Five Tips for Investors

Morningstar markets editor Jeremy Glaser offers investment tips to help you avoid April Foolishness.

Five Tips for Investors Jason Stipp: I'm Jason Stipp for Morningstar and welcome to the Friday Five. I’ve fooled you, it's only Thursday, but welcome anyway to a special Thursday edition of the Friday Five ahead of the Good Friday market holiday. Joining me back from vacation is Morningstar's Jeremy Glaser. Jeremy, nice to see again. Jeremy Glaser: It is always good to be back, Jason. Jason Stipp: So what do you have for a special April Fool's Day edition of the Friday Five? Jeremy Glaser: We want to make sure that investors don't play the April Fool when it comes to chasing high yields, converting their IRA, loving a stock as much as they love our product, not knowing what they're buying when they get investment products, and finally, we have a new investment idea that you would be the fool not to buy. Jason Stipp: So for number one, it seems like a lot of people are chasing yield. Why might that be foolish? Jeremy Glaser: If you have a money market account that's giving you about 0% yield right now, it can look really attractive to see dividend-paying stocks that are paying 3% or to see bonds that are paying you an OK yield, but these aren't equivalents for each other. They might be fine investments in their own right, but you can't just substitute them from cash because you want a little bit more yield. If you need cash, you're going to have to accept that you have that 0% return right now. You can't worry that you could get more elsewhere. If you're looking to those other asset classes, they might be good choices, but they're not a substitute; don't get fooled into that. Jason Stipp: Okay, good advice. For number two, I've been hearing this everywhere, lots of advertisements about converting to a Roth IRA. Everyone seems to say it's great idea, but is it always the way to go? Jeremy Glaser: 2010 represents an opportunity for investors to convert traditional IRA accounts into Roth IRA accounts. Now when they do this, they'll have to pay taxes, but a lot of financial brokerages are out there convincing people that this is probably the best move for them. And for some investors it probably is, but you have to make sure that you actually consult a tax advisor, and you look at someone who is impartial to make sure that this is what you really want to be doing, and it makes sense for you to do it right now and not wait a few years or maybe spread the taxes out over time. The brokerages have a vested interest in you moving these assets over, converting them over to the Roth and trading more often, and putting more assets under management for them. They might not be the most completely impartial advisor on this. Definitely talk to your tax advisor. Don't get fooled into doing something that might not be the right move for you. Jason Stipp: Very good advice, Jeremy. So for number three, you know there are lots of products out there that I love, love, love. Why shouldn't I buy the stocks of those? I mean, they're obviously lovable products. Jeremy Glaser: You're absolutely right, Jason. There are lots of great products out there, but there are a lot fewer great stocks. If you look at something like Netflix, everybody loves getting DVDs by mail. The online streaming business is starting to really take off, but the stock looks like it's trading at over twice what our equity analysts think that it's worth. And a lot of that has to do with people think that the growth that they've experienced now, that everybody loves the product, continues forever. But as things move to streaming, there's going to be a lot more competitors there. You have people like Apple and Amazon already offering similar services. It's not clear that Netflix is going to have quite the advantage of scale they do now. They do buy DVDs by mail. Probably doesn't look like a very good investment right now. So continue on with your subscription, enjoy your Netflix, but definitely stay away from the stock. Jason Stipp: Great product does not always equal great stock. Jeremy Glaser: No. Jason Stipp: So for number four, Jeremy, speaking of investment options, there's lots and lots and lots of ETFs and more every day, is there some potential pitfalls for me to be foolish in this space? Jeremy Glaser: You certainly could look foolish buying some products if you stop your research just at the name of the fund. If you look at something like USO, United States Oil, you might first believe that it's actually tracking the spot price of oil. So whatever the price of a barrel of oil is that's the return that you're going to get. But the reality is it tracks the futures curve. And those futures contracts have to be rolled over every month. And the process of rolling over the curves really distorts the type of returns that you're getting from that fund. So it might have a place in your portfolio, but you need to do your research and make sure you know what you're buying or you could certainly end up looking foolish. Jason Stipp: Doesn't that mean that the fund doesn't have a use, but you have to know what you're buying. Jeremy Glaser: Yeah, absolutely. Jason Stipp: So for number five, Jeremy, speaking of investment opportunities, you've got me on pins and needles for number five, this great investment pick. Tell us a little bit about this new fund. Jeremy Glaser: Well, it's an exchange-traded note that's going to track the futures contracts related to bad jokes on the Friday Five. It's going to trade under the ticker symbol LAF, and we think that there's going to be a bull market in bad jokes on the Friday Five throughout 2010. We think this is a good way for investors to gain some exposure to that. Jason Stipp: Well certainly, Jeremy, it seems to be that we've already gotten a leg up on that particular investment. Jeremy Glaser: I think we may have. Jason Stipp: Thanks so much for joining me. Jeremy Glaser: You're welcome. Jason Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.