american funds investor magazine spring & summer 2010

8/8/2019 American Funds Investor Magazine Spring & Summer 2010

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Investors should carefully consider the investment objectives, risks, charges and expenses of the American Funds.This and other important information is contained in each funds prospectus, which can be obtained from your

nancial professional and should be read carefully before investing.

2 i n v e s t o r

Investing these days may seem more complicated because our recent economic recovery has clearly differed from

previous recoveries. Emerging nations have sparked this recovery, whereas in the past the U.S. consumer led the

charge. Markets in China, Brazil and Southeast Asia have done dramatically better

than developed countries thus far.

Last March, I suggested it was important for individuals to have exposure to

emerging markets because they have become signi cant players on the global

economic stage. This remains true today, but we should realize that while emerging

market economies have done exceptionally well, they may not do as well in the

future.At Capital Research and Management Company, we are global investors. We

continue to expand our investment research resources. Our investment analysts

and portfolio counselors travel to all corners of the world to visit companies they

feel provide potential investment opportunity.

In this issue, we talked with three couples to see how they worked with their

nancial advisers to reassess their asset allocations. We focused on how theyve adapted to changing circum-

stances. While most of them didnt make major modi cations they did make subtle, important shifts to help them

achieve their nancial goals.

During these turbulent times, I believe it is particularly important to meet with your adviser to develop a well-

diversi ed portfolio and revisit your long-term investment strategy.

Cordially,

From the Chairmans desk

James F. RothenbergChairmanCapital Research and Management Company, SM

investment adviser for American Funds

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any otherentity, so they may lose value.


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contents Spring | Summer 2010editor-in-chief: Linda Molnar Hines

editor: Earl Gottschalk

writer: Doug Mehagian

production manager: Paul Mayeda

designer: Jim DeLouise

For address updates, please includeyour current mailing label and sendyour new information to:

American FundsAttn: Shareholder ServicesP.O. Box 6007Indianapolis, IN 46206-6007

If you have questions or commentsabout this publication, please call800/421-0180, or write to us at:

American Funds Investor333 South Hope Street50th FloorLos Angeles, CA 90071

This magazine often includes articlesabout American Funds shareholders.This does not necessarily constitute

an endorsement of the funds by theindividuals or organizations portrayedin the magazine.

Visit our websites:americanfunds.com for individual investors

AmericanFundsRetirement.com for 401(k) plan participants

investor

i n v e s t o r

Departments2 From the Chairmans desk

A message from Jim Rothenberg,chairman of Capital Research andManagement Company.

4 At the openingRoth IRA conversion opportunitiesoffer several bene ts; going globalwithout leaving home; the arithmetic

of loss and recovery.

14 Closing bellVeteran portfolio counselor andgrowth investor Gordon Crawfordshares his investment philosophy anddiscusses where he expects the bestgrowth opportunities will be over thenext decade.

Features6 Does your investment

portfolio t todays changingcircumstances?After a tumultuous two years in thestock market, many investors havefound that their investment mix nolonger accurately re ects their goalsand risk tolerance. We talk with threeshareholder families to discover how

they rebalanced their portfolios to keeptheir nancial objectives on track.

10 2020 Vision: Six ways topursue your goals over thenext decadeWhat will your nancial picture looklike a decade from now? Here aresix steps you can take to help achieveyour long-term nancial goals.

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at the openingRetirement

4 i n v e s t o r

years and reached the age of 59(certain other exceptions may apply).

In addition to income tax-free with-drawals, a Roth IRA has several otherlong-term bene ts:

With a Roth IRA account, you arentrequired to take yearly minimum

distributions starting at age 70.That could leave more money for yourbene ciaries if you dont need it foryourself. The money your bene ciariesreceive from your Roth IRA will be freefrom federal income tax.

A Roth IRA can also provide tax diversi-cation. Tax experts say that if you have

Starting in 2010, anyone regardless oftheir income can convert a traditional IRAto a Roth IRA. In the past, people whoseadjusted gross income was more than$100,000 were unable to take advantageof this tax and retirement strategy.

If you elect to convert, you will haveto pay income taxes on any amount con-

verted that hasnt already been taxed. (Forconversions in 2010 only, Congress hasapproved a special rule allowing you totreat half of the income from the conver-sion as received in 2011 and the otherhalf in 2012.) Future withdrawals from theRoth IRA that include earnings are freefrom federal income tax and penalty afteryouve had the account for at least ve

Roth IRA conversion opportunities o er several benefts

a mix of tax-free accounts (like a RothIRA) and tax-deferred accounts (such asa 401(k) or traditional IRA), youll havegreater income exibility as your needfor money changes during retirement.

Besides traditional IRAs, a rollover froma retirement plan can be converted toa Roth IRA if you are eligible to take adistribution from the plan. That could

include a 401(k) plan or a 403(b) planonce you have reached age 59.

While Congress removed the incomelimits on conversions to Roth IRAs, theincome limits on contributions to RothIRAs remain. Thus a higher income inves-tor still cannot contribute directly to a RothIRA. However, a higher income investorcould contribute each year to a nondeduct-ible traditional IRA, which has no incomelimits, and then convert the account to aRoth IRA.

Your individual circumstances are mostimportant. IRA conversion rules and taxcalculations can be complicated, espe-cially if you own more than one traditionalIRA. There may be other ancillary bene ts(or detriments) to doing a conversion, soit is important that you meet with your

nancial adviser and tax consultant before

making any decisions.

2 0 1 0 W a l l y S c h w a d r o n . A l l r i g h t s r e s e r v e d . C a r t o o n s t o c k . c o m

Do you realize youre not earning any interest on that?


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Trends

Investors seeking global diversi cationoften believe they need to invest in a port -folio full of international names. Yet thatsnot necessarily the case. From the UnitedStates to South Korea, many of the worldsleading companies, such as Coca-Colaand Samsung, generate signi cant revenueoutside their home markets.

As the world has become more inter-connected, where a company has itsheadquarters is becoming less relevantall the time, explains American Fundsportfolio counselor Jody Jonsson. Itswhere that company does business thatcounts.

Indeed, as you can see in the tableat right, many iconic corporations withidentities strongly linked to particularcountries have the majority of their opera-

tions and derive the lions share of theirrevenues beyond their home base.

latitude to invest in high-quality, globallydiverse companies provide an opportunityto bene t from economic growth whereverit may occur.

Going global without leaving home

From its high in October 2007 throughits low in March 2009, the unmanagedStandard & Poors 500 Composite Index,a broad measure of U.S. stocks, fellnearly 57%. Since then, the S&P 500 andglobal markets in general have reboundedsharply. In fact, as of December 31, 2009,the index had risen almost 65% off itsMarch low. But, thanks to somethingknown as the arithmetic of loss andrecovery, that sharp gain doesnt meanthe recovery is complete.

Consider the following example: If a

$1,000 investment loses 50%, its value

drops to $500. In order for the investmentto return to the $1,000 level, that $500must do more than gain 50% (whichwould only bring it to $750); it needs to

double. Based on thishard mathematical

reality, for the S&P 500 to return to itsOctober 2007 high, it would have to real-ize an increase of over 131%.

The arithmetic of loss and recoveryhighlights the importance of making down-side protection a criterion when selectinginvestments. Mutual funds with histori-cally low relative volatility may not be atthe forefront in bull markets, but theycan outpace the competition over longertime periods by ceding less ground during

downturns.

Market savvy

The arithmetic o loss and recovery

If your investmentdeclines

To get back to break-even,youll need a gain of

Back in the black

10%

20

30

40

50

11.1%

25.0

42.9

66.7

100.0

0% 20% 40% 60% 80% 100%

Vodafone (U.K.)

Nestl (Switzerland)

Honda (Japan)

Roche (Switzerland)

Cemex (Mexico)

Coca-Cola (U.S.)

Nokia (Finland)

Acer (Taiwan)

ExxonMobil (U.S.)

Siemens (Germany)

Sony (Japan)

Procter & Gamble (U.S.)

Hewlett-Packard (U.S.)

Samsung (South Korea)

Lenovo (China)

87%

87%

84%

82%82%

80%

77%

72%

72%

68%

61%

61%

59%

47%

47%

Europe JapanU.S.Emerging markets

Percentage of sales and operations outside home economy

Source: United Nations Conference on Trade and Development, World Investment Report 2009.

The lesson? Achieving global diver-si cation goes beyond regional orcountry-speci c investments. Whilerisks still exist, mutual funds with the


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After a tumultuous two years in the stock

market, it may be time to take anotherlook at your investment portfolio. What youlearn may surprise you. You may nd thatyour investment mix no longer accuratelyre ects your nancial situation, goals andtime horizon (i.e., number of years beforeyou will begin to withdraw the money).Surveys of 401(k) plan holders conductedby Hewitt Associates, a human resourcesconsulting rm, have shown that manyinvestors have not readjusted their port-

folios to re ect changing circumstances.Whether or not that is your situation, it isvitally important to meet with your nancialadviser to carefully consider your long-termstrategy.

According to Pam Hess, director ofretirement research at Hewitt, Whileparticipants in 401(k) plans continuedto save during the past several months,investments in stocks dropped to 50% atthe end of 2008. Thats down from 68%at the end of 2007, thanks to lower sharevalues and the movement out of equities.She adds, Even with no action on their

parts, many investors asset allocationshave changed dramatically.

Lets consider what would havehappened had an investor made no adjust-ments to a hypothetical $100,000 portfolioconsisting of 60% stocks and 40% bondsfrom the markets high on October 9,2007, through its low on March 9, 2009.

The portfolios asset allocation, if not

rebalanced during that period, would haveautomatically reversed to 61% bonds and39% stocks because of the decline inmarket values.

With these numbers in mind, the bigquestion today is: Are your investmentsproperly allocated to meet some of lifesmost basic goals, such as funding achilds college education and preparingfor retirement?

We talked with three couples to see

how they worked with their nancialadvisers to reassess their asset allocations.Our focus was how they adapted tochanging circumstances to meet theirindividual goals. As you will see, most ofthem didnt make large-scale modi cationsbut they did make subtle yet importantshifts to keep their long-term investmentstrategies on track.

Creating a portfolio to meet two invest-ment challenges college educationand retirement: David Kleve and Molly

Schneider of Redding, CaliforniaDave Kleve, 46, is a stay-at-home fathercaring for the couples two daughters,Katherine, 10, and Karen, 6. He maintainstheir home on the Sacramento River inRedding, as well as manages their ranchnearby, where his mother, Mary Jeanne,resides. His wife Molly Schneider, 44, isan emergency room physician at a hospital

in nearby Chico, California. The couplemoved from Los Angeles to the scenicrural community of Redding to escapeSouthern Californias high real estateprices and to allow one of them to remainat home.

For Dave and Molly, having ample fundsin 529 college savings plans for theirdaughters is extremely important. WhenDave was an undergraduate science majorat UCLA, he worked 20 hours weekly topay for his education. It was a disadvan-tage because I couldnt dedicate the timeneeded for some of the tougher courses,he admits. By contrast, Molly had loansand grants that made it possible for herto focus solely on her medical studiesat Northwestern University. Through thestock markets ups and downs, Dave andMolly have continued to invest monthlyin their daughters 529 plans. Katherine

6 i n v e s t o r

Does your investmentport olio ft todays changingcircumstances?Shareholders reveal how they adjusted their assetallocations to meet important li e goals.

Were pleased with theseshifts in our portfolio andbelieve were in a good placefor the coming years.

Dave Kleve


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Why? The adviser believed the newallocation was more in tune with the couplesages, nancial situation and time horizon.Now Dave and Molly also have a larger

exposure to companies that pay dividends,as well as to those that do business inplaces such as China, Brazil, India and Asia,where growth is expected to be greaterthan in the U.S. over the next decade.Were pleased with these shifts in ourportfolio and believe were in a good placefor the coming years, Dave says. The cou-ple meets with their nancial adviser twicea year to keep track of their progress. Investment lesson: Its good to meetwith your adviser regularly to monitoryour progress toward retirement and col-lege funding goals, and to take advantageof new investment opportunities. Daveand Molly feel theyve bene ted from thisapproach. Keep in mind that investing out-side the United States involves additional

risks, such as currency uctuations, peri-ods of illiquidity and price volatility. Theserisks may be heightened with investmentsin developing countries.

Preparing for semi-retirement with abalanced portfolio: Evan and Susan

Williams of Rochester, MichiganBy all accounts, Evan Big Cat Williams,

62, has had a storied career. More than30 years ago, Evan won the National LongDriving Championship of golf in both 1976and 1977. In 1977, he hit a record 353yards, which stood until 1995 when it wasbroken by Sean The Beast Fister. SportsIllustrated described him in action: WhenEvan Williams drives a golf ball off the tee,caddies cower, Jack Nicklaus sticks his

ngers in his ears and owners of propertyanywhere near the fairways get nervousabout their picture windows.

Evan says he recognized right away thathitting a golf ball farther than anyoneelse was something I could market. Hewent to a sports agent, who booked himfor teaching exhibitions and corporate golfoutings in the United States, Japan andelsewhere around the world. He even methis wife, Susan, at a gol ng exhibition. Theonly drawback was that he spent an aver-age of 160 nights on the road each year.

will begin college in eight years; her sisterKaren will follow four years later.

Retirement funding is also a vital con-cern for the couple. Molly has a physically

and mentally challenging job. With theemergency room open 24 hours a day,her schedule is never set. The older youbecome, the harder it is to work 10- to14-hour days, she says. For many ERdoctors, early retirement is an understand-able goal.

Prior to the markets steep dive in 2008and early 2009, Dave and Mollys portfolioheld an overall mix of 60% growth funds,36% growth-and-income funds and 4%money market funds. In late 2008, whenthe markets woes began to take a toll ontheir investments, their nancial adviserrecommended that they shift some of theirassets from pure growth mutual funds togrowth-and-income mutual funds that paydividends. The adviser also suggested theymove a portion of their daughters 529plans from pure growth funds into interna-tional dividend-paying growth-and-incomefunds.

Left to right: Dave Kleve, daughter Katherine, mother Mary Jeanne Kleve, daughterKaren, and wife Molly Schneider at their California ranch. Insets: Dr. MollySchneider in the emergency room; mother and daughter at elementary school.


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With all the volatility weve experienced in the past few years, 2010 is a good time to takea hard look at your investment approach. Some investors concluded that being diversi eddidnt really work in 2008 and 2009, when all stock markets U.S., international andemerging declined simultaneously. The majority of bond prices also fell, offering onlylimited protection against the market collapse.

The fact is that diversi cation did work as it typically has, even if during extreme times ithasnt been able to entirely prevent losses. For example, from December 31, 2007, through

December 31, 2009, a portfolio composed of 60% stocks and 40% bonds would haverealized a drop of 7.6%. During that same period, a 100% U.S. stock index portfolio wouldhave lost 20.3%, nearly three times as much as the diversi ed investment.*

With that in mind, how can you position your investments for the rest of 2010 and beyond?

First, work with your nancial adviser to set up an appropriate allocation, or investmentmix, for your portfolio. Take into consideration your time horizon (the number of years, forinstance, before you might need money for a childs college tuition, the downpayment on a home or your eventual retirement), your nancial situation and yourtolerance for risk.

Second, invest regularly in a diversi ed port folio of stock, bond and money market funds.By dollar cost averaging depositing money in one of these three categories on anautomatic basis you can help reduce your risk if one type of fund doesnt do as wellas another. Stock, bond and money market fund investments all have varying degrees ofrisk and respond differently to changes in the nancial markets. Keep in mind that regularinvesting does not ensure a pro t or protect against loss, and investors should considertheir willingness to keep investing when share prices are declining.

Third, rebalance your portfolio if your asset mix is thrown off kilter by volatility ormarket surprises. This might mean forcing yourself to buy stocks when theyre down andsell them when theyre up. Doing so may allow you to take advantage of irrational herdmentality, rather than being the investor who falls victim to it.

* Stocks are represented by the unmanaged Standard & Poors 500 Composite Index, a widely used measure of largeU.S. stocks. Bonds are represented by Barclays Capital U.S. Aggregate Index, a respected measure of U.S. bonds.All returns are cumulative as of December 31, 2009.

8 i n v e s t o r

Despite his success, he realized early

on that long ball hitters dont get betterwith age and that his career could end atany time. Thus, he and Susan saved andinvested money regularly. They paid foreverything up front, including their home inRochester, located a short 50-minute drivefrom the Detroit airport. Susan worked asa teacher, and the couple raised two boys.During his spare time on the road, Evanbecame a student of the stock market. Hestill follows the market closely but relies

on his adviser for overall nancial strategyand to keep an eye on his asset allocation,so it doesnt get out of whack with thecouples future retirement income needs.Susan has gone back to work as a recep-tionist for a dental practice.

Recently, Evan has given some thoughtto semi-retirement, focusing more on com-peting in state tournaments and teaching.He and Susan sit down with their nancialadviser twice annually to strategize andbe certain their investment mix is wherethey want it to be. After the 20082009market decline, their nancial adviserconvinced them to reduce their portfoliosstock market volatility. They have begunto shift assets out of growth funds intomore income-oriented funds. At one timetheir portfolio held 75% in growth fundsand 25% in income funds. Now they havemoved to a 60% growth fund/40% incomefund mix, and their adviser would like them

I always want to have asigni cant equity exposure.I believe in the long-termfuture of the stock market.

Evan Williams

Susan and Evan Williams shopping for vegetables ata Michigan grocery store. Insets: Evan relaxing in hisstudy and on the golf course.

Why diversi cation and asset allocation can still work


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11/16i n v e s t o r 1

2020 Vision:

When asked to reveal the biggest issue that stands in the way of his clients nancial success, a longtimenancial adviser found it dif cult to narrow it down to just one. Instead, he ticked off a list of common

mistakes, ranging from short-term decision-making to trying to time the market to living beyond ones means.All these roadblocks, he noted, can be avoided with a common solution: Develop a realistic nancial planand stick to it.

Its a familiar refrain to those of us who

have taken the time to outline our long-term goals and develop a basic strategy toachieve them, and yet still found ourselvesoff track. A key problem is that many of usmay lack the basic day-to-day skills neededto neutralize some of the challenges thatinvariably arise.

As we enter a new decade, consider

implementing some of the following strate-gies into your nancial plan. By doingso, we believe that you will have a betterchance at achieving your nancial goalsover the next 10 years.

1. Understand where your moneyis going.We all know that creating a budget playsa key part in ensuring nancial health,no matter what your income. Yet its astep many of us dont take, for reasonsranging from procrastination to denial.

But ultimately theres no substitute for

getting a grasp on where your money isbeing spent.

The good news: Getting started isntthat hard. Advisers can often providebudgeting templates, and many freeworksheets can be downloaded from theInternet. In addition, most personal nancesoftware offers budgeting functionality.

In terms of compiling data, strive foraccuracy and thoroughness. One adviserasks her clients to track expenses for ahandful of different months in order tocapture less frequently incurred expensessuch as quarterly insurance payments,taxes or holiday travel.

Once youve developed a budget,consider the following steps for stayingon track:

Revisit your costs at a set timeeach year. The best-run companies

constantly re-examine how and wherethey spend their money. When they ndopportunities to lower costs, they do.As individuals, however, we often letthe perceived inconvenience of switchinginsurance providers or cell phonecarriers stand in the way of reducing ourexpenses.

But this cost-cutting approach to yourpersonal nances can really pay off. Asan initial goal, focus on reducing yourexpenses by 5% to 10%. Then, everyyear at an appointed time, revisit yourbudget with the aim of keeping it fromrising. At a minimum, make it yourobjective to let your expenses rise at arate slower than your income growth.

Increase your payment frequency. At one time or another (and that timemay be right now) most of us havesystematically chipped away at debt only

Six ways to pursue your fnancial goals inthe next decade and beyond


12/1612 i n v e s t o r

to nd ourselves back in the sameposition a few months or years down theroad. Staving off debt is not a one anddone event but an ongoing commitmentrequiring vigilance and systematic effort.

If credit cards are your downfall, getrid of them. But if youre unwilling to

part with your plastic, limit it to a singlecard and be dogged about paying offyour balance each month. To makedoing so easier, one adviser suggeststhat rather than paying credit card billsmonthly, do so each time you receivea paycheck. That way, the amount youowe at any one time becomes moremanageable, and the temptation to carrya balance is reduced.

The importance of keeping revolving

debt in check cannot be overstated.According to one adviser, In my experi-ence, the aftereffects of accumulatingsigni cant revolving debt can set ones

nances back 10 years ve if theyrelucky.

Make room for investing. The importantpay yourself rst dictum means thatsaving and investing should be part ofan overall budgeting strategy, not simplyafterthoughts to be considered once thebills are paid. Make saving and investinga cost on your budgeting worksheet.

2. Avoid lifestyle in ation.With the recent economic downturn,warnings about how personal spendinginvariably rises with income may not seemtimely. But when wage growth returns,its important to recognize the tendency

to spend more as you make more.To ensure that saving and investing keep

pace with income, consider switching yourfocus from dollar amounts to percentages.For example, if you commit to saving 8%of your income rather than a at amount,such as $250 per month, your saving will

rise in step with your income.Many experts agree that automating

increases is the best way to ensure thatyou save more as you earn more. Forthose investing for retirement within anemployer-sponsored vehicle such as a401(k) plan, such step-ups often happenautomatically. But to the extent that itspossible, strive to automate the increasesin your higher education and taxableinvestments as well.

If you know that a raise is in yourfuture, make certain your adviserincreases the amount automatically trans-ferred from your checking account intoyour brokerage account as soon as theincrease takes effect. If you never getaccustomed to seeing the extra money inyour checking account, youll feel lesstempted to spend it.

3. Dont follow the herd.We need look no further than the technol-ogy bubble of the late 1990s or the recenthousing boom to see that investors dontalways act in their own best interests. Ourinclination to dive headlong into variousassets as they are peaking is matchedonly by our instinct to sell assets whentheir prices are in decline. This tendencyto buy high and sell low is one of manysubconscious and self-defeating tendencies

that researchers in behavioral nance havebrought to light in recent years.

The investment community longoperated under the assumption thatmarkets were ef cient and investors wererational, says John Armour, executive vicepresident of the Personal InvestmentManagement division of Capital GuardianTrust Company,SM an af liate of CapitalResearch and Management Company.But it turns out that human nature canlead us astray. For example, we take toomuch or too little risk and we pay toomuch attention to recent events and ignorethe long-term tendencies of the markets.

When it comes to blunting the negativeimpact of these tendencies, a system-

The important pay yourself

rst dictum means that savingand investing should be part of

an overall budgeting strategy,

not simply afterthoughts to be

considered once the bills are

paid. Make saving and investing

a cost on your budgeting

worksheet.


13/16i n v e s t o r 1

atic investment plan is perhaps the mosteffective strategy. By committing to auto-matically invest a predetermined amounton a weekly, monthly or quarterly basis,you reduce the likelihood that hot trends,unexpected market events or bad newswill drive you to make decisions out of step

with your long-term goals. And rememberthat while remaining true to your planis especially tough when markets are inretreat, it can increase your accountspotential for growth when markets recover.

4. Be proactive with yourretirement.Getting a complete picture of your retire-ment investments and making sure theyare on track to meet your long-term needs

can be a challenge. Taking the followingsteps can help:

Consolidate when possible. How manypieces of paper must you sort throughto tally up your retirement assets?If youre one of the many who hasntconsolidated retirement accounts(including IRAs and employer-sponsoredaccounts from previous jobs) the picturemay be jumbled. To clarify it and helpensure that your retirement assets arecollectively invested in keeping with yourlong-term goals, consider consolidatingyour accounts. Your adviser can helpselect the option thats best for you. Onepiece of good news: For 2010, investorsof all income levels can convert tradi-tional IRAs to Roth IRAs, which couldprovide added long-term tax advantagesfor many (see article on page 4).

Research your options. When decidinghow to invest your contributions, thetemptation may be to select funds withabove-average recent returns. But itsimportant to look at results over longertime periods and consider whetherfund objectives and risk pro les match

your own. Enlisting your adviser to helpevaluate the funds being offered andsuggest an allocation aligned with youroverall retirement strategy can help takethe guesswork out of it.

Maximize your contributions. Whenit comes to employer-sponsored planssuch as a 401(k) or 403(b), maximizingyour contributions is a vital step particularly if they are matched by your

employer. For example, those earning$35,000 per year who consistentlycontributed 3% of their annual salaryto their 401(k) plan the equivalentof about $40 every two weeks wouldhave over $16,000 at the end of 10years (assuming an 8% annual rate ofreturn on their investment). If just halfthat 3% annual contribution was matchedby their employer, that amount wouldbe more than $24,000.*

5. Expect the unexpected.The uncertainty brought about by therecent economic downturn is a harshreminder that even the most secure

nancial situation could one day bechallenged. Thats why having severalmonths of living expenses on hand in the

event of an emergency or job interrup-tion is essential to ones nancial health.Otherwise, you may have to fall backon credit cards to meet living expensesor suffer the tax consequences of raidinginvestments earmarked for retirementor higher education purposes. As one

adviser puts it, We never want to haveto sell long-term assets to meet shorterterm needs.

In fact, this adviser views the liquidassets that comprise a rainy day fundas the base of an investment pyramid.Until that base has been established,

shes reluctant to move clients to thepyramids next level stock and bondinvestments, for example. Based ona clients employment longevity and job

security, the amount may differ, but itshould never really be less than threemonths of living expenses, she says.

6. Dont let past mistakesparalyze you.For those with false starts and stumblesin their pasts, taking another stab atshaping up your nances can be tough.Dont dwell on past mistakes or what youshould have done. Instead, learn fromthose mistakes and plan your future basedon where you are now. Many times,your greatest ally in helping you to moveforward can be your nancial adviser.By working with you to develop a plan,continuously measuring your progressagainst it and providing you with a valu-able perspective on markets, an advisercan help you focus on achieving yourlong-term nancial objectives.

* This example is for illustrative purposes only anddoes not portray an actual investment.


14/16

closing bell

The future of growth investing

Since he began his investment career with Capital Research and Management Company nearly four decades ago,portfolio counselor Gordy Crawford has witnessed a number of political, technological and economic changes,including six major stock market declines, innovations such as the cell phone and the Internet, and the emergenceof developing countries as leading economic players. A growth-oriented investor who covered the media andentertainment industries for 35 years, Gordy manages money for The Growth Fund of America, The New Economy

Fund and SMALLCAP World Fund. We asked Gordy to share his investment philosophy as well as his thoughts onwhere he expects the primary areas of growth will be for investors over the next 10 to 20 years.

What have been the most signi cantchanges youve seen in the markets andinvesting since you began your career?When I started in the business, it wasa much simpler time. There were somemutual funds managing money and somebanks managing money, but we didnt

have 9,000 hedge funds or enormousderivatives markets. The whole worldhas become much more complex, muchmore global, with many more players inthe markets. Despite all that change inthe marketplace, the way I invest has notfundamentally changed since I did my rstindustry review on the re and casualtyinsurance business in the summer of 1971.

You were a relatively new investorduring the 19731974 market crash,which at the time was considered theworst since the Great Depression.How does the 20072009 nancialcrisis compare?Theyre not even in the same league tome. Ive been through the market declinesof 19731974, 19801982, 1987, 1990,20002002 and this most recent one.This one was by far the most dif cultof my career. From 1973 to 1974, we

had the worst down market since theGreat Depression. Stocks declined almost50%. There was a global recession. ThePresident of the United States was beingimpeached. The rst oil shock happened.Yet you knew these were events thatwould eventually correct themselves. You

knew that economies would eventuallyrecover. That was also true in 19801982and even in the dot-com bust of 20002002. What was distinctly different thistime is that the global nancial systemcame dangerously close to breaking. Idont think most people realize how nearwe were to a total collapse of nancialmarkets worldwide. Ive never felt fear likethat before.

As a growth investor, what criteria doyou use to choose companies for yourportfolios?I try to identify industries and countriesand groups of stocks that have large secu-lar tailwinds behind them. So the rst stepfor me as a portfolio manager is gettingthe forest right before I worry about thetrees. Once I determine what I think theworld is going to look like two or threeyears down the road, I then build portfolios

from the bottom up, picking individualstocks one at a time. But Im picking themwith that forest in mind.

What trends are informing your choicesright now?There are vast changes going on in the

global economy. The United States, Japanand parts of Western Europe are in seculardecline in relative terms, while emergingmarkets Brazil, India, China, the rest ofSoutheast Asia, Russia are gainingmarket share. As a result, my wholeportfolio is shaped around that. Over thenext 20 years, I think as much as 70% ofincremental growth in the global economywill occur in emerging markets. Althoughthere are other risks to investing in devel-oping countries, thats where the peopleare. Thats where the unmet needs are. Soin the broadest of senses, thats where Imlooking to invest.

Thats a considerable shift.Twenty years ago, developed markets likethe United States, Japan and Western

Europe were the places that were safe andstable. The countries were well run, theyhad their scal affairs in order, they had

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american funds investor magazine spring & summer 2010

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