As chief equity officer for the AIM family of mutual funds, Edgar M. Larsen is responsible for some $125 billion in stocks. The firm, now a veritable fund armada, is further evidence that investment money is sailing west. With little attention, AIM has become the seventh-largest fund company. So far this year the firm has ranked third in net new money, trailing only Janus (Denver) and Putnam (Boston). It’s 9 a.m., Thursday, Oct. 12, and an uncertain world has become much more uncertain. The USS Cole has been hit by a suicide mission off Yemen, oil prices are spiking, and the technology stocks that were to lead us to nirvana are imploding. The Dow Jones Industrial Average is already well into a plunge that will take it down 379 points for the day, and Home Depot is being hacked by power tool-wielding portfolio managers after the latest in a series of earnings warnings. It will close down 29 percent for the day. Even AIM Constellation, its flagship fund and a stellar performer, loses 3.2 percent of its value for the day. That’s more than $1.2 billion. Mr. Larsen, a graybeard in the business, remains calm. Carnage and chaos notwithstanding, he expects AIM to be the best-selling fund complex for the third quarter. I ask what he thinks of the market. “If you own the Nasdaq, you’re down 37 percent and it’s the second time it has happened in a year,” he said. “This (drop) hasn’t been as dramatic as the one in spring, but it feels as bad. In spring it centered on the Internet. This time it’s fiber optics, telecom, semiconductors and wireless. Even the old technology companies Microsoft, Dell are getting hit. There’s hardly anyplace that hasn’t been hit. I asked if it might be a good time to be out of the market. “You can actually lose money by being out of the market,” Larsen said. “The risks of market timing have never been higher. There are no market-timing mutual funds out there for a reason it is impossible to affect. Historically, October has been a bad month. But we’re certainly very oversold at this point.” I asked what the evidence of being oversold was. “Ohhh … lots. Start with the put/call ratio. Everyone is writing puts; no one is writing calls. Then consider the Internet bubble. It has burst. Look at the money that has been lost! They’re selling at 5 cents on the dollar, and you have to multiply that by hundreds of companies. “Today, the technology sector funds are in net redemption. If they are flat, holding their own, it’s heroic.” I asked how that would affect AIM funds, many of which hold large slugs of technology stocks. “We get hurt whenever a company misses its earnings. Nasdaq is in a serious bear market. That’s not what is going on in the Dow, the oils or the REITs. It’s almost like the flip side of 1999 when the average stock fell but the Nasdaq rose. I asked if there was a problem with market liquidity. “When you look at the volatility of stocks Lucent lost 30 percent of its value, Apple 50 percent, in a day then you know we’ve got a liquidity problem. And it’s exacerbated by the new individual investor who is in these stocks. “You just know there is a big liquidity problem if you’re in the Internet space because there’s no value. But if you look at a company like Motorola, you can look at what the pieces are worth. That can mean opportunity in solid companies like Applied Materials, Texas Instruments and Teradyne. That’s one reason Applied Materials is a core holding. Could he give a specific example? “OK. If Nokia is selling for 25 to 30 percent of what it used to sell for and expectations start to rise, then Nokia will be reborn, along with Motorola. The future is your personal phone. This is a secular growth business.” Did he see positives, a near-term recovery for stocks? “Yes. The markets hate uncertainty. Someday the election will be over. There’s a good chance that the spike in energy prices will be over. And it looks as though we’ve seen the last interest rate increase from the Fed. “This is not the time of year when people invest. They’re all worried about getting a capital gain distribution. And, finally, the tax-selling season will end.” Simplified Lifestyle Question: I’m a 58-year-old divorced woman. I work for a bank but make only $24,000 in salary. With overtime and annual bonus, I make about $30,000 plus another $3,000 to $4,000 from managing a couple of rental properties. I have a home mortgage of $42,000 at 8 percent, with 23 years left. I’ve also got $20,000 in Roth IRAs, about $90,000 in mutual funds, $11,000 in my 401(k), and I’ll get a small company-contributed pension when I retire. I’d like to pay off my mortgage because my paychecks aren’t large enough to make extra principal payments. If I sell one fund in December and another in January, I’ll spread the capital gains over two tax years. I could then raise my 401(k) contribution to 15 percent pretax and 6 percent taxable, and get the full match from my employer. Is this a reasonable plan? – I.D.L Answer: Congratulations on a well-thought-out plan. The current mortgage payment brings no tax benefits and won’t be paid off by retirement. Your alternative brings you immediate income tax saving, captures free matching dollars from your employer, and works to smooth out investment returns between now and retirement. While some would argue that it is silly to give up an invested position that could double over the next seven years, the combination of the employer match and the power of dollar-cost averaging will allow you to invest in equities over the next seven years. In addition, you are not proposing to devastate your investments. Assuming a typical defined-benefit pension plan and about 10 years of work, your pension would be about 15 percent of income, or $300 a month, assuming it is based on $24,000 a year. It could be more. Your Social Security will be about $800 a month, tax-free. Your investments and 401(k) plan are likely to grow to about $240,000, which could provide a long-term retirement income of $1,000 a month. More than half of this amount will be tax-free, due to the personal exemption and standard deduction. Questions about personal finance and investments may be sent to Scott Burns, The Dallas Morning News, P.O. Box 655237, Dallas, TX 75265; or by fax: (214) 977-8776; or by e-mail: scott(at)scottburns.com. Check the Web site: www.scottburns.com. Questions of general interest will be answered in future columns.
