Why oil won't hit $100

New production, new energy sources and some conservation could push down prices by 2010 - but don't expect $20 a barrel anytime soon.

NEW YORK (CNNMoney.com) -- Despite oil's record high last week, forget about crude going to $100 a barrel.
Prices have already dropped about 7 percent since last week, and are likely to fall even more in the coming years.
That's the consensus of analysts, who say rising production, the advent of biofuels, and conservation measures will likely lead to lower oil prices by 2015.
But how much lower is subject to wide interpretations, and estimates rage from $20 to $60 a barrel.
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"If this market can continue going lower without OPEC disrupting it, it's very possible that by 2010 we could be substantially lower than anyone is imagining," said Peter Beutel, an oil analyst at the consultancy Cameron Hanover. "Four to 8 years from now, we could come down and break $20 a barrel."
Beutel bases his prediction on the fact that oil is historically a cyclical commodity. In the early 1980s it hit $38 a barrel, far higher than today's price when adjusted for inflation, only to fall to $10 a barrel by the late 1990s.
He also said high energy prices are hurting the American consumer, especially the young, the elderly and the poor.
"This has decimated their lifestyle," he said. "I'm convinced it will give us a recession."
But Beutel is in the minority, and most analysts don't ever expect crude prices to trade anywhere near $20 a barrel ever again - which is good news for renewable energy technologies, most of which need crude prices near the $50 mark to remain competitive.
The government-run Energy Information Administration has a $50 target price for crude by 2015.
EIA says by 2010 the amount of oil OPEC can pump should increase by 2 million barrels per day, largely driven by Saudi Arabia. The EIA, like most analysts, does not agree with the view that production has peaked or will soon peak in Saudi Arabia, although a small but growing number of experts say it might.
EIA says more oil from Central Asia and the Gulf of Mexico should offset production declines in the North Sea and and Mexico.
And co-called "non-traditional" fuels, such as oil sands from Canada and corn-based ethanol, are expected to double, going from the current 3 million barrels a day to 6 million barrels a day by 2010.
While demand is expected to continue growing, EIA says conservation measures should slow the rate of growth to 1.3 percent a year from 2 percent.
All this means the world's spare production capacity - the difference between what is consumed and what is produced - should grow, relieving some of the fears that have pushed prices so high as of late, such as a disruption in supply from a hurricane in the Gulf of Mexico or a war with Iran.
"You're not going to get to $100, but you're not going to see $20 either," said Glen Sweetnam, director of EIA's international economic and green house gas division.
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Most analysts agree with EIA's assessment.
"This is an inherently cyclical business," said Edward Morse, chief energy economist at Lehman Brothers, who said he could see oil prices in the $40 to $50 range by 2010. "We're seeing a potential overbuilding of refining capacity."
But while the possibility of $100 seems to be fading fast, some analysts are predicting oil will remain close to current prices.
"Several recent forecasts, including those from such groups as the IEA (International Energy Agency) and the Economist Intelligence Unit, are in stark opposition to any forecast of a price drop," Mike McKee, a director with KPMG Corporate Finance, said via e-mail. "They see demand-driven strength in prices through the next 4-5 years, as the industrializing world is taking up an increasingly large portion of worldwide production."
And Deutsche Bank recently raised its 2010 target price for crude to $60 a barrel from $45, citing the increasing costs associated with bringing new oil to market from such expensive sources as Canada's tar sands and the deep water Gulf of Mexico, as well as continued strong demand.
"We need it all, and we needed it yesterday," said Adam Sieminski, Deutsche Bank's chief energy economist. "There's still a shortage."

The end of oil

A small - but growing - group of experts think world oil production will peak in the next few years, to devastating effect.

NEW YORK (CNNMoney.com) -- At some point in the near future, worldwide oil production will peak, then decline rapidly, causing depression-like conditions or even the starvation of billions across the globe.
That's the worst-case scenario for subscribers to the "peak oil" theory, who generally believe oil production has either topped out or will do so in the next couple of years.
What follows depends on who one talks to, but predictions run the gamut from the disaster scenario described above to merely oil prices in the $200-a-barrel range while society transitions to other energy sources.
It's not a view held by most industry experts, including the oil companies, the government and most analysts at the financial houses.
Why oil won't hit $100
But its adherents are growing, and include some fairly well-known names.
In the coming week, a former chairman of oil giant Royal Dutch Shell (Charts) is speaking at a peak oil conference in Ireland, as is former U.S. Energy Secretary James Schlesinger.
Most peak-oil proponents simply don't believe the numbers put forward by industry and the government.
The world will produce 118 million barrels of oil a day, up from its current 85 million barrels per day, just to satisfy projected demand by 2030, according to the Energy Information Agency.
"That's never going to happen," said Richard Heinberg, a research fellow at the Post Carbon Institute and author of three books on peak oil.
Heinberg says world production of regular crude oil actually peaked in May 2005. He also says production in 33 of the 48 largest oil producing countries is in decline, and that global oil discoveries peaked in 1964.
Most importantly, he says reserves in the Middle East, where EIA predicts the bulk of new supply will come from, have been "systematically overstated."
"Everyone just takes their figures at face value," Heinberg said. "But they are national oil companies, they can't be audited."
Instead of production ramping up to 118 million barrels per day, Heinberg sees a plateau over the next few years, then gradual declines beginning in 2010.
By 2015, he says the rate of decline will accelerate as field after field runs dry and few new supplies are found. By 2030, the world could be looking at powering its economy on 30 million barrels a day.
"It's going to be an enormous shock to the global system," said Heinberg. "We're talking something on the order of the Great Depression, perhaps much worse."
As for billions starving to death when crops dependent on fossil fuel-based fertilizers fail en masse, he said, "that's the worst case scenario, but it can't be ruled out."
Indeed, Web sites devoted to peak oil sell numerous survival-style books seemingly geared toward a society in which, at the very least, the basic economic infrastructure has broken down - if there's not total anarchy.
From the Web site lifeaftertheoilcrash.net, titles include "Gardening When it Counts: Growing Food in Hard Times" and "Crisis Preparedness Handbook: A Comprehensive Guide to Home Storage and Physical Survival."
"It's fear mongering, sensationalist crap," said Fadel Gheit, a senior energy analyst at Oppenheimer.
Gheit says there's plenty of oil out there, it just needs to get to a price where it's profitable to extract.
"We have so far consumed one trillion barrels" in all of history, he said, pointing to a 2000 study from the U.S. Geological Survey that made predictions based on rising prices, technology advances and assumed new discoveries based on past finds. "There are three trillion more to go."
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He said proven oil reserves - the ones oil companies believe they can extract with today's technology at current prices - have increased every year for the last 30 years.
A lot of the new oil will come from existing fields, said Gheit.
He said oil companies have never extracted more than 30 or 40 percent of the oil in any given field. It just became too expensive to continue drilling there, so the companies moved on to new areas.
"The free market is working," he said. "With higher prices, there will be incentive for companies to develop new technology" to extract the remaining oil.
Industry executives also downplay the peak oil theory.
"Similar predictions were made in 1914, in 1939, in 1951, when post-war demand was on the rise, and again in the 1970s," Exxon Mobil (Charts, Fortune 500) head Rex Tillerson was quoted saying in the Calgary Sun in 2005. "These predictions were always proven wrong."
But whether oil production peaks or not, by pushing crude prices up more than eightfold over the last 10 years, traders clearly believe supplies will strain to keep up with demand.
"Growth in the developing world is just too great," said Stephen Leeb, an investment manager who has authored two books on oil scarcity, the last one predicting $200-a-barrel oil in the next 5 to 10 years. "Demand for oil will outstrip supply."

The end of oil is just a game

New combat videogame depicts a world at war over rapidly dwindling crude supplies. But what's the message players walk away with?


NEW YORK (CNNMoney.com) -- On a futuristic battlefield littered with broken oil wells, burnt-out electric cars and dilapidated wind turbines, you are leading crack military unit on a mission to secure the world's last remaining oil supplies.
Your enemies are the Russians and Chinese, who are of course after the same prize.
Suddenly machine guns rattle, men are hit, the helicopter goes down, and you're in the middle of an intense firefight in Central Asia.
Over the last two decades prior to 2030 oil production has peaked and is declining rapidly, renewables never panned out, plagues hit, and starvation ensued. In other words, things have been very bad, at least according to Kaos Studios, the maker of this video game you're playing.
"It's a mess, it's a real wreck in there," said Frank DeLise, Kaos' general manager.
While Frontlines: Fuel of War is one of the first video games to capitalize on the doom-and-gloom scenario of what might happen when the world runs out of oil, it's not the only video game focusing on energy as oil prices rise, developing nations use more and more crude, and the world grapples with global warming fears.
DeLise chose oil as a story line because "energy seems to be a hot topic, and it seems to be getting worse. When stuff is in the news, it gets people involved, and they want to know more about it."
The peak oil theory - that is, that oil production has already peaked or will do so in the next few years, followed by widespread social disruption - has been gaining ground in recent years.

Most oil industry analysts say peak oil production is many decades, if not hundreds of years away, and a transition to other sources will likely be more orderly than the scenario depicted in Frontline.
But a small and growing number of experts -- some well-respected -- say peak oil production is close or has happened and the transition will be much more painful than mainstream analysts predict.
Either way, DeLise said he hopes people will get more out of the game than just an adrenaline rush.
"If they play this game they will walk away thinking 'wow, energy is a problem," he said.
Experts say video games can be fun as well as educational, although the outcome largely depends on the content.
"They could in fact lead to changes in attitudes, beliefs, and ultimately, changes in behavior," said Craig Anderson, a professor of psychology at Iowa State University who studies the effects of video games on people.
The multi-player version of Fuel of War lets gamers connect and play along side or against each other from anywhere in the world.
They can choose to fight for the Western Alliance, made up of the U.S. and European countries, or the Eastern Alliance consisting of China and Russia.
And the choice of weapons is staggering - players can hop from ground combat with an array of hand-held munitions to flying helicopters, planes, or driving tanks - all futuristic designs DeLise and his team created using current weapons and intelligence gleamed from the Internet and other sources on next-generation military hardware.
Fuel of War, set for release in February, is a first-rate shoot 'em-up game with a well developed story line. It is one of a growing number of games that center around the theme of energy.
A previous game from Kaos centered on an oil war in the Caspian region, and Energyville, a SimCity-like Web-based game from Chevron and the Economist Group, lets players plan the energy needs of a future city.
But Anderson, the psychologist, is concerned about the message that violent games like Fuel of War may send to players.
"It may well change attitudes towards the use of these tactics as a political tool," he said. Players may think "of course we have to use military tactics to go take oil."
DeLise dismisses such concerns, saying nations go to war all the time over resources, and that the game is merely a reflection of reality.
"When it comes down to it, it's about what countries will do to survive," he said. "That's not going to change."

Tax rebates: Where's your check

Lawmakers are still working out final details on cutting checks to all Americans to fight recession.

NEW YORK (CNNMoney.com) -- Consumers fuel the economy and if they're strapped, the thinking goes, better get them some cash to spend.
The biggest component of any government plan to jump-start the economy is expected to be issuing tax rebate checks - both Republicans and Democrats are pushing the idea of sending out checks for several hundred dollars if not more.
But their effectiveness is debated, and it could be summer before Americans see any real cash.
In a statement on the economy delivered Friday morning, President Bush said any plan should feature "direct and rapid income tax relief" to boost consumer spending. "Letting Americans keep more of their own money should increase consumer spending, and lift our economy at a time when people otherwise might spend less."
As of Friday morning, there was little expectation that a deal would be finalized before Tuesday when Congressional leaders are expected to meet with President Bush.
Whatever the final decision, here's how a rebate would work, when you're likely to get a check and how it might affect the economy.
When
Once a rebate is decided on, the IRS could start mailing out checks by the end of June since the agency is now in the middle of the 2007 tax-filing season, said Jason Furman, a senior fellow at the Brookings Institution. The IRS, however, is not yet commenting on the matter since negotiations about the rebate are still under way.
The goal, however, for both Democrats and Republicans is to get the money into the hands of consumers as soon as possible.
In a briefing after the president's statement, Treasury Secretary Henry Paulson said, "If (tax relief) is broad-based and simple, I believe we'll be able to get it out quickly and in time to make a difference this year."
On Friday afternoon, House Financial Services Chairman Barney Frank (D-Mass.) told CNN he believed lawmakers could pass a stimulus package, including a rebate, by March 1.
How much
Right now, President Bush is said to want an income tax rebate that would be generated by eliminating the 10 percent tax bracket, which applies to roughly the first $8,000 of income for single filers and the first $16,000 of income for married couples filing jointly.
That would mean taxpayers could get rebates of up to $800 if single, or $1,600 if married.
But neither President Bush in his statement nor Paulson in a briefing afterwards would confirm that amount. "I don't want to play bigger than a bread box," Paulson told reporters. "The president is focused on broad-based tax relief for those paying taxes."
Who would get it
Democrats could get on board with an income tax rebate if it's fully refundable, meaning that everyone with earned income would get the full rebate, even if they didn't make enough money to owe income tax, said Furman.
Otherwise, roughly 40 percent of tax filers (which is more than 50 million households) would get only a partial rebate or no rebate at all, according to the liberal Center on Budget and Policy Priorities.
A significant portion of that 40 percent would be families of four making between $25,000 and $40,000, the CBPP said.
There are a few ways that could be prevented, Furman said.
One way is to offer tax credits, a dollar-for-dollar reduction of your tax bill. If it's refundable, it means you get the credit even if your tax bill is $0 or something less than the full credit.
Another way is to have the rebate be a payroll tax rebate. The payroll tax - 6.2 percent of your wages - is what's taken out of everyone's paycheck to fund Social Security, no matter how low your annual income.
A payroll tax rebate would not affect your Social Security benefits or the long-term solvency of the entitlement program, Furman said, because it would really serve as a tax credit. In other words, money from your paycheck would still be taken out and put towards Social Security, but the federal government would send you a check that would serve as an advance on a refundable tax credit on your tax return.
Do rebates work?
Economists disagree about the effectiveness of rebates. "Estimates of how much consumers spend in response to various stimuli are treacherous," former Federal Reserve Governor Lyle Gramley wrote in an e-mail to CNNMoney.com.
Gramley noted, for instance, that estimates of spending by consumers who cash out home equity range wildly - from 0 to 60 cents on the dollar.
But Furman and Mark Zandi, chief economist of Moody's Economy.com, point to a study published last year that found in 2001, when households received rebates between $300 and $600, consumers spent two-thirds of those rebates within six months of receiving them. The study estimates the rebates gave a healthy boost to consumer spending at the time.
But, Zandi noted in an e-mail, "The effectiveness of a tax rebate on consumer spending would be enhanced if targeted to lower and middle income households that are more financially constrained and thus more likely to quickly spend the rebate check."
A study of various stimulus options by the Congressional Budget Office released this week, meanwhile, found that a one-time rebate could be highly cost-effective in terms of boosting demand if it's focused on people most likely to spend it. It also found that a rebate could take between 6 months and a year to achieve its full effect in boosting demand.
If rebate checks are first sent out starting in late June - almost six months from now - it's not unreasonable to wonder if that is soon enough to be effective. Zandi thinks it could be.
"It certainly won't forestall a recession if we are in one, but it could reduce the severity of a downturn or make it shorter," he said in separate e-mail. "Say the rebate is $100 billion. Two-thirds will get spent by year end if the 2001 tax rebate is a guide. Thus, $60-$70 spent in the second half of the year will translate into about 1% of annualized real GDP growth. That is measurable."

Washington's hard case: How to juice economy

Congress on Wednesday kicks off a series of hearings to weigh stimulus options. The right answer isn't so clear.

NEW YORK (CNNMoney.com) -- Washington lawmakers are about to begin playing a notoriously tricky game: pinpointing just how to steer the economy away from recession.
On Wednesday, the Joint Economic Committee of Congress is holding the first of several hearings to assess options for easing the financial strain many leading economists forecast is ahead.
Successfully predicting the chances of a recession, let alone staving one off, has left plenty of economists with egg on their face. But momentum has been building in Washington to do something to address a cascade of discouraging economic indicators - continued declines in housing, a rise in energy prices, slower-than-expected job growth and weaker-than- expected retail sales.
But there's no consensus on what's needed, what's politically feasible or whether any of it will be enough to nip a recession in the bud.
Rebate checks - a lump-sum payment to millions of consumers - is one idea reportedly being considered by both Democrats and Republicans. But the similarities in expected approaches by the two parties end there.
Republicans are said to be leaning more toward making President Bush's income tax cuts permanent and giving businesses tax relief, such as letting companies write off more of their investments sooner rather than later.
Bush has not yet committed to proposing a package, although he has said numerous times that he's considering a broad range of options. If he proposes one, he is expected to do so at his State of the Union address on Jan. 28.
The Democrats, meanwhile, are interested in boosting government spending to provide more money for the financially strapped and more aid to states. House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Harry Reid, D-Nevada, have asked to meet with the president to discuss viable options for what they say they hope will be a bipartisan package. But if recent history is any guide, it's far more likely that a stimulus package will be subject to as much partisan grandstanding from Democrats and Republicans as any other bill.
Pelosi also met this week with both Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson.
Some Washington observers are saying that only the Federal Reserve has any real chance of steering the economy away from recession and that any moves from lawmakers would be only for the sake of politics in an election year.
Skeptics on both sides of the aisle express concern about how quickly any stimulus package could take effect and how temporary any measures would be.
"We're suspicious of stimulus packages because a lot of the time by the time Congress acts it's too late to have an effect on a recession," said Josh Gordon, senior policy analyst at the Concord Coalition, a bipartisan deficit watchdog group.
What's more, Gordon said, when lawmakers put a temporary tax cut in place there's a lot of political pressure to leave it there or risk being accused of raising taxes. The Concord Coalition doesn't oppose temporary deficit increases brought about by efforts to combat recession, he said. But too often, he added, "all stimulus options do is blow a hole through the deficit."
Jason Furman, a senior fellow in economic studies at the Brookings Institution who worked in the Clinton administration, agrees that stimulus must be temporary in nature. He thinks three forms of stimulus could help give the economy the kick it needs, and he says they're among the leading ideas being considered by Democrats:
A one-time rebate Economists disagree about the effectiveness of rebates. "Estimates of how much consumers spend in response to various stimuli are treacherous," former Federal Reserve Governor Lyle Gramley wrote in an e-mail to CNNMoney.com last week.
He noted, for instance, that estimates of the effect on spending of consumers who cash out home equity or take out home equity loans range wildly - from 0 to 60 cents on the dollar.
But Furman points to a study published last year that found that in 2001, when households received rebates between $300 and $600, consumers spent two-thirds of those rebates within six months of receiving them.
The study estimated that the rebates gave a healthy boost to consumer spending.
Reports have indicated that politicians could be considering rebates as high as $500 per individual or $1,000 per couple. It's not clear, however, whether rebates would be given to everyone or limited to, say, households with incomes below a certain threshold.
A temporary extension of the time to collect unemployment benefits This was another measure taken in 2001, and now Furman says the number of long-term unemployed is twice as large as it was then.
A temporary increase in food stamp payments The advantage of doing this rests on the assumption that families eligible for food stamps already spend some of their own money for food, Furman said.
A temporary increase in food stamps could mean families spend less of their own money on groceries and can redirect their spending to other things or even just better afford rising heating and gas prices.

Asian stock market summary

MUMBAI, Jan. 16, 2008 (Thomson Financial delivered by Newstex) -- JAPAN
Nikkei closed 3.4 pct lower at 13,504.51, its lowest closing level since October 2005, amid fears of further fallout from the US subprime mortgage crisis, and on concern about what Wall Street might do later today.Market was hit by the huge declines on Wall Street overnight following Citigroup's (NYSE:C) fourth-quarter loss of 9.83 bln usd and weak US December retail sales data. Weaker-than-expected earnings from Intel Corp (NASDAQ:INTC) also disappointed investors.The broader Topix eased 3.5 pct to 1,302.37.

SOUTH KOREAThe KOSPI index finished down 2.4 pct at 1,704.97 as sentiment took a beating from a major setback on Wall Street overnight.The Korean market is now at its lowest level since mid-August when the US credit crisis sent shares into a free fall.

AUSTRALIAThe S&P/ASX 200 closed lower for the eighth straight session, down 2.5 pct at 5,809.7, in reaction to a sell-off on Wall Street.The All Ordinaries was 2.5 pct lower at 5,870.8.

CHINAThe benchmark Shanghai Composite Index closed down 2.81 pct at 5,290.61, following sell-offs on the US and Hong Kong bourses amid growing worries over a recession in the US.

The Shanghai A-share Index fell 2.82 pct to 5,552.46 and the Shenzhen A-share Index was down 2.41 pct at 1,619.67.
The Shanghai B-share Index fell 1.76 pct to 361.46 and the Shenzhen B-share Index fell 3.09 pct to 696.35.

TAIWANThe weighted index closed down 2.96 pct at 8,179.54 on Wall Street's overnight plunge.
The bellwether technology stocks were also battered on Intel's decline in the US-trading, after its weaker-than-expected quarterly results.PHILIPPINESManila's composite index ended down 2.8 pct at 3,351.66, its weakest close in four months, on heightened fears over the US economy.Investors also worry that the faltering US economy will further crimp demand for

Philippine products and reduce remittances by Filipinos working abroad that help sustain consumer spending at home.Copyright Thomson Financial News Limited 2007. All rights reserved.The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.

Money 70: Funds for the long run

Investing is a marathon. Use our Money 70 funds to run a safe, steady race.
By Penelope Wang and Walter Updegrave

NEW YORK (Money Magazine) -- If ever there was a time when it paid to be diversified, it was last year. As the market got rocky amid an old-fashioned credit crunch, many blue chip U.S. stock funds took a beating.
Even some of the nation's best-known investors - like Bill Miller of Legg Mason Value and Bill Nygren of Oakmark Select - suffered losses due to troubles in the financial and housing sectors caused by the subprime mortgage mess.
But if you held your domestic stock funds within a well-diversified portfolio that included bonds and other types of equities, you didn't feel much pain. Indeed, if you invested in foreign equity funds in 2007, you probably earned double-digit gains, up for losses you suffered among your domestic funds.
The key is, you needed to be patient and balanced. A long-term view and a diversified asset mix - that's exactly what the Money 70, our list of recommended mutual and exchange-traded funds, is all about.
What we look for
When assessing funds, we don't focus on short-term performance swings, because history shows that funds that are hot in one period are often stone cold the next.
Nor do we try to spot the coming year's chart toppers, as other lists do.
In addition to being an exercise in futility, that's not the purpose of the Money 70.
What we're offering you is a menu of high-quality funds and ETFs that you can use as building blocks in constructing a prudent, well-balanced portfolio. We hope these funds will help you reach your long-term goals - which, by the way, don't include bragging rights around the watercooler.
In selecting the Money 70, we focus on criteria with lasting value. For example, we make sure that all of our funds charge fees lower than their category average. Why? Since fees reduce total returns, funds with low costs are likely to outperform those that levy steep expenses. This is such a simple concept it's amazing that high-fee funds can still exist.
We also look for funds with strong records for putting shareholders first, as measured by Morningstar's stewardship grades. These ratings evaluate such factors as a fund group's corporate culture, regulatory history and board independence. The way we figure it, while you can't control how good your returns will be, you can at least stick with stock pickers who've been good to their investors.
On top of that, we look for funds with a consistent strategy and experienced managers.
Of course, we also consider performance - but over the long term. We prefer funds with better-than-average returns over five years, although we make some exceptions, as we'll explain.
These standards don't always prevent our funds from stumbling. Over the long run, however, the majority of the Money 70 funds have performed admirably. Even in last year's difficult market, 57% of the actively managed funds on our roster delivered returns that rank in the top half of their category; and over the past five years, 73% outperformed their category average.
There's one more thing: The Money 70 is designed to help you construct all aspects of your portfolio. For your core holdings, you might consider one of the 25 index funds or ETFs on our list. If you're willing to take a few more chances, check out the 43 actively managed stock funds we like. And if you simply don't want the hassle of building your own portfolio, you can choose either of two sets of target-date portfolios, which give you a preset mix of funds that automatically becomes more conservative as you near retirement.
This year's changes
Though we believe in buy-and-hold investing, we did make a few alterations to our list.
Actively managed funds: We removed Fidelity Dividend Growth and Madison Mosaic Investors. Neither kept pace with other large-cap funds in their category (they ranked in the bottom 10% of their peer group over the past five years).
But it's not about raw performance. If a fund lags its category for a long enough time, you have to question whether it's fulfilling its role in your portfolio.
If you own these funds in your 401(k) or IRA, where selling won't trigger an immediate tax bill, we recommend you shift into a better choice: FMI Large Cap. This low-cost fund also invests in blue-chip stocks. The managers' risk-averse approach kept the fund out of troubled financial stocks recently, which helped it rank in the top 24% of its peers over the past three years.
More important, FMI's consistent investing style makes it a better portfolio building block over time. A few other funds on our list have also lagged their peers.
Among them: American Funds American Mutual, Matrix Advisors Value, Jensen, FAM Value and FPA Perennial. These funds have something in common: They take a lower-risk approach than others in their categories. This means they might lag during stretches when the market is soaring - like the five-year-old bull market.
But they hold up well in downturns. So their five-year results, which don't reflect the 2000-02 bear market, may understate their long-term potential. Especially in light of today's shaky economy, these funds still make sound choices. Taking a low-risk approach was not what held back Weitz Hickory and Muhlenkamp, two other laggards on our list. These go-anywhere funds were torpedoed by big stakes in subprime lender Countrywide and other financial and real-estate- related stocks.
But Wally Weitz and Ron Muhlenkamp are contrarians with a tradition of wild performance swings - their chart-topping years are followed by periods in the cellar and vice versa. Their 10-year returns are still strong. It's worth hanging on to these multicap funds since history suggests they'll soar again.
Meanwhile, we are adding Third Avenue International Value to the roster. Run by Amit Wadhwaney, the fund focuses on overlooked small and midsize foreign stocks, an often forgotten category, but one that provides needed diversification and that hasn't been represented before on the Money 70. To keep its assets at a manageable level, the fund had been closed to new investors for years, which is a strong sign of stewardship.
But it reopened recently when Wadhwaney began spotting more opportunities in the wake of the upheavals in the global financial markets. Because the fund looks for small, undervalued shares in overseas markets, it probably doesn't invest in stocks your other foreign funds do. For all these reasons, we think International Value, a low-cost fund run by a respected fund family, is a solid new addition to the list.
Index funds and ETFs: While it's hard to tell which actively managed funds will outperform in any given category, that's not the case with index funds. Since these portfolios just mimic a market index, it's simply a matter of arithmetic that the lowest- cost funds are likely to beat out more expensive peers that track the same benchmarks.
With this in mind, we revisited all of our index funds and ETFs. We noticed that Vanguard recently introduced ETF versions of Vanguard Short-Term Bond and Vanguard Total Bond Market, which are both on the Money 70 index fund roster. With fees of only 0.11%, Vanguard's ETFs are cheaper than two similar ETFs on our list: iShares 1-3 Year Treasury (0.15%) and iShares Lehman Aggregate Bond (0.20%).
Moreover, Vanguard Short- Term Bond ETF offers a broader range of fixed-income issues than iShares 1-3 Year Treasury.
So we are replacing the iShares ETFs with their Vanguard counterparts. Vanguard also launched an ETF that tracks the Morgan Stanley Capital International EAFE index, a benchmark for developed stock markets in Europe, Asia and Australia.
Vanguard Europe Pacific sports a 0.15% expense ratio, which is significantly lower than the 0.34% fee for iShares MSCI EAFE, so we are swapping these ETFs as well.
We are also adding the Vanguard FTSE All- World ex-U.S. This new ETF tracks both developed and emerging markets, including Canada, which enables investors to buy the whole world outside the U.S. with a single ETF. Finally, we are dropping iPath Dow Jones-AIG Commodity Index.
This is actually not a fund but an exchange-traded note, or ETN - a structure designed to minimize taxes. ETNs recently came under the scrutiny of the IRS, which might disallow their favorable tax treatment. If that happens, it could be trouble for investors in taxable accounts.
For an alternative in the Money 70, try T. Rowe Price New Era, a mutual fund that buys mainly natural-resources stocks, or iShares S&P GSSI Natural Resources Index, an ETF that owns energy and commodity shares. Whether you opt for ETFs, index funds or actively managed portfolios, you can be assured of some important advantages with the Money 70.
You will pay reasonable fees, and the fund managers are unlikely to betray your trust and will stay consistent in their strategies. In an uncertain world, those advantages will give your portfolio a big head start toward your long-term investing goals.