Ben Stein How Not to Ruin Your Life

Happy New Year to one and all. I hope it's a healthy and prosperous one with no bad surprises. We hate bad surprises.

Speaking of the future, intelligent people keep emailing me and asking me what 2007 will hold in terms of investment. How will the stock market do? My answer is always the same: "It will fluctuate." The line is stolen from J.P. Morgan when he was asked the same question long ago.

Dollar Doings

But there are some long-term trends that seem to me to likely continue, and you can take advantage of them in your savings and investments.

First of all, the decline of the dollar may have pauses and eddies, but for the long run it's going to continue. The United States is importing so much more than we export that the world is awash in the dollars we've created to pay for them.

As when all commodities are in surplus, their price goes down. The dollar is the primary reserve currency for the world, so exporting nations must hold a vast amount of dollars. But the dollar need not be the reserve currency for the world forever.

Little by little, the petro-states and major Far Eastern exporters are starting to hold more of their reserves in Euros -- the currency of the Eurozone, which is most of western and central Europe. This will push the dollar down.

The Eurozone as a whole has large trade surplus with the United States, and this is also making the Euro appreciate against the dollar. The currencies of many emerging-market countries like Taiwan, Korea, and Thailand are also strengthening against the dollar (with the appearance of some immense hiccups in Thailand) as their economies run trade surpluses with the United States.

Betting the World

The simple, sensible way to play this is to buy the index funds of the major foreign industrial powers in Europe, Australasia, and the Far East, known as the EFA. The EFA allows investors to bet that these economies will strengthen and that corporate profits there will rise, but most important of all, that their currencies -- especially the Euro -- will strengthen against the dollar.

Investors can also buy the index funds of the emerging markets, namely the EEM or the ADRE, to name just two. These allow investors to bet on continuing success in China, India, Brazil, Russia, Thailand, the Philippines, Mexico, and many other countries.

They also allow investors to bet that the currencies of these countries will continue to rise against the dollar. This seems like a sure thing, and in the long run it is. There will be pullbacks and losses along the way, but the long-term picture seems clear: Dollar down, Euros and emerging market currencies up.

Investing by the Numbers

I would put about 15 percent of my holdings into EFA; if you have a very long investment span, you could perhaps go as high as 25 percent. I would also put 10 percent of my holdings into emerging markets, again with the caveat that the ride can be bumpy indeed.

For the rest, I recommend about 30 percent of your total in the Fidelity (FSTMX) or Vanguard Total Stock Market Index (VTI), which covers a very large swath of the market and allows for major diversification in one purchase. It's pedestrian, but tends to be fairly stable compared with foreign country funds.

I also like about 10 percent in the ICF, the index fund of Real Estate Investment Trusts, which are very high now but pay a good dividend and will probably stall for a while and then go up in the future. I might suggest about 10 percent in the IWN, the small-cap-value version of the Russell 2000 Index of smaller companies (still very large compared to anything I own). The IWN has had a fabulous move this year, and I wouldn't expect another one like it for a while, but small cap is historically a fine place to be in the long run.

Finally, I think you can safely put about 15 percent in cash against a rainy day, unless you have so much money that with a lesser percentage you still have over a million dollars in cash.

Don't Be Stock-Market Wary

Now, please bear in mind that there was an immense rise in the stock market in 2006. The price of stocks as measured by the trailing price earnings ratio on the Dow is now above 20. This is very high by historical standards, and sometimes predicts a correction.

I wouldn't let that stop me from buying. As high as the market is, barring some awful act of terrorism, a natural disaster, or a catastrophic failure of monetary policy, in 20 years it will be much, much higher. You'll be sorry if you didn't buy in 2007 -- and keep on buying. If the market falls, just keep on buying. When the prices fall is when you get the real bargains.

I would also urge you to take some of that large allotment to the total stock market fund and put it in the form of variable annuities that invest in the broadest possible stock market indices. (Full disclosure: I'm the spokesman for the National Retirement Planning Coalition and the National Association of Variable Annuities is one of our many, many sponsors.)

I urge you to shop extremely thoroughly for VA's. Know what every dime of fees is going for. Get only the features you need, and pay the lowest prices you can for them. But an investment that lasts a long as you do (which is what an annuity is all about) and captures the returns of the stock market is no trivial item. I agree that they're not perfect, but no investment vehicle is.

I'll write more about this next time, when I consider who you would or could turn to in case of an emergency. Hint: You probably see that person in the mirror when you brush your teeth.