market, you assumed that margin was used to be levered long. Today hedge funds are a much bigger force, and my research suggests they’re relatively neutral. Some of that margin is being used for shorting. So I don’t think increased leverage is driving up prices.

What other bubble indicators do you look for?

When sentiment becomes overwhelmingly bullish to the point where people jettison diversification, that is very, very worrisome.

Related: How we feel about our finances

You see that now in highflying tech, social media, some biotech. Valuations are so out of whack with reality. You’d think that people would have learned from the hot stove.

What do you say to analysts who worry that equities are inflated by the artificial suppression of interest rates by central banks?

I get that question all the time. The point of stimulative monetary policy has always been to artificially inflate asset prices. Interest rates are lowered so that people take more risks and multiples expand. Companies get a cheaper cost of capital, which they can then use to invest.

The notion that the Fed is the only reason the stock market is up is what people claim during the early stages of every bull market. The time to worry is when the Fed inflates asset prices too much and the characteristics of a bubble emerge.

What happens if earnings — the “E” in P/E — drop to historical norms?

Profit margins are at an all-time high. There’s no doubt about that. But profit levels are also a function of sales. When margins compress, companies generally start to fight for market share. We think earnings forecasts for large-cap multinationals may be way too optimistic; we are concerned about emerging markets and the impact they could have on multinationals’ earnings. But domestic U.S. manufacturing is gaining market share. I’m not talking about 3D printing. I’m talking about ball bearings and grease. Small- and mid-caps.

Examples, please?

I’m not a stock picker. But we believe investors should probably focus on more domestically oriented stocks and avoid emerging-market stocks as much as possible. In addition, since profit margins around the world seem likely to contract, investors should aim at market-share gainers. We like U.S. small-cap industrials. If you know the name of the company, the odds are that they have too much international exposure.

Also, I think that high-yield municipal bonds are a tremendous value play right now.

Really?

They yield more than high-yield corporates for the first time in history.

So when will you know your portfolio is overpriced — that it’s time to get out of small-cap industrials or high-yield munis?

We look at gaps between perception and reality. Over the past several years, the sentiment toward small-cap stocks, despite their superior performance, has been quite poor. But ultimately that gap between perception and reality will begin to change.

There will be more negative-earnings surprises because expectations get too high. Flows into small-cap funds will pick up. We’ll hear people talking about how cheap they are, as opposed to how expensive they are. [Laughs.] Then we’ll find other investments that look more attractive.

THE BEAR: JAMES MONTIER (cont.)

THE BEAR: JAMES MONTIER

Are stocks overpriced?

There is no doubt that the U.S. stock market is exceedingly overvalued.

What makes you so sure?

The simplest sensible benchmark is the Shiller P/E. Right now we’re looking at a broad index like the Standard & Poor’s 500 trading at something like 26, 27 times the Shiller P/E. Fair value would be 16 or 17 times historical earnings.

But bulls say the Shiller P/E doesn’t look so bad if you adjust it for interest rates or inflation.

It doesn’t make any sense to do that. The history of stock prices shows that they are good long-run inflation hedges. That’s because companies can generally raise their prices when their input costs rise, which protects their profits and dividends from inflation. And since equities are valued based on profits per share, equities are largely immune from inflation too.

Adjusting for interest rates is even more bizarre. Empirical horseraces show that valuation ratios — say, P/Es — unadjusted by current interest rates have predicted long-run returns far better than valuations adjusted by interest rates.

What if you look at P/Es based on expected earnings for the next year?

I spent nearly 23 years working at investment banks surrounded by analysts, and I have to say I think analysts probably were put on this planet to make astrologers look like they know what they’re doing.

The idea of basing a valuation on a forward earnings number is laughable. Most analysts spend all of their time being spoon-fed by company management and thinking about the next quarter’s earnings release — a horizon that is just not meaningful.

But maybe rising profits will justify higher stock prices. Maybe corporate profit margins will be higher than they used to be.

It is possible. We spend a lot of time worrying about that: What could prevent margins from falling?

[GMO co-founder] Jeremy Grantham puts it very well. For most investors, he says, “This time is different” are the four most dangerous words. But for value investors [who buy stocks they think the market has undervalued], “This time it’s never different” are the five most dangerous words. They lead to simple-minded extrapolation — an unchecked belief that the future will be like the past.

For a really good example of that, think of value managers who bought financials in 2008 because they were “cheap.” They failed to understand the dangers posed by the bursting of the credit bubble and the way in which earnings had been inflated during the housing bubble.

But profits as a percentage of gross domestic product have indeed been elevated for a sustained period. Now the data show profit ratios are not increasing anymore, and that may be the first sign that they’re beginning to peak. Looking forward, more federal budget cuts are coming, which should reduce profits.

Are we in a bubble now?

The technology bubble of ’99 was a good old-fashioned mania. People really did believe this time was different — that the dotcoms would change the way the world worked forever. I think what we are seeing today is more of a near-rational bubble.

When you have central banks around the world setting interest rates below the rates of inflation, effectively telling you that cash will earn nothing, then you tend to seek out other vehicles for investing. That distorts pricing across a wide range of assets.

I’d call it a foie gras market, in which investors are the geese being force-fed risk assets by central banks. It isn’t pleasant, but it may be the best that you can do given the alternatives that are available to you.

So what should investors do?

Personal investment advice is not our business. But when you look at the S&P 500 at today’s valuations, our return forecast is negative 1.5% annually after inflation. Cash will earn something like minus half a percent over the next seven years.

It’s hard to find bits of the market that are actually attractive. So we look for high-quality stocks, which have three features: high profitability, stable profitability, and low leverage: the Johnson & Johnsons JOHNSON & JOHNSON JNJ -0.3547% , Procter & Gambles THE PROCTER & GAMBLE CO. PG 0.3488% , and Microsofts MICROSOFT CORP. MSFT 0.0654% of the world. They’re certainly not cheap. But they are the best of the bad bunch.

And outside the U.S.?

Globally, European value stocks also probably deserve a place in a portfolio. So do some emerging markets, which is probably a brave call given the events that are unfolding around the world. In our unconstrained portfolios, we have just under 50% in equities spread among those groups, and then the rest in a combination of things like Treasury Inflation-Protected Securities and cash.

Related: How much will I need to retire?

You don’t want to be fully invested or else you give up the ability to take advantage of shifts in the opportunities you face. Also, we have found that if you shift assets depending on your opportunities, you’ve greatly reduced the risk of lifetime ruin — running out of money before you die.

Does that mean timing the market? Or simply having a global portfolio and rebalancing once a year? That is, selling the asset that’s performed the best and buying the one that’s done the worst?

Rebalancing is the simplest of all valuation-based strategies and a really good start. But I think one absolutely should try to market-time based on valuation.

Ben Graham actually said that in Security Analysis [a classic investing book co-written by David Dodd and first published in 1934]. He said, “It is our view that stock-market timing cannot be done…” and that’s the bit everybody quotes. But he goes on to say “unless the time to buy is related to an attractive price level,” which I think is exactly right.

Any tips on how to market-time?

My colleague Ben Inker says you should smoothly and slowly enter and exit markets. Rather than trying to pick the top or bottom, which you’ll never do, move maybe 5% or 10% of your portfolio in or out each quarter. That’s what we’re doing.

We are slowly drawing down our equity exposure in recognition of the fact that the markets have been expensive. If they get more expensive, we may sell a little faster, and if they get less expensive, we may stop selling.

Being patient is a massively underestimated virtue when it comes to investing because there is nothing worse than sitting there watching your neighbor get rich because he’s been invested and you haven’t because you think the market’s expensive. But if you can be patient, a valuation-based framework is exactly the right way to do things.

MONEY Investing

Emerging Markets that Merit a Closer Look

Pedestrians walk past a Citibank branch in Mumbai Dhiraj Singh / Bloomberg / Getty Images

Emerging economies have tumbled in unison, yet some have far better prospects than others

The best time to buy something is when it’s on sale.

The place to look for stock bargains may finally be among developing economies, where share prices collectively are down 17% from their recent spring 2011 peak and stocks are trading at an average price/earnings ratio of 10.7 — a 40% discount to shares of developed nations.

Notes Jeff Shen, head of emerging markets at BlackRock: “That’s about the widest spread in more than 15 years.”

True, with risks rising abroad, there are reasons developing-nation stocks are so cheap. China’s growth is slowing, Brazil faces deficits, Russia just annexed Crimea — the list goes on. And as the Federal Reserve tapers bond purchases, global credit is shrinking, which hurts smaller countries dependent on foreign investment.

For those with a discerning eye, however, the recent selloff could spell opportunity.

“Emerging-market nations are no longer monolithic, and some are in pretty good shape,” says T. Rowe Price emerging-markets specialist Todd Henry.

He expects these healthier economies to spur the benchmark MSCI Emerging Markets Index to deliver 11.5% earnings growth in 2014 — more than two percentage points higher than the forecast for the S&P 500 index.

The following strategy will help you identify the most promising areas, while limiting your risks.

Look under the hood

Three trends seem likely to move emerging markets this year:

Asia will deliver solid growth. As China shifts from an economy propelled by exports to one driven by domestic consumption, its expansion is slowing. Yet concerns about stagnation seem overblown, given forecasts for a 7.5% rise in GDP in 2014.

“That’s more than twice as fast as developed nations,” says Justin Leverenz, manager of Oppenheimer Developing Markets, which has a 19% stake in China. Even if China stumbles, Taiwan and South Korea look strong.

“These countries have big current-account surpluses, as well as global trade that isn’t dependent on China,” says Arjun Jayaraman, co-manager of Causeway Emerging Markets.

Scary markets will stay scary. Case in point: Russia, where stocks have fallen 17% this year. Even before the Crimean crisis, Russia’s economy was in a slump, partly from political uncertainty.

“Disruption goes with the emerging-market territory,” says Craig Shaw, co-lead manager of Harding Loevner Emerging Markets. Shaw is sticking with a 6% stake in Russia.

Emerging markets do often rebound sharply before their economies recover. Over the past year, for example, stock prices in Greece, which was demoted to emerging-market status last fall, have jumped 52%, even though its debt problems aren’t resolved. Whether those gains are sustainable if there’s no progress soon is another question.

Think smaller for bigger gains. The least-developed emerging economies — so-called frontier markets, such as Ghana, Estonia, and Vietnam — tend to perform differently from more established markets.

Over the past year, for instance, the MSCI Frontier Index has risen 22.6%. The challenge: It can be tough to get in on the action since these shares tend to be thinly traded and most emerging-markets funds hold only a small stake.

Fine tune with two funds

Given the risks, “most people should put no more than 5% of their overall portfolio into emerging markets,” says Chicago financial planner Mary Deshong-Kinkelaar.

Start with a diversified fund that gives you exposure to all these countries, but maintains a bigger stake in more stable areas. For instance, Vanguard Emerging Markets Stock Index VANGUARD INTL EQUI EMERGING MARKETS PORTFOLIO VEIEX -1.1359% , recommended on our MONEY 50 list, has 23% of its assets in China, 15% in Taiwan, and 5.2% in Russia. T. Rowe Price Emerging Markets ROWE T PRICE INTL EMERGING MKTS STK FD PRMSX -1.576% , also on the MONEY 50, holds similar country stakes.

Then add a second fund, tilting toward added safety or a riskier bet, as you prefer. Cautious investors might gravitate to Matthews Asian Growth & Income MATTHEWS INTL FDS ASIAN GW&INC INV MACSX -0.5176% , which holds dividend-paying stocks from developed and emerging Asian countries.

Looking for more pop? Add a frontier-market fund, such as Guggenheim Frontier ETF CLAYMORE ETF TST 2 GUGG FRONTIER MARKETS ETF FRN -1.7253% . Just be sure to fasten your seat belt for the inevitably bumpy ride.

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