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On money

Past may not be good guide for investment

By HELEN HUNTLEY
Published February 13, 2005

Do you invest by looking in a rear-view mirror?

Most of us do to some extent. After all, it's a lot easier to check out past performance than it is to project future results. Sometimes looking at the past works well because a trend can persist over several years. Other times the leaders start lagging and the laggards start leading. It's calling those turning points that's so difficult.

For most of us, the best way to deal with that uncertainty is to stay diversified. No matter what happens, we'll get some of the best returns the financial markets have to offer and won't be overwhelmed by the worst returns. But professional money managers don't get paid to float with the tide.

Conrad Herrmann, one of the top money managers at Franklin Templeton Group, thinks we're at one of those turning points and he's aiming to take advantage of it. For the past five years, large growth stocks have been among the worst-performing U.S. investments, while bonds and small-company stocks led the way.

Now he thinks - and hopes - that big growth companies are due for a resurgence.

"With the Fed raising interest rates and the economy showing signs of slowing, the companies that have more sustainable growth should do well," he said in a recent interview in St. Petersburg.

Herrmann manages the Franklin Flex Cap Growth Fund, a $2.1-billion mutual fund with the freedom to invest in any size company. It had half its assets in small-company stocks in the mid 1990s, but these days the small-cap weighting is down to about 10 percent. Large caps make up half the portfolio, with 30 percent in mid-caps and 5 percent in cash.

Herrmann is putting some of his biggest bets on health care stocks such as Johnson & Johnson as well as other big names such as Amgen, Dell, Clorox and Yahoo. He is looking at Wal-Mart Stores and Microsoft Corp. And he is holding onto eBay, in spite of its recent tumble.

Even if he's right though, Herrmann says stock market investors should not expect fantastic results in the years ahead. "Single-digit returns will be more the norm" for the market, he predicted. "It's a challenging environment worldwide."

Herrmann's fund has a track record of beating the market most years, but shareholders have endured a bumpy ride, from a 95 percent gain in 1999 to 23 and 24 percent losses in 2001 and 2002. The fund was up 41 percent in 2003 and 13 percent last year.

Last year I did not claim interest that I paid on my home mortgage. Can I claim it this year on my tax return?

For your 2004 return, you can only deduct mortgage interest paid in 2004. If you had some 2003 deductions you forgot to include on your 2003 return, you can file an amended return (1040X) to claim any refund you are due.

We had a mandatory hurricane evacuation during the hurricanes last year. Can I deduct my hotel and other expenses from my 1040?

No. However, if your property was damaged by the hurricane, you may have a deductible casualty loss. In order to actually deduct anything, the damage must be more than 10 percent of your adjusted gross income plus $100. Your deduction would be based on the decrease in the property's value as a result of the hurricane. Incidental expenses such as temporary housing are not part of your casualty loss. However, in some circumstances they might be deductible as business expenses if the damaged property is business property.

I forgot to deduct sales tax on purchase of car in 2003. Was this a legal deduction then and can I amend my return?

No. Sales tax was not deductible on 2003 returns.

CORRECTION: The average cost method described in an earlier column (Jan. 23) for determining tax basis on an investment can be used only for mutual fund shares. If you sell shares of stock, you must either use the cost of the earliest shares acquired or the cost of specific shares identified at the time of the sale.

Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified August 31, 2005, 11:01:04]