The Chances of a Turning TideRiding the stock market wave is easier when the surf keeps rolling in.

I learned to surf when I was 13 years old, tagging along with my older brother one

weekend when both of us were out of school for the summer and had nothing better to do. We drove over to Indian River Inlet at the Delaware shore, where the outgoing current from the bay collides with the incoming ocean tide to create a steady supply of decent-size waves.

Never one to mince words, my brother’s advice was simple: “The easy part is riding the wave; the hard part is catching it.” It took me an hour before I finally caught one, slowly standing up once I realized I had finally timed it right. I didn’t stay up long, but after several more attempts I caught a durable wave and made it to the beach before the board slid up on the soft sand.

And that’s how it is for the stock market. Once a bull market gets started, it tends to roll on, but once it loses momentum, with no big waves to catch, it’s harder to get those stagnant waters going again. Fortunately for investors, the U.S. stock market has enjoyed a strong recovery since bottoming out six years ago. But with quantitative easing finished here, just as its

equivalent is ramping up in Europe and elsewhere, it is fair to ask if this long ride atop a powerful wave is about to come to an end.

Just as the ocean’s tides require the moon’s gravitational pull to create the waves that we see washing up on shore, so too does the stock market demand an external stimulus for attracting investor capital to keep a bull market

moving higher. Some of those forces are readily apparent—such as the trillions of dollars the Fed injected into our economy—but others lie hidden beneath the surface until a correction or bear market reveals their existence.

On the following page, I make a case for both sides of the argument, concluding with my opinion as to the probable outcome in the

years to come. Of course, social, economic and geopolitical events we can’t foresee will shape the market’s course short term, but ultimately a few essential elements that we already know will dictate its future direction.

PersonalFinance4 1 Y E A R S O F P R O F I T S I N B U L L & B E A R M A R K E T S

Vol. XLII, No. 9 • May 13, 2015Jim Pearce, Chief Investment Strategist PFnewsletter.com

INSIDE THIS ISSUEMARKETWATCH

For the next investing wave, consider what a billion more consumers will want ...........2

SMALL CAP

Patent expirations are sweet medicine for this small generic drug maker ........................3

GROWTH TRACK

Consumer electronics help insulate tech companies from a strong dollar ......................4

The smart money is on this organic grocery chain ........7

ROUNDUP

A brokerage offers an IRA match; what demographics tell us about stock valuations ....6

INCOME REPORT

First-quarter earnings fly in the face of low expectations .......................8

FUND FOCUS

As Europe’s own quantitative easing begins, our fund portfolio stands to benefit ..10

MIND GAINS

Take this test to pinpoint your investing style ...................12

NEXT ISSUE AVAILABLE ONLINE: MAY 23, 2015

10

11

12

13 14 15 16 17 18

19 20

21S&P 500 P/E Ratio

Mean = 15.54

1

2

3

4Consumer Price Index

Mean = 2.26

1

2

3 4 5

6

7 8

9

10-Year Treasury

Mean = 4.62%

G A U G I N G T H E M A R K E T

M A R K E T WAT C H

50+10+30+10Stocks50%

10% Bonds

Hedges 10%

Cash30%

Current PF Allocation

+ + =

IS THE RIDE ALMOST OVER?

Source: Morningstar

0

500

1000

1500

2000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

The S&P 500: So far, so good.

PERSONAL FINANCE2 May 13, 2015

PERSONAL FINANCE (ISSN 0164-7768) is published semi-monthly. © 2015 by Investing Daily, a division of Capitol Information Group, Inc. Address editorial correspondence to Investing Daily, 7600A Leesburg Pike, West Building, Suite 300, Falls Church, VA 22043-2004. CHIEF INVESTMENT STRATEGIST: Jim Pearce; EDITORIAL DIRECTOR: Robert Frick; MANAGING EDITOR: Catherine Siskos; INVESTMENT ANALYSTS: Ari Charney, David Ditt-man, Jim Fink, Igor Greenwald, Khoa Nguyen, Robert Rapier, Tom Scarlett, Benjamin Shepherd, Richard Stavros; DESIGN EDITOR: Tina Bacas Gibson; PUBLISHER: Alane K. Dashner. SUBSCRIPTIONS: 24 issues, $99; in Canada, US$123; International US$201. POSTMASTER: Send address changes to: PO Box 3808, McLean, VA 22103. Send subscription-related correspondence to above address; enclose mailing label from a recent issue and a new ad-dress. For customer service, call 800-832-2330. The information contained in Personal Finance has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. Investing Daily, a division of Capitol Infor-mation Group, Inc. its officers and owners, the editors of Personal Finance and their respective affiliates, or accounts managed by such persons, may from time to time have a position in investments referred to in this newsletter. Periodicals postage paid at Falls Church, VA, and additional mailing offices. Printed in USA. R136740115. For permission to photocopy or use material electronically from Personal Finance, ISSN #0164-7768, please access www.copyright.com or con-tact Copyright Clearance Center, Inc. (CCC) 222 Rosewood Drive, Danvers, MA 01923, 978-750-8400. CCC is a not-for-profit organization that provides licenses and registration for a variety of users. Issue 825

MARKETWATCH MARKETWATCH MARKETWATCH MARKETWATCH

Catching the Next Big Investing WaveThe rise of hard assets could bring tremendous wealth to astute investors.BY JIM PEARCE

For an idea of the next big investing wave, consider this: While the value

of large-cap U.S. stocks more than doubled the past five years, commodity prices declined 25%. Just compare the performance of the S&P 500 to the PowerShares DB Commodity Tracking Exchange-Traded Fund (see chart). Its holdings include metals (18%), energy (55%) and agriculture (23%).

It takes a growing supply of cash to inflate the value of an asset class, and for the past decade, that asset has been cor-porate stocks, as the S&P 500 skyrock-eted nearly 100% despite dropping al-most 50% in March 2009. Before that, the U.S. housing market doubled in value between 1995 and 2005, accord-ing to the Case-Shiller Home Price Index. Meanwhile, bond prices also had their day, escalating as their yields plum-meted. From 1985 to 1995, the yield of 30-year U.S. Treasuries plummeted from almost 12% to just above 6%.

That’s three distinct asset classes that doubled in value during successive 10-year periods. So, with both bond and stock values at or near record highs, once again cash should hone in on a sufficiently undervalued asset to ride atop the next economic wave. In my opinion that asset is commodities such as precious metals, agriculture and ener-gy. They could double in value over the next five to 10 years, and here’s why.

They Ain’t Makin’ Any MoreWill Rogers (or Mark Twain, depend-

ing on which source you consult) once said, “Buy land. They ain’t making any more of the stuff.” (For this discussion we’ll ignore Hawaiian volcanoes, which are making more land but not enough to change the statement’s basic premise.) The same argument holds true for hard assets such as diamonds, gold and oil.

Even though we’re dis-covering more of those as-sets, only a finite amount exists, with some of it in remarkably short supply. For example, all of the gold ever mined on this planet would only fill a high school gymnasium. Other assets, such as oil, are more plentiful but take so long to form that we will deplete sup-plies before new ones materialize.

The result is shrinking inventory. That’s not a problem provided demand remains in check by reasonably priced alternatives.

A Billion More ConsumersUntil recently, much of the world’s

population was relatively poor, lacking the financial muscle to bid up prices for even basic goods. But a rising mid-dle class in the world’s two most popu-lous countries—China and India—will drive up prices for certain commodities far above current levels. For an idea of the scale, the combined populations of those two nations are currently about 2.6 billion—as much as the next 24 countries combined! Until recently their populations were mostly poor and disconnected from global commerce, but that is changing.

By 2022 more than 75% of China’s urban consumers will earn the equiva-lent of $9,000 to $34,000 a year, a nearly 20-fold increase in China’s mid-dle class, according to a 2013 McKinsey & Co. study. Only 4% of Chinese house-holds fell into that wealth band in 2000.

A similar dynamic is at work in India, where by 2025 the middle class should grow to more than 10 times its size in 2008. If one definition of mid-dle class is people with enough money

to afford basic ne-cessities plus discre-tionary purchases such as jewelry, cars, appliances, and bet-ter-quality food and housing, then a bil-lion more consumers will want those items over the next decade!

Winners of Higher DemandAlthough I don’t expect rampant

inflation, prices should rise steadily as more middle-class consumers compete for these goods, with the profits of top companies in these sectors growing faster than the overall economy. Our subscribers can benefit from this trend in several ways.

An entire PF portfolio, Inflation Hedges, is designed to capitalize on ris-ing prices of hard assets through mutual funds and stocks that benefit either di-rectly, such as Australian mining com-pany BHP Billiton, or indirectly, such as American jeweler Tiffany & Co.

On page 11 of every Personal Fi-nance issue, you’ll find our Fund Port-folio, which includes a category dedicat-ed to inflation hedges. Four exchange-traded funds—SPDR Gold Shares, iS-hares Residential Real Estate, Power-Shares DB Agriculture and SPDR DB International Government Inflation-Protected Bond—create an inexpen-sive, diversified portfolio that should benefit from inflation.

Our PF Growth and Income portfolios each include several companies that should be inflation winners, including ConAgra, Chevron and Eastman Chemical from the Growth Portfolio, and Noble Corp., LyondellBasell and Kraft Foods from the Income Portfolio. Cowabunga!

THE NEXT WAVE?

Source: Bloomberg

15

17

19

21

23

25

27

29

31

33

Apr '10 Apr '11 Apr '12 Apr '13 Apr '14 Apr '15

PowerShares DB Commodity Tracking Fund

www.PFnewsle t ter.com 800-832-2330 May 13, 2015 3

Small but MightyA generic drug maker cleans up on scraps from industry giants.BY LINDA MCDONOUGH

Selling cheap drugs is big business. We’re not talking about street-corner

dealers but generic drug merchants with stocks sold on Wall Street. In six months, three gigantic mergers of ge-neric drug makers have been proposed, each one larger than the last.

First, Perrigo bought Omega, a pri-vate European generic drug manufac-turer, for $4.5 billion last November. After a brief interlude, two more deals were announced last month in what’s turned into a dog-eat-dog acquisition frenzy. In early April, Mylan bid $29 bil-lion for Perrigo, the large generic manu-facturer who had barely digested its re-cently acquired Omega. A little more than two weeks later, Teva bid $40 bil-lion for Mylan, which presumably now owns Perrigo and Omega.

While larger players chase each other in concentric circles of mergers, a smaller player stands to benefit handsomely. ANI Pharmaceuticals (NSDQ: ANIP), a small but scrappy generic manufactur-er, is poised to excel in this environment.

Before we discuss ANI, why all the mergers? You can attribute some of the frenzy to Obamacare. The Affordable Care Act added about 30 million lives to the pool of insured patients and requires all health insurance to include some form of prescription drug coverage. Most of these plans are priced to encour-age use of generic drugs so that a huge wave of new customers is lining up on the doorstep of generic drug companies.

A Patent CliffThe more obtuse reason for the rise

of these companies’ fortunes has to do with the timing of patent expirations. A record level of patents for branded drugs expired over the past three years, a phenomenon often referred to as the “patent cliff.” Once a drug comes off patent, a generic drug company is ready and waiting with a filing at the FDA to allow it to produce a cheaper generic version.

At least five blockbuster drugs came off patent in 2014. Each one of these generated at least $1 billion in sales. Trade publication Fierce Pharma esti-mates that branded drugs worth $66

billion will come off patent in 2015 alone. As each drug falls off the patent cliff, its expiration opens up a whole new stream of medications for generic manufacturers to sell. Not only do the generic manufacturers now have a larger pool of customers, they have an abun-dant supply of product to sell to them.

As the large generic companies get larger, the only avenue left to grow profits is to buy competitors. While the whales and sharks de-vour each other in bid-ding wars, ANI Pharma feasts on the delicious scraps these large corpo-rations ignore.

ANI was born from a reverse merger with BioSante Pharmaceuti-cals in June 2013. Since then the company ac-quired a portfolio of 31 previously marketed generic products from Teva Pharmaceuticals and two branded drugs from Shire and Noven Pharmaceuticals while selling more of its hormone replacement therapy drugs. Revenue rocketed up 86% in 2014 and should grow another 50% in 2015.

If any of the generic mergers noted above come to fruition, ANI could reap additional benefits as the larger compa-nies are forced to divest overlapping drugs to gain FTC approval for the deals. And ANI is ready and willing to acquire more marketable drugs at the right price.

Good MedicineANI’s primary drug is a generic fe-

male hormone replacement. Although revenue from this drug more than dou-bled in 2014, its growth is expected to slow as competitors reenter the market in 2015. To insulate sales growth, ANI has been transferring production of the 31 drugs purchased from Teva in De-cember 2013 to its own plants. As these drugs already have FDA approval, ANI needs only a quiet nod from the agency to sell them. The market value for the generic versions of these 31 drugs

equals $860 million, with only a fraction of these sales needed to make a dramatic impact on ANI’s current $80 million in annual revenue.

The company had $169 million in cash at year-end. This was partly funded by a convertible bond deal that netted $138 million for the company and by

$22 million in cash from operations generated in 2014. Management is eager to purchase other drugs pruned from the multibillion-dollar port-folios of the larger gener-ic companies.

The stock marched up steadily since the Bio-Sante merger, more than doubling to $20 in the second half of 2013. It caught fire again in No-vember 2014, when the company first began re-porting sustainable prof-

its. Shockingly, the stock, which is now close to $70, still trades at a significant discount to its peers.

Industry giants Mylan and Perrigo are growing between 12% and 17% and trade at P/Es roughly 1.25 times their growth rates. ANI currently trades at 18 times 2016 estimates. ANI’s 2014 earn-ings benefited from a favorable tax al-lowance that skewed the numbers dra-matically, but after subtracting that one-time benefit, the company earned $1.48 for the year, up from a loss the previous year. Management estimates ANI will earn $2.72 in 2015, an 83% in-crease!  Estimates for 2016 reflect earn-ings growth of another 40%.

Buying a stock that is up tenfold over the past two years may be a hard pill to swallow, but it certainly looks like good medicine to us. ANI should continue to benefit from the tsunami of patent expi-rations and the divestiture of products from merger activity. By fostering and nurturing smaller drugs, ANI has a for-mula for bulking up on profits. Buy ANI Pharmaceuticals up to $75.

Linda McDonough is a contributing writer to Personal Finance.

SMALL CAPS SMALL CAPS SMALL CAPS SMALL CAPS

SWEET MEDICINE

Source: Yahoo Finance

ANI Pharmaceuticals Projected Earnings Growth

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

2015 2016

83%

40%

PERSONAL FINANCE4 May 13, 2015

Tech Stocks Beat GreenbacksDespite the strong dollar, most of the technology sector is thriving.BY JIM PEARCE

It came as no surprise to me when Apple once again reported earnings

that caught the market flatfooted. This time the market figured the weakening Asian economy would put a dent in its profits.

But on April 27 the company announced its best second quarter ever, with profits of $13.6 billion, a 33% increase over the same quarter last year. Most impressively, sales of its large-screen iPhone 6 in China were 70% higher than last year.

As Leo Boeckl, portfolio strategist for Investing Daily’s Smart Tech Investor, once told me: “Most people don’t understand what type of company Apple (NSDQ: AAPL) really is. It’s no longer just a PC company; it’s a consumer-products conglomerate—and one of the best in the world.” This was before he named Apple the “One Tech Stock to Own in 2014” in the December 2013 inaugural issue of Smart Tech Investor.

Even now some analysts fret that a lukewarm reception to Apple’s new smart watch, together with pain from the strong dollar, may hurt overseas sales revenue. Once again they are missing the point: Apple knows how to make the most popular consumer electronics devices in the world.

Apple remains a core holding that should be bought up to $130.

Tech ServeAs for the other stocks in the infor-

mation technology sleeve of our port-folio, Microsoft (NSDQ: MSFT) also reported better-than-expected earn-ings. That raised its stock price from below $42 on the day it reported to more than $48 three days later.

Just as Apple is no longer just a PC company, Microsoft is no longer just a software company, and it’s beginning to show in the numbers.

We are raising the buy limit on Microsoft to $50.

Oracle, which still is a software company, released quarterly earnings in March that included a 30% jump in revenue from its cloud Software-as-a-

Service and Platform-as-a-Service products. The company also announced it will increase its dividend payment by 25%, driving its stock price 10% higher.

It’s close to being fairly valued, so only buy Oracle on dips below $42.

Our fourth tech stock, Qualcomm, has a major problem in its deteriorating relationship with Samsung, which is going to use its own microprocessor in its smartphones instead of Qualcomm’s. The recent increase in Qualcomm’s stock-repurchase program should keep the stock price from falling below $65 until the company is able to get its Asian sales numbers back on track.

Until then, Qualcomm should not be bought above $75.

Telecom Services provider Level 3 Communications (NYSE: LVLT) continues to benefit from the explosive growth in demand for bandwidth. The company recently announced first-quarter earnings of 35 cents per share, a little better than the consensus estimate of 33 cents. The stock price jumped more than 4% that day on the news, fueled in part by its estimates for higher revenue and free cash flow for the remainder of the year.

You can feel comfortable buying Level 3 up to $59.

Pain from a Strong Dollar Global food distributor Mondelez

International reported earnings on April 29, which pushed its stock 5% higher based partly on better-than-expected growth in Latin American markets.

Perhaps more than any stock in our portfolio, Mondelez has huge currency exposure, as 80% of its sales are booked overseas. Nevertheless, it managed to raise prices and reduce costs enough to convince investors that once the dollar begins to weaken, the company will be able to book much bigger profits.

But until that happens, Mondelez remains a hold as its IDEAL score has dropped below the market average.

Another company with large foreign-exchange risk is insurer ACE Limited (NYSE: ACE), which still managed to beat reduced earnings expectations. Thanks to stellar underwriting results, ACE was able to offset increased write-downs to its revenue from the strong dollar with decreased write-offs from reduced claims. However, it still could not avoid a 4% decrease in net income versus the last year, pushing its share price down 4%.

But we’re keeping ACE up our financial sleeve, with a buy limit of $125.

Another holding in the financials sector, credit card issuer Discover Financial (NYSE: DFS), reported earnings per share on April 21 down 2% from the previous year. It also announced a 17% bump in its dividend, but that wasn’t enough to prevent a small drop in its share price. As long as interest rates remain low, it will be difficult for Discover to grow profits on its existing product line. But it has enough cash reserves to buy more profitable loan portfolios from other lending institutions, while continuing to buy back more than $2 billion of its stock over the next five quarters.

It won’t take long for investors to find Discover once interest rates begin rising, but until then we are reducing our buy limit to $65.

Pharmaceutical giant Baxter International (NYSE: BAX) also suffered as a result of the strong dollar, reporting a 2% loss in sales after adjusting for currency valuations. The good news is that Baxter’s share price managed to remain above its 50-day moving average despite shedding 3% of its value.

We think the pain for Baxter will subside once the dollar begins to weaken, so it’s still a buy up to $75.

GROWTH TRACK GROWTH TRACK GROWTH TRACK GROWTH TRACK

The following advice is suitable primarily for investors who seek long-term capital appreciation. The Growth Portfolio tracks the 10 sectors in the Standard & Poor’s 500. Please note that we consider stocks above the buy limits to be holds unless and until we recommend that you sell. Regarding the pie chart at right, you should use the Growth Portfolio to populate the Stocks portion of your portfolio, and the Fund Portfolio can provide choices for the Bonds and Hedges portions.

Security Date Total IDEAL Score Total IDEAL Recent Stop-Loss(Exchange: Symbol) Added Yield* Return+ Dividend Cash Flow Value Score Value Price* Price Advice#

Consumer Discretionary Growth Portfolio Allocation: 9.3%, S&P 500 Weighting: 12.6%*)

Best Buy (NYSE: BBY) 03/24/15 2.6% -14.7% 3 3 4 10 $74.66 $34.86 $27.00 Buy < 45

Home Depot (NYSE: HD) 07/11/12 2.2 122.8 3 1 1 5 116.41 108.71 95.00 HOLD

Viacom (NSDQ: VIAB) 01/08/14 1.8 -14.9 2 0 4 6 92.83 72.24 60.00 Buy < 75

Consumer Staples (9.0%, 9.7%)

ConAgra Foods Inc. (NYSE: CAG) 02/24/15 2.7 5.6 3 0 2 5 38.99 36.41 32.00 Buy < 39

Mondelez International (NSDQ: MDLZ) 03/28/12 1.6 65.0 2 0 1 3 24.86 38.7 33.00 HOLD

Energy (13.6%, 8.0%)

Chevron (NYSE: CVX) 03/28/90 3.8 1495.3 3 0 4 7 167.50 111.73 88.00 Buy < 105

Kinder Morgan Inc. (NYSE: KMI) 10/22/14 4.5 17.4 3 1 3 7 64.57 43.07 35.00 Buy < 48

National Oilwell Varco (NYSE: NOV) 12/09/14 3.5 -17.7 3 2 4 9 102.00 52.92 38.00 Buy < 58 t 75

Schlumberger (NYSE: SLB) 09/10/14 2.1 -8.6 3 1 4 8 161.53 94.28 74.00 Buy < 90

Financials (12.3%, 16.2%)

ACE Limited (NYSE: ACE) 04/09/14 2.4 11.7 3 0 4 7 161.97 108.04 87.00 Buy < 125

BlackRock (NYSE: BLK) 09/24/14 2.4 12.7 3 2 3 8 549.69 366.67 300.00 Buy < 395

Discover Financial Services (NYSE: DFS) 11/24/10 1.9 231.8 2 1 4 7 87.42 58.31 47.00 Buy < 65 t 74

U.S. Bancorp (NYSE: USB) 08/28/13 2.3 23.9 3 0 4 7 64.43 42.98 34.00 Buy < 50

Wells Fargo (NYSE: WFC) 05/15/13 2.7 48.0 3 0 4 7 83.14 55.46 44.00 Buy < 63

Healthcare (7.1%, 14.9%)

Baxter International (NYSE: BAX) 12/10/08 3.0 60.4 3 1 2 6 89.63 69.75 60.00 Buy < 75

Gilead Sciences (NSDQ: GILD) 06/11/14 1.7 26.6 2 3 4 9 197.22 102.32 78.00 Buy< 115

Johnson & Johnson (NYSE: JNJ) 10/12/11 3.0 74.1 3 1 2 6 129.00 100.39 86.00 Buy < 140

Novartis (NYSE: NVS) 12/10/08 2.2 191.5 3 1 1 5 110.02 102.74 88.00 Buy < 90

Industrials (8.1%, 10.4%)

Delta Air Lines (NYSE: DAL) 02/12/14 0.8 46.1 1 3 4 8 77.15 45.03 37.00 Buy < 55

Honeywell International (NYSE: HON) 05/11/11 2.0 82.0 3 1 1 5 108.95 101.74 87.00 Buy <110

Union Pacific (NYSE: UNP) 12/14/11 2.1 131.1 3 1 1 5 114.49 106.92 92.00 Buy < 110

United Rental Services (NYSE: URI) 02/24/15 0.0 4.2 0 3 4 7 146.56 97.76 76.00 Buy < 105

Information Technology (9.3%, 19.7%)

Apple (NSDQ: AAPL) 04/03/13 1.6 117.8 2 2 3 7 192.85 128.64 113.00 Buy < 130

Microsoft (NSDQ: MSFT) 10/22/14 2.5 12.0 3 1 1 5 52.53 49.06 42.00 Buy < 50 s 45

Oracle (NYSE: ORCL) 11/27/13 1.3 29.1 1 1 3 5 47.90 44.73 38.00 Buy < 42

Qualcomm (NSDQ: QCOM) 01/12/11 2.8 41.8 3 1 4 8 117.65 68.67 56.00 Buy < 75

Materials (8.5%, 3.2%)

Eastman Chemical Co. (NYSE: EMN) 02/24/15 2.1 1.2 3 1 4 8 130.71 76.29 60.00 Buy < 84

Telecom Services (12.5%, 2.3%)

Level 3 Communications (NYSE: LVLT) 03/10/15 0.0 6.0 0 3 3 6 72.83 56.68 44.00 Buy < 59

Utilities (10.4%, 3.0%)

PPL Corp. (NYSE: PPL) 12/09/14 4.3 -1.8 3 1 2 6 44.22 34.41 29.00 Buy < 39

*As of 4/29/15, close. Estimated yields for the next 12 months can differ from actual dividends because of company policy. Estimated yields based on company filings because a full year’s dividends have not yet been paid. +Returns are calculated from the date added. Returns for sold stocks are the returns on the date they were sold. Sold stocks will continue to appear in the Portfolio for two subsequent issues. #Buy at or below prices given. All buy prices are in U.S. dollars. We consider our Portfolio to consist of all stocks rated either buy or hold.To buy all or part of the Growth Portfolio in one transaction, go to PFnewsletter.com/Folio. To ask questions about Folio Investing, please call 1-888-973-7890. Personal Finance and Folio Investing do not have a financial relationship.

May 13, 2015 5www.PFnewsle t ter.com 800-832-2330

GROWTH PORTFOLIO GROWTH PORTFOLIO GROWTH PORTFOLIO RECOMMENDED ALLOCATION

50+10+30+10Stocks50%

10% Bonds

Hedges 10%

Cash30%

Fund a Nest Egg with an IRA MatchIf you needed another rea-

son to contribute to an IRA, try this one: a match from your broker.

Hoping to poach business from its competitors, Fidelity Investments offers an IRA match for new or existing customers who transfer a Roth, traditional or rollover IRA from a non-Fidelity account to the brokerage. Fidelity will match up to 10% of your annual contribution for a maximum of $1,950 for the next three years. Direct rollovers from a 401(k) are ineligible.

How much of a match you get depends on the account’s value. An account worth $500,000 qualifies for the full 10% match whereas an IRA worth $10,000 or less only gets 1%. Midlevel tiers for IRAs valued at $50,000, $100,000 and $250,000 re-ceive matches of 1.5%, 2.5% and 5%, respectively. So for a customer contributing $5,500 to a $500,000 IRA, Fidelity will match $550 for the first year for a total of $1,650 over three years, assuming the in-dividual contributes the same amount each year. (Visit

www.fidelity.com/IRAmatch for details.)

But don’t transfer an IRA unless you’re prepared to make your annual contribution within 60 days of transferring the funds, a requirement for the broker match. Like the transferred IRA, the contribu-tion must also come from a non-Fidelity account and is in-cluded in the IRA’s total value, which determines the percent-age match for future years.

Fidelity ranked first in a 2014 Kiplinger’s survey of the top 10 online brokerages for having the best combination

of fees, tools, research and in-vestment choices. Neverthe-less, depending on how you invest and manage your retire-ment savings, Fidelity may not be the best place for your IRA. Even with the sweet carrot of an IRA match, frequent traders may be better off at discount brokerage TradeKing, which charges $4.95 compared with Fidelity’s $7.95 transaction fee. As for investors of ex-change-traded funds, Charles Schwab offers more than 200 commission-free ETFs com-pared with Fidelity’s 70. —Catherine Siskos

PERSONAL FINANCE6 May 13, 2015

ROUNDUP ROUNDUP ROUNDUP ROUNDUP

Reading the Population Tea LeavesDemographics offer a

decent crystal ball for predicting U.S. stock values, and one study reads the population tea leaves as call-ing for price-to-earnings ra-tios to be halved over the next decade. The culprit, economists say, is the ratio of middle-aged to older people. There are roughly 46 million Gen Xers com-pared with 78 million baby boomers, and about 8,000 baby boomers turn 65 every day for the next 14 years.

The prime years for buying stocks are when people are in their forties, while people in their sixties are in prime stock-selling years. As more people enter their sixties, sales will go up and P/E ratios will fall. That’s the prediction of economists at the Federal Reserve Bank of San Francis-co. They think valuations will plummet from an average P/E of 15 for Standard & Poor’s 500-stock index today to an average of 8.2 in 2025, after which P/Es and stock prices will start to recover. By 2030,

when the oldest members of another large generation—millennials—turn 48, the Fed-eral Reserve study projects stock valuations will be 20% higher than in 2010.

The link between U.S. stock values and the popula-tion’s age distribution is strong, with P/E ratios closely mirroring the middle-aged-to-older (M/O) ratios of adults between 1954 and 2010. In

fact, the San Francisco Feder-al Reserve economists esti-mate that the ratio accounts for about 61% of P/E values during that period.

Economists, though, don’t see the same strong connec-tion between stock values and aging populations in other de-veloped countries, where M/O ratios are falling off a steeper cliff than in the United States. That’s good news for U.S.

stocks, which are closely linked with financial markets in Europe and Japan. If aging populations overseas don’t af-fect share values in those markets, they’re even less likely to drag down ours.

Also good news: Baby boomers may decrease their stock holdings more slowly than previous generations of retirees to compensate for their longer life expectancies.

It’s unclear if demo-graphics affect stock values in emerging markets the same way they do in the United States. The markets in those countries, where populations are typically younger, have fewer years of P/E data to interpret and often tighter government controls that skew the numbers. Other-wise, the demographic crystal ball could tell us if rising M/O ratios in emerging markets are a sign that their stocks might be entering a prolonged period of higher prices, as the United States had in the 1980s and 1990s. —Catherine Siskos

A P/E CRYSTAL BALL?■ Age ratio■ S&P 500 P/E

Source: Federal Reserve Bank of San Francisco

0.0

0.5

1.0

1.5

2.0

2.5

0

5

10

15

20

25

30

35

'54 '58 '62 '66 '70 '74 '78 '82 '86 '90 '94 '98 '02 '06 '10 '14

www.PFnewsle t ter.com 800-832-2330www.PFnewsle t ter.com 800-832-2330 May 13, 2015 7

On an Organic Buying BingeAs food companies gobble up smaller businesses, the smart money is on a fast-growing grocery chain.BY LINDA MCDONOUGH

Wall Street is binging on organic food stocks. Since General

Mills acquired Annie’s Homegrown, the maker of organic crackers and pasta, last September, investors have been stuffing organic food-related stocks into their portfolios.

Annie’s, the stock with the adorable ticker BNNY, was acquired for $46 a share, a 37% premium to where it trad-ed before the deal. The price General Mills paid was rich by any standard. Just one month before the deal was announced, Annie’s reported a loss for its June quarter and revenue growth of only 5% on its base business. General Mills paid roughly 50 times expected 2015 earnings for Annie’s.

Large food companies have been on an organ-ic shopping spree for some time now—and with good reason. Ac-cording to the Organic Trade As-sociation, organic food sales grew 11.5% in 2013, the fastest rate in five years. Con-trast this stellar pace to Kraft and Kellogg, which re-ported declining sales for the past 12 months, and General Mills and Pepsi-co, whose growth was less than 1%.

With financing both abundant and cheap, buying established organic brands is easier than creating a new one from scratch. According to in-dustry source the Cornucopia Insti-tute, there were 81 independent or-ganic food companies in 1995. As of 2005, all but 15 had been acquired by the same large food companies that had once lobbied against label-ing initiatives for genetically modified and organic food. The most recent count we can find was that 18 organ-ic food companies were independent as of January 2011. Since then at least another six organic food compa-nies have been purchased by their

larger brethren, including General Mills’ purchase of Annie’s.

Headed for HeartburnHungry for similar gains, investors

have bid up the few remaining public plays in the organic space. White-wave, the manufacturer and distribu-tor of Silk soy milk, is up 29% since the Annie’s deal was announced. Hain Celestial Group, an organic food distributor, is up 30%, and an-other natural food conglomerate, United Natural Foods, is up 11%. This hearty performance compares with a positively unappetizing 5% gain in the Standard & Poor’s 500-stock index for the same period.

Buying these stocks at cur-rent levels is bound to pro-duce some portfolio indi-gestion some-time in the fu-ture. The scarci-ty of pure or-ganic product plays probably has contributed to the outland-ish valuations

placed on most of these stocks, which now trade at price-to-earnings ratios that are almost twice the companies’ growth rates.

Plus, these smaller companies have been taking on debt to finance their own acquisitions of smaller private lines of organic foods. With more product lines to distribute, Hain Ce-lestial and United Natural are bor-rowing money to expand warehouses to ensure efficient distribution. The high valuations placed on these com-panies do not reflect the risks lurking within these corporate transitions.

Sprouting Tasty ReturnsThe better way to play the boom

in organic food is to buy Sprouts Farmers Market (NSDQ: SFM), a fast-growing chain of midsize, value-

priced organic foods. Sprouts has its roots in San Diego, where the chain’s founder, the Boney family, first opened a fruit stand in 1943. After selling their first group of stores to Wild Oats in 1999, the Boney family opened the first Sprouts store in 2002. The company ended 2014 with 191 stores and is growing its store base about 14% a year.

Sprouts earned $0.74 a share in 2014, an increase of 50% from the previous year. Earnings are expected to grow 23% in 2016, compared with the lackluster 11% increase in earnings for industry leader Whole Foods. Sprouts had 191 stores at year-end, less than half the number that Whole Foods operates. With a goal of 1,000 stores, Sprouts has quite a bit of running room before it slows. As Whole Foods experiments with new tap and wine rooms in its stores along with flower delivery, Sprouts is sticking to expanding its base of stores by offering customers an inexpensive basket of organic foods. A Bloomberg analysis notes that Sprouts prices are on average 13% cheaper than Whole Foods. Sprouts is currently only in 12 states, leaving 38 wide open for expansion.

Sprouts generates positive cash flow that grew 13% last year and is plentiful enough to allow the company to pay down its debt after expenditures for adding new stores. It is the cheapest stock in a basket of organic-food stocks and has the potential to increase its growth by opening more stores than planned. Whole Foods, the matriarch of the group, has earned a premium valuation thanks to its history of reliable, profitable growth. That stock enjoys a P/E equal to 26, more than twice the rate that earnings are growing. As Sprouts continues to seed new markets with stores, the stock could offer investors tasty returns. Buy up to $35.

Linda McDonough is a contributing writer to Personal Finance.

HEALTHY RETURNS

Source: Companies

0%

5%

10%

15%

20%

25%

Sprouts Whole Foods

2016 Earnings Growth

GROWTH GROWTH GROWTH GROWTH

PERSONAL FINANCE8 May 13, 2015

Defying Not-So-Great ExpectationsDespite a flatlining economy and strong dollar, these four portfolio holdings stood up under pressure.BY BENJAMIN SHEPHERD

U.S. first-quarter earnings are com-ing in better than expected, de-

spite some analysts predicting the first quarterly decline since 2009. Of the S&P 500 companies that reported so far, earnings not only didn’t decline the forecasted 2.9% but were up an av-erage of 0.02% compared with a year ago. By and large, our portfolio hold-ings generally defied expectations, too.

Ford’s first-quarter earnings came up a bit light, as net income fell $65 million year-over-year to $924 million while earnings per share dipped 2 cents to 23 cents.

Although the new, all-aluminum F-150 is catching on quickly with con-sumers, production problems kept it and the Edge on a slower sales track. Production of the F-150 was down 60,000 trucks compared with last year while the Edge was off 15,000. Ford (NYSE: F) also launched three new models so far this year, including the Edge, Focus ST and Focus ST wagon, with 12 more new vehicles hitting showrooms later this year.

The main issue, though, has been currency headwinds. Ford made $1.34 billion in North America but lost $189 million in South America because of the strong dollar and weaker-than-ex-pected sales. Still, South American sales improved compared with last year. Eu-ropean sales also dropped as the auto-maker is struggling in the Russian mar-ket, though it continues to invest and roll out new vehicles there.

The company saw a net profit of $79 million in the Middle East and Af-rica, while Asia-Pacific profits totaled $103 million, thanks largely to 10% more Chinese volume.

Despite the rocky start to 2015, Ford predicts pretax profit for the year will range between $8.5 billion and $9.5 billion. It boosted its dividend from 13 cents to 15 cents to yield 3.8%.

Ford Motor Co. should hit its stride later this year after resolving its production issues; it remains a buy up to $20.

The strong dollar also posed a challenge to Philip Morris International, where first-quarter revenue was $6.6 billion, 4.4% less

than expected. Without the currency-exchange penalty, revenue would have been 9.2% higher year-over-year. Earnings of $1.16 per share beat estimates after the company raised prices across the board.

Although sales in-creased in all regions, Europe was particular-ly strong, up 7.8% on a currency neutral basis, with a 13.9% jump in Eastern Eu-rope. Latin America was another bright spot, where revenue rose 14.2%.

Despite the strong dollar, Philip Morris (NYSE: PM) boosted its earnings expectations to range between 9% and 11% compared with its previous estimate of 8% to 10%. If that prediction holds true, EPS should be between $4.32 and $4.42 for the full year. Clearly Philip Morris has adapted to the strong dollar and should continue growing, with a divi-dend increase likely before year-end.

As the strong dollar isn’t sending profits up in smoke, Philip Morris International is a buy under $89.

EPS at Kraft Foods Group beat the consensus, 86 cents to 81 cents, but profits dipped for the fourth con-secutive quarter, falling 16% year-over-year to $429 million. Revenue declined 0.2% to $4.35 billion.

Although management didn’t offer much information about earnings be-cause of the pending merger with Heinz, first-quarter results were good after the company raised prices the past few quarters. Net revenue from cheese products was particularly good, up 1.3% thanks to a reinvention of Kraft’s Philadelphia cream cheese. But lower sales volumes from the hike in prices offset much of that gain.

With the merger expected to close in the third quarter, I don’t expect any surprises from Kraft (NSDQ: KRFT). Management will work on improving margins but hold off on other changes until the newly merged company de-cides where to cut costs and which brands to emphasize or shed.

Although we continue to rate Kraft Foods Group a buy under $90, share prices should stay put for a while but will pop once the Heinz deal is consummated.

Despite losing some subscribers, both AT&T and Ver-izon posted respect-able quarters. At AT&T (NYSE: T), about 200,000 phone customers defected in the first quarter, while Verizon (NYSE: VZ) lost 138,000. Compe-tition was intense dur-ing the quarter, with both Sprint and T-

Mobile advertising heavily to lure cus-tomers away from the top two players.

Consolidated revenue at AT&T rose 0.3% to $32.6 billion, with net income down 13.5% to $3.2 billion and an EPS of 63 cents matching expecta-tions. Verizon’s earnings, though, beat analysts’ expectations, coming in at $1.02 per share versus 95 cents, as rev-enue rose 3.8% year-over-year to $32 billion. Verizon outperformed AT&T largely because it reduced its advertis-ing, which helped cut costs and boost profits.

Both telecoms should keep growing respectably from television service. AT&T added about 50,000 television subscribers during the quarter while Verizon announced lower-priced monthly Custom TV subscriptions with fewer channels.

We still rate AT&T a buy under $38, but we’re boosting Verizon’s target to $55.

Finally, Noble Corp. (NYSE: NE) blew expectations out of the water. Av-erage daily revenue rose 2.8% to $340,000 after the company increased the use of its fleet from 82% to 86%. Operating revenue notched up about 1% to $804.3 million. Net income per share rose from 60 cents at the same time last year to 72 cents, beating con-sensus estimates of 51 cents, as drilling margins expanded from 50% to 59%.

Even though oil prices remain in a slump, Noble Corp. continues to rate a buy up to $30.

INCOME REPORT INCOME REPORT INCOME REPORT INCOME REPORT

Source: Standard & Poor’s

BUCKING THE TRENDAnalysts forecasted a decline in Q1 earnings for S&P 500

companies that didn’t pan out.

-5%

0%

5%

10%

15%

Q1 '13 Q2 '13 Q3 '13 Q4 '13 Q1 '14 Q2 '14 Q3 '14 Q4 '14 Q1 '15

The following investment guidance is generally suitable for people who seek a high level of current income while preserving wealth.

In general, this advice will apply most to investors who are retired or less than five years from retirement. However, investors of all

ages and risk tolerances can benefit from allocating some of their assets to these investments. New subscribers should consider

investing first in the stocks that currently are trading below our buy limits. Please note that we consider stocks above the buy limits

to be holds unless and until we recommend that you sell. Regarding the pie chart at right, you should use the Income Portfolio to

populate the Stocks portion of your portfolio, and the Fund Portfolio can provide choices for the Bonds and Hedges portions.

Security Date Total IDEAL Score IDEAL Recent Stop-(Exchange: Symbol) Added Yield* Return+ Dividend Cash Flow Value Total Price* Loss Advice#

Cisco Systems 3.625% Note of

03/04/2024 (CUSIP 17275RAN2) 11/26/14 3.6% 6.4% 3 0 4 7 $107.30 N/A Buy

Consumer Discretionary

Ford Motor Co. (NYSE: F) 02/24/15 3.7 -1.8 3 2 4 9 16.06 $13.00 Buy < 20

Consumer Staples

Kraft Foods Group (NSDQ: KRFT) 11/12/14 2.6 51.7 3 0 0 3 85.88 59.00 Buy < 62

Philip Morris International (NYSE: PM) 11/12/14 4.8 -3.3 3 0 2 5 82.88 75.00 Buy < 89

Energy

Noble Corp. (NYSE: NE) 12/09/14 9.2 -0.5 3 0 4 7 15.81 12.00 Buy < 30

Financials

Bank of Nova Scotia (NYSE: BNS) 09/25/13 3.9 3.8 3 0 4 7 56.00 47.00 Buy < 66

Chubb Corp. (NYSE: CB) 04/07/15 2.3 -1.4 3 1 4 8 99.97 79.00 Buy < 120

People’s United Financial (NSDQ: PBCT) 09/24/14 4.4 6.1 3 0 3 6 15.33 13.00 Buy < 21

Umpqua Holdings Corp. (NSDQ: UMPQ) 08/28/13 3.5 11.6 3 3 4 10 17.34 13.00 Buy < 21

Healthcare

AbbVie (NYSE: ABBV) 03/12/15 3.1 15.6 3 0 3 6 66.49 43.00 Buy < 70

Information Technology

CA (NSDQ: CA) 09/24/14 3.1 15.0 3 0 4 7 32.18 27.00 Buy < 34

Materials

LyondellBasell (NYSE: LYB) 02/24/15 2.7 15.0 3 2 4 9 104.14 70.00 Buy <115

Metals

BHP Billiton (NYSE: BHP) 08/25/10 4.8 -6.0 3 0 0 3 52.27 40.00 Buy < 60

Preferred Stocks

AES Corp. 6.75% Pref C (NYSE: AES C,

CUSIP: 00808N202)** 02/08/06 6.6 43.7 3 0 4 7 50.67 48.00 Buy < 50

Cons Energy $4.50 Pref B (NYSE: CMS B,

CUSIP: 210518304)** 02/28/01 4.4 151.3 3 1 1 5 100.5 95.00 Buy < 100

Real Estate Investment Trusts

Realty Income (NYSE: O) 10/23/13 4.8 27.4 3 2 0 5 49.03 47.00 Buy < 50

Telecommunications Services

AT&T (NYSE: T) 09/10/14 5.4 4.7 3 0 4 7 34.86 30.00 Buy < 38

Verizon Communications (NYSE: VZ) 08/17/87 4.4 962.8 3 0 4 7 50.55 43.00 Buy < 55 s 50

*As of 4/29/15, close. Estimated yields for the next 12 months can differ from actual dividends because of company policy. +Returns are calculated from the date added and can

be volatile due to significant price and dividend moves. Returns for sold stocks are the returns on the date they were sold. Sold stocks continue to appear in the Portfolio for two

subsequent issues. #Buy at or below prices given. All buy prices are in U.S. dollars. **Call dates and prices for the preferreds are as follows: AES Corp., 06/01/15, $50.00; and Cons

Energy, 06/01/15, $110.00. We consider our Portfolio to consist of all stocks rated either buy or hold.

www.PFnewsle t ter.com 800-832-2330 May 13, 2015 9

INCOME PORTFOLIO INCOME PORTFOLIO INCOME PORTFOLIO RECOMMENDED ALLOCATION

50+10+30+10Stocks50%

10% Bonds

Hedges 10%

Cash30%

PERSONAL FINANCE10 May 13, 2015

Cheap Money Sparks Interest in EuropeWith the continent reviving, we answer your questions about investing there and in closed funds.BY BENJAMIN SHEPHERD

This time last year, we speculated about Greece’s exit from the euro

zone and worried that deflation would dog the region, sending it into eco-nomic chaos. With Grexit still not off the table, Mario Draghi, president of the European Central Bank, announced that it would purchase bonds monthly through September 2016, Europe’s own version of quantitative easing.

Although U.S. growth was virtually nil in the first quarter, which seems to be a recurring theme, Europe’s econo-my is starting to revive. European con-sumer prices halted a four-month slide, the euro is strengthening, and yields on German bonds are rising. In a sign of how much times have changed, we’re now getting questions from readers about how to invest in Europe instead of how to avoid it. Although our port-folio doesn’t have any Europe-specific funds, we’re not bereft of European ex-posure either.

Betting on EuropeAt Causeway International Value

(CIVVX), managers Sarah Ketterer and Harry Hartford like companies in crisis because that’s when you get them cheap. And nothing drops a company’s share price faster than a home region gripped by economic turmoil.

The duo found quite a few bargains, ramping up their European exposure to more than 70% of assets. In particular, Ketterer and Hartford added to their positions in European banks over the past few quarters, taking stakes in BNP Paribas, Lloyds Banking Group and HSBC Holdings. Given our own expe-rience with quantitative easing, bulking up on banks makes sense because they profit nicely from lending virtually free capital at interest.

Besides banks, the fund recently added a new stake in German automak-er Volkswagen AG and built its posi-tions in French utility GDF Suez and British infrastructure company Balfour Beatty. Financials are by far the fund’s biggest stake, at a little over 19% of as-sets, followed by consumer discretion-ary at 14.1%, industrials at 12.3% and healthcare at 11.5%.

The fund has had some ups and downs, underperforming 75% of its peers last year. But it’s also slightly less volatile and tends to outperform long term, ranking near the top third of its catego-ry over the past decade and in the top 10% over the past five years. And because Ketterer and Hartford aren’t shy about rushing into tough situations, they favor companies with strong balance sheets and price discipline while paying careful attention to valua-tions.

If you’re looking for pure European exposure, Vanguard European Stock Index (VEURX) is one of the best and cheapest funds around. Tracking the FTSE Developed Europe Index, the fund holds more than 500 large and mid-cap stocks from 17 developed Eu-ropean nations. At 21.6% of assets, fi-nancials get the greatest weighting, fol-lowed by healthcare at 14.1% and con-sumer staples at 13.3%, though every sector is represented to some degree.

With a 0.26% expense ratio, the fund offers an inexpensive, reliable way to capitalize on a continent buoyed by quantitative easing. If you prefer ex-change-traded funds, buy Vanguard FTSE Europe ETF (NYSE: VGK), the same fund in a different wrapper, but with an even lower, 0.12% expense ratio.

A Good Problem to HaveWe’ve also gotten questions about

two Fund Portfolio holdings: Wasatch Small Cap Growth (WAAEX) and T. Rowe Price Small-Cap Value (PRSVX).

Some of you told us that the funds are closed, which is partially true. T. Rowe Price Small-Cap Value was closed for a time because assets under manage-ment were approaching $9 billion. When the fund has too much money to

invest, it can’t find enough small-cap stocks to buy without moving the mar-ket. That’s a fairly common problem with small-cap investing, and most well-run funds will close when their coffers overflow, a good problem to have. With $2.3 billion under manage-ment, the Wasatch fund has been run-ning into the same issue.

The T. Rowe fund has since re-opened and can be purchased either through your broker or directly through T. Rowe Price. Wasatch, on the other hand, limited new investment to those purchasing shares directly from the fund at 800-551-1700.

If you’d rather not go to that trou-ble, a good alternative is T. Rowe Price Diversified Small Cap Growth (PRDSX). Manager Sudhir Nanda uses computer models to select stocks that are cheap relative to their cash flow and have high-quality earnings, more cur-rent assets than liabilities, and strong upward momentum. Interestingly, the fund has a low turnover rate, changing between 20% and 30% of its holdings in a typical year. It’s also inexpensive with an expense ratio of 0.85%.

The seemingly clairvoyant computer models have kept the fund in the top 10% of its category for one-year, three-year, five-year and even 10-year returns. Because the fund spreads assets evenly across portfolio holdings, it rarely needs to limit new investment.

FUND FOCUS FUND FOCUS FUND FOCUS FUND FOCUS

Source: Bloomberg

EUROPEAN GROWTH RESUMESAs Europe's economy comes to life, the pace will

pick up with quantitative easing.

-1.50%

-1.00%

-0.50%

0.00%

0.50%

1.00%

Q1 Q2 Q3 2012

Q4 Q1 Q2 Q3 2013

Q4 Q1 Q2 Q3 2014

Q4

www.PFnewsle t ter.com 800-832-2330 May 13, 2015 11

FUND PORTFOLIO FUND PORTFOLIO FUND PORTFOLIO

The funds listed are suitable for investors seeking to build a complete fund portfolio or fill gaps in their portfolios. Transaction fees may be charged for some mutual funds if they are bought

through brokers. Exchange-traded and closed-end funds carry transaction fees.

1-Year 5-Year 10-Year

Fund (Symbol) Return Return Return Yield Expenses

U.S. Large Cap

Fidelity Large Cap Stock (FLCSX, 800-544-6666) 13.2% 14.9% 9.4% 1.2% 0.84%

PRIMECAP Odyssey Growth (POGRX, 800-729-2307) 17.7 14.4 10.8 0.6 0.63

Dodge & Cox Stock (DODGX, 800-621-3979) 10.8 13.9 7.0 1.9 0.52

U.S. Mid Cap

Vanguard Strategic Equity (VSEQX, 800-662-7447) 16.0 16.6 9.1 1.0 0.27

Buffalo Discovery (BUFTX, 800-492-8332) 20.0 16.5 12.3 0.0 1.01

Fidelity Mid Cap Value (FSMVX, 800-544-8544) 17.5 15.6 9.9 0.0 0.83

U.S. Small Cap

Schwab Small-Cap Equity (SWSCX, 800-435-4000) 13.1 15.5 8.9 0.0 1.10

Wasatch Small Cap Growth (WAAEX, 800-551-1700) 13.8 14.1 9.2 0.0 1.21

T. Rowe Price Small-Cap Value (PRSVX, 800-638-5660) 2.9 10.8 8.8 0.7 0.82

International

Matthews Asia Growth (MPACX, 800-789-2742) 12.2 9.3 9.1 1.7 1.11

WisdomTree Emerging Markets Equity Income (NYSE: DEM) 1.1 2.2 N/A 4.5 0.63

Causeway International Value (CIVVX, 866-947-7000) 2.2 8.9 5.3 2.1 1.16

Sector

ALPS Alerian MLP ETF (NYSE: AMLP) 1.2 N/A N/A 6.8 8.56

iShares S&P Global Healthcare (NYSE: IXJ) 20.7 19.0 10.3 1.3 0.48

Technology Select SPDR (NYSE: XLK) 20.6 15.0 9.3 1.7 0.15

Tortoise Energy Infrastructure (NYSE: TYG) -2.6 10.8 10.8 5.8 10.97

T. Rowe Price Financial Services (NYSE: PRISX, 800-638-5660) 15.7 10.2 5.3 1.0 0.94

Vanguard Energy Investor (VGENX, 800-662-7447) -13.5 4.1 6.4 2.1 0.37

Bonds

Osterweis Strategic Income (OSTIX, 866-236-0050) 2.0 5.8 6.6 5.7 0.85

Vanguard High-Yield Tax Exempt (VWAHX, 800-662-7447) 6.5 5.7 5.1 3.7 0.20

Vanguard Interm-Term Inv-Grd (VFICX,800-997-2798) 4.9 5.8 5.7 3.0 0.20

Inflation Hedges

SPDR Gold Shares (GLD) -7.0 0.0 10.2 0.0 0.40

iShares Residential Rel Est Capped (REZ) 19.0 14.5 N/A 3.3 0.48

PowerShares DB Agriculture ETF (DBA) -23.5 -2.1 N/A 0.0 1.01

SPDR DB Intl Govt Inflation-Prot Bd ETF (WIP) -5.2 3.3 N/A 0.0 0.50

As of 4/28/15, close. Source: Bloomberg.

RECOMMENDED ALLOCATION

50+10+30+10Stocks50%

10% Bonds

Hedges 10%

Cash30%

PERSONAL FINANCE12 May 13, 2015

What Kind of Investor Are You?The answer isn’t as simple as you think, but knowing it can boost your portfolio performance.BY ROBERT FRICK

The investment profession’s holy grail is a formula for figuring out

how clients will react to market gyra-tions. If you’ve ever used a financial planner or broker, you probably were asked to fill out a questionnaire, espe-cially one designed to pinpoint your risk tolerance. Answer the questions and planners typecast you.

The idea is that if they know what motivates you financially, they can tai-lor a portfolio to suit your risk toler-ance.

Most of these questionnaires don’t work, or at least not well. (At the end of this column is a link to a test that I believe works very well.) As one finan-cial planner told me, the tests rarely worked because of the “Mike Tyson” problem. The former heavyweight champ is credited with saying, “Every-body has a plan until they get punched in the face.”

So when the market crashed in 2008, even many investors who scored on those tests as loving volatility sold stocks at the bottom and lost their shirts. Likewise, investors who score as cautious still pile in at the top of the market and lose their shirts when the bubble pops.

Unlocking Investor BehaviorI have to admit I was once enam-

ored with slicing and dicing investors by archetypes. But eventually I real-ized, as many planners have, that these systems are incomplete, ineffective or just plain silly. Dozens of other de-scriptions of investors are based on ev-erything from pop psychology to Bud-dhism. Then in the past 15 years, the field of behavioral finance unlocked much of the basic wiring for our finan-cial decision-making. Given most in-vestors don’t even earn the market rate of return because their biases lead

them to make bad decisions, find-ing the key to influence their be-havior is important work.

I recently came across a be-havioral-science company that de-vises solutions in different areas and has designed an eye-opening sys-tem that may be a key to understanding investor behavior.

Its president, Hugh Massie, started a financial services business in the 1990s and observed, “It doesn’t matter whether a client is wealthy or not. They behave a certain way when things are going well, but under pressure their be-havior changes.”

Since then he’s worked with psychologists and behaviorists to develop a system that accounts for our biases—things such as following the herd or having an unreasonable fear of losses. Using the firm’s proprietary questionnaires, he can predict an individual’s likely behavior during market ups and downs.

I took the questionnaire. It forces you to make difficult decisions regard-ing trade-offs to simulate thinking under pressure. But of all the ques-tionnaires I’ve taken—and I’ve taken at least a dozen—it described me the best. (I like new challenges and am flexible, but I may not see dangers and juggle too many tasks.) What’s more, it nailed my risk tolerance and the kind of portfolio I have and am com-fortable with, without ever asking me about risk and investing. That’s pretty ingenious.

Key CharacteristicsThe DNA Behavior system is de-

signed to help financial professionals identify the right portfolios for clients and communicate with them in tai-lored ways to help them better weath-er market volatility. For example, when the market deals us a Mike-Ty-son-punch-in-the-face test, some peo-ple need reassurance, while others need reining in because they see too many bargains and want to rush in and buy with abandon. At its simplest level, the test breaks people down into four groups. See if any of these

groups ring true for you or someone you know.

Goal-setting. Much more goal-driven than average,

these people will take risks. Communicating with them is “about their goals and the bot-

tom line,” Massie says. They tend to look at the big picture in a consolidat-ed way, which can be a problem be-cause they’re not as good with details. One danger for goal-setters is they tend to justify losers in their portfolios if the overall result is okay, and trade their accounts too much. The best way to keep them from making bad deci-sions is to have them focus on making progress toward their overall goals.

Lifestyle. These folks want to main-tain their lifestyle and are aware of what other people have and do. They tend to follow the herd and make in-stinctive decisions with no research. When the market goes down, they need to know “their world isn’t get-ting rocked,” Massie says. They tend to spend too much, which can make them a tough client to deal with. In times of trouble, getting through to them involves using graphics in a re-laxed environment to illustrate their options.

Information. Besides saving a lot of money, these individuals engage in be-havior known as “mental accounting.” This means they tend to sequester money into different accounts—for re-tirement, vacations, a car fund and so on. They’re more inclined than others to follow patterns and benchmarks, and they can be rigid in their thinking when changes need to be made. These folks need facts, details and transpar-ency to change their views.

Stability. We are all loss-averse to some degree—behavioral studies show we feel the pain of loss more than twice as much as the pleasure of an equal-size gain. But stability peo-ple are hyper-sensitive to losses. They also are afraid of making decisions for fear of making wrong ones. When losses occur, they need a calm atmo-sphere and space to discuss their feel-ings to avoid making rash decisions.

MIND GAINS MIND GAINS MIND GAINS MIND GAINS

TRY IT YOURSELFDNA Behavior has set up the test

exclusively for Personal Finance subscribers. To take the test, type this into your browser: www.dnabehavior .biz/Account/RegisterByGroup/Investment%20Daily/22