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Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game -- and the contenders -- click here.
I want to thank everyone who came to The World Money Show in Orlando, Fla., a couple of weeks ago. I had so many great discussions with people at the MSN Money booth that I'd like to share with you my answers to the three questions that came up the most often.
Q: What can I do to protect my core portfolio?
A: If you are using mutual funds, the managers of your core funds should make adjustments for you without being asked. After all, it is times like these when good managers earn their fees.
No one likes to lose money, but if your core fund has fallen less than the market, I'd say your fund manager is doing a decent job. However, if your core fund has fallen more than the market and the manager is not doing anything about it, it's time to make a change.
In general, I think your core should be between 40% and 60% of your equity investments divided among three or four great core funds. There are not many mutual funds that have done a good enough job over the past five years under the current manager to be considered a core fund.
In December, I searched Morningstar's database and came up with a list of just 16. If you would like to see the list, click here to send me a message.
Q: Is it time to buy beaten-down financial stocks?
A: I wouldn't do it. These stocks look attractive to value investors because of their low price-earnings ratios and high dividend yields. But using historical earnings to calculate P/E ratios is misleading when the earnings are the result of a business that has been shut down.
In this case, the subprime-mortgage business that produced much of profits in this sector over the past five years has essentially been shut down, and it will not be back soon. Many banks are still sorting out the extent of the damage, and there is a chance that the problem will expand beyond subprime mortgages to other types of loans that were securitized in the same way as subprime mortgages.
In short, the losses could get worse, and I don't see anything that will replace the profits that the subprime-mortgage business used to generate for the banks. These stocks look cheap, but the prospect for earnings is grim, so they are not good values.
If you want to invest in some beaten-down financial stocks, look for stocks like U.S. Global Investors (GROW, news, msgs) and MasterCard (MA, news, msgs) that don't have direct exposure to the subprime-mortgage industry and have much better earnings prospects.
Q: Should I get out of the market?
A: I don't believe the doom-and-gloom predictions. Sure, we have problems in the financial and housing sectors, but we are working through them, and the interest-rate cuts that are already in place have planted the seeds for a strong recovery later this year.
The best time to buy a company's stock is when it has dropped significantly for reasons that do not affect the company. I believe this is the case with many of the stocks in my Strategy Lab portfolio. If I am right, this is a great time to be investing in my portfolio. But if I am wrong, I've tried to select companies that I think will fall less than the market.
I don't think it is advisable to get completely out of the market because if the doom-and-gloom crowd is wrong, the market could make a nice run once the crisis subsides and the interest-rate cuts kick in.
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