No risk, no reward. It’s a plain-spoken maxim that Richard Marshall Jr. lives by. The U.S. Navy commander, who currently lives in Alexandria, Virginia, and works at the Pentagon, invests in mutual funds and seeks to supercharge his holdings.
His personal situation allows him to take some risks. He’s single and without major financial pressures. He doesn’t have to worry about house or car payments eating into his cash flow. A naval officer since 1991, he’s within sight of 20 years of service, which will entitle him to a lifelong pension. Moreover, Joe E. Outlaw, president of San Diego-based PenTrust Financial Services and Marshall’s financial planner, says that “Richard has the kind of personality that allows him to sleep at night, even if the market is down. He knows he’s in for the long term.”
Marshall has followed Outlaw’s suggestion that he reduce his exposure to domestic stock funds, real estate funds, and bond funds. “My portfolio now includes 55% in international funds and 25% in global funds,” Marshall says. (Global funds invest in U.S. and foreign companies while international funds focus solely on offshore stocks.)
He’s decided not to sit on the sideline because of market turbulence. But a number of investors have become increasingly cautious due to economic uncertainty. With consumer prices up 4.1% in 2007, inflation was pushed up by the largest amount in 17 years. Now the prospect of recession looms as inflation threatens to rise even further. Oil prices spike as the value of the dollar slides. Housing prices continue to plummet as mortgage defaults increase. Investors witnessed a sharp downturn in the stock market in the first weeks of this year—the S&P 500 declined 6.1% in January alone.
There’s every indication that the market in the coming months will prove to be even more tumultuous. For instance, the Chicago Board Options Exchange’s Volatility Index, which measures market swings, roughly doubled from early 2007 to early 2008. For instance, in a mere three months, from October 2007 to January 2008, the Dow dropped by 14.5%. If you were sitting on a $200,000 nest egg last October, one that moved in sync with the Dow, you’d suddenly be facing the future with only $171,000 to tap.
These factors led Marshall, 39, to tilt his portfolio sharply to non-U.S. holdings. In fact, his largest position is now in Oppenheimer Developing Markets Fund (ODMAX), which is classified as an emerging markets fund. Such vehicles are considered among the riskiest of all stock funds because they invest in countries that may have light stock market regulation, political turmoil, hyperinflation, and currency devaluations.
For taking such chances, investors may be well rewarded. That turned out to be the case for Marshall, who saw his fund, which invests heavily in Brazilian and Indian equities, return nearly 34% in 2007. “My other international and global stocks also did well,” he says. To achieve his lofty returns for his portfolio—which is worth $200,000—the top gun doesn’t own a single bond fund and only 5% of his holdings is