TV's Price is Right offers valid lessons in fund investing

Your Fuinds

Your Money

June 05, 2007|By Marketwatch

It's easy to banter about "playing the market," but investing is no game when it's your money at stake. And yet there is little doubt that people pay a lot of attention to games when money is at stake.

The most visible, long-running example of this may be The Price is Right, the popular game show that will be all over the news this month as longtime host Bob Barker takes his final bow.

The show is all about knowing the cost of various items, playing the odds to get a positive outcome, and winning a big prize in the end.

In that way, the little competitions are not so dissimilar from real-life investing, where consumers are confronted with a variety of market, economic and personal conditions that they must account for to win the savings game and capture the ultimate prize of lifetime financial security.

With that in mind - and in tribute to Barker - this column will look at some classic Price is Right games today and again next week, showing how a little tweak turns a TV show's pricing contest into an investor's money-management challenge.

The Bargain Game: On Price is Right, the contestant is playing for two prizes, and sees a price that is less than the actual retail value on each. The contestant wins by correctly discerning which item is the better "bargain," the one where the actual value is furthest from the discount price.

In mutual funds, investors looking to buy a fund ultimately should boil their picks down to a select few, and then go bargain hunting.

In this case, that means examining a side-by-side description of the funds to see how they intend to accomplish their investment objective. If two funds take the same strategy, the better bargain is clearly the fund with the lowest expense ratio. If they take different strategies in the same asset class, picking the better bargain will mean balancing any additional costs against an expectation of higher returns.

Triple Play: An old favorite, this game is played for three cars on Price is Right, and features three games within a single contest. Win all three games, win all three cars; lose one, get nothing. Each successive contest involves picking the right price from among a growing number of wrong ones.

In mutual funds, Triple Play is all about building a portfolio, because it's not enough to pick one good fund. The idea is to hit the big prize - a fund you can count on, that can deliver to your expectations - in several asset classes.

The first fund tends to be easy - because it's a broad, safe choice with the fewest chances to go wrong - but expanding your holdings into sectors, international stocks and more makes subsequent choices more difficult.

To win, an investor must own several high-quality funds that move independently.

That's Too Much: Played for a car on the game show, Barker shows the contestant up to 10 prices, one at a time, from lowest to highest. The contestant shouts "That's too much!" upon seeing the first price they think is too high; if they're correct, they win.

In mutual funds, this is a contest investors should play when looking at a fund's expense ratio, and they can win if they remember one simple playing hint. For a stock fund, the "too much" number is 1.25 percent; for a bond fund, it's 0.75 percent.

Those numbers keep a fund slightly below average for their broad category; upon seeing costs above those levels, say "That's Too Much!" and consider whether it's worth the excess costs.

Take Two: The Price is Right contestant is given a dollar figure and must choose two of the four items where prices total the target amount in order to win all of the prizes.

In fund investing, the dollar target is the amount needed to be "set for life," to achieve lifetime financial security. The key is picking mutual funds - a few from the thousands of available choices - that the investor believes can turn current and future savings into that jackpot.

To play successfully, investors should determine their target number, the amount needed to reach their goals.

jaffe@marketwatch.com

Charles Jaffe is senior columnist for MarketWatch. He can be reached by mail at Box 70, Cohasset, MA 02025-0070.

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