Legendary money manager John Templeton is dead

  Sir John Templeton, who introduced many Americans to foreign investing, died today in Nassau at the age of 95. Templeton was known for many things, including an avid interest in science and religion and the sponsorship of the Templeton Prize. In the investment world he made his mark as founder of the Templeton Funds, now Franklin Templeton Funds after being bought out by Franklin Resources in 1992.  The Templeton Funds established a presence in St. Petersburg 30 years ago when Templeton's partner, John Galbraith, brought the company's marketing and distribution arm here. Today Franklin Templeton is a major employer in the Carillon office park. I had the privilege of interviewing Sir John a few times and always found him to be patient, kind and a great optimist. He often said you should buy stock in a country when things look darkest.

[Photo credit: Times files]

The great debate continues: Indexing yes or no?

You can't beat the low costs of index funds, but you can beat their performance....if you're lucky and pick the right funds. Index funds simply aim to replicate the performance of a particular index, such as the Standard & Poor's 500 Index. When the index goes up, so do they. And when it goes down...well, that's the problem. Many investors are convinced they can beat the indexes if they choose the right active money manager, so they keep trying. That's the triumph of hope over experience, Vanguard Funds founder Jack Bogle, the father of index investing, once told me in an interview.

St. Petersburg Times readers include investors on both sides of the fence, avid indexers and proponents of active management. Here's what some of them had to say.

My column today is about a very active approach to investing--trying to pick the hot IPOs (initial public offerings). Scott Sweet of Lutz has been doing it for 25 years and now runs IPO Boutique.

Jack Bogle weighs in with the Bogleheads

They're buzzing over at the Bogleheads investment forum today because The Man himself, Vanguard founder Jack Bogle, signed on to offer some personal comments. The forum, formally the Vanguard Diehards Investment Forum, is a great place to learn and discuss sound investment principles. Like their hero, the Diehards are big believers in low costs, indexing and taking the long-term view.

Bogle describes himself as "unusually risk averse," but it hasn't prompted him to change his asset allocation. This is how he says he's invested: "My year-end statement from Vanguard (the only time I peek) shows about 63% bonds and 37% stocks, and--for a conservative, fairly well-to-do investor like me--I'm comfortable doing nothing. (In fact, I've made no changes in my asset allocation for 7 or 8 years.)"

Don't savings bonds pass tax-free to heirs?

Q. In your column in the Money section on Sunday, you stated that if one held E or EE bonds that had matured until death, it was "sticking your  beneficiaries with the tax bill".   Don't E or EE bonds passed on  to beneficiaries get stepped-up basis and the accrued interest is therefore not taxed to benefciaries?'

A. No. Savings bonds do not get a stepped-up tax basis at death. Tax-deferred investments such as IRAs, annuities and savings bonds do not get a stepped-up basis at death. The beneficiary owes income taxes the same way the original owner would have owed them.

Should I dump my mutual fund?

Q. I have Vaguard index European fund with a ytd return of 15.7% and Vanguard Growth index with a return of -1.2%.  Would I be wise to close the Growth fund and put it all in European? 

A. It might or might not turn out to be more lucrative, but it would not be wise. That's because it would violate two important tenets in my vision of investing wisdom. First, wise investors diversify. They invest in both stocks and bonds and in both the U.S. and foreign countries. International diversification involves more than just Europe. It's OK to have more money in one area than in another, but not OK to exclude the rest of the world entirely. Second, wise investors do not switch investments based on short periods of performance, nor do they compare apples to oranges. Your US fund should be judged against the Standard & Poor's 500 Index, not against a foreign fund. If it has underperformed for two or three years, you should trade it in for a better-performing U.S. fund, not a foreign fund.

Saving for retirement with mutual funds

Mutual funds are the best retirement savings vehicle for most workers, but deciding which ones to use can be challenging. Some people like analyzing fund information, but lots of us would rather keep things simple. I found some good suggestions for doing that in Kiplinger's Retirement Planning: Your Guide to Securing Your Dreams.

First, the magazine suggests the all-index Vanguard stock portfolio:
30% Vanguard 500 Index (VFINX)
25% Vanguard Small Cap (NAESX)
20% Vanguard Total International (VGTSX)
15% Vanguard Growth (VIGRX)
10% Vanguard Emerging Market (VEIEX)
I'll admit that it caught my attention because the first three funds are ones I happen to have in my Times 401(k) account. The magazine recommends this assortment of funds as a fairly aggressive long-term investment for workers in their 20s or 30s. I think it also could work as the stock portion of an older worker's portfolio, balanced out with fixed-income investments.

Another approach, which is even simpler, is to go with a target-date fund. You pick your fund company (American Century, Fidelity, T. Rowe Price and Vanguard are among the companies that offer them), then pick the fund with a target date closest to your own retirement. As time goes by, the fund managers automatically adjust the stock-bond percentages to become more conservative.

Either approach could get you on track for the future.

Can I own stock in my IRA, not just mutual funds?

Q. I would like to own stock in specific companies outside of  IRA mutual funds.  Is it possible for these stocks to be held in an IRA if the custodian of the IRA purchases the stocks with money already in the IRA?  I would then like to take ownership of the stocks as part of my annual required distribution.

A. Sure. Just open an IRA with a brokerage firm and fill out its form to have your assets transferred from wherever they are now. However, be sure to ask about fees before you open your account. There are wide variations both in commission costs and in annual fees.

You can have securities distributed to you from an IRA. The taxable value is the securities' value on the date they were taken out of the IRA.

Open end, closed end: Which end is up?

Mutual funds come in so many different variations today that it can be tough to keep them straight. First you have to figure out the difference, then determine which type is right for you. In today's Times I wrote about a new closed-end mutual fund being launched by Raymond James & Associates (see story here). Is that something you should consider?

The first thing you need to know is that closed-end funds operate differently from their more familiar open-end cousins. Instead of buying shares from or selling shares to the fund company, you trade with other investors, buying and selling shares on the stock market just as you would any other stock. You also pay a brokerage commission each time you buy or sell, so closed-end funds aren't for you if you make your investments in small dollar amounts.

With this type of trading arrangement, closed-end funds will fluctuate more in value than open-end funds. Those fluctuations will first reflect price changes in the securities a fund owns in its portfolio and second the demand for the fund itself. A closed-end fund can sell for more or less than the value per share of the securities it holds (net asset value). Right now, for example, the Raymond James fund is trading at a premium. However, closed-end funds more typically trade at a discount once they've been on the market a few months. If you pay a premium when you buy, you lose money when you sell unless the stocks in the fund's portfolio have gone up enough to make up the difference.

The concept of the Raymond James fund is rather unusual. The fund will invest almost exclusively in funds with top ratings from Raymond James' research department, which has a very good track record. It will be interesting to see how close the fund can come to replicating the research department's performance. The fund will not be able to buy the stocks the instant they get a top rating or sell them the instant they are downgraded. The timing of these transactions will have an impact on performance.

If you've had any experiences investing in closed-end funds that you'd like to share or an opinion regarding the new Raymond James fund, feel free to post your comments.