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Posts Tagged ‘Risk Profile’

Girish asks, “I have heard people talk about ‘taking advantage of’ or ‘minting money from’ a recession. How does one do it?”

If you have cash you can find great bargains in almost any market or asset class – whether it is a stock, bond, mutual fund, buying tax liens or judgments or even real estate.  This is the classic sort of value investing espoused by Benjamin Graham and practiced masterfully by Warren Buffet.

Certainly, when stock prices are down you can pick up shares in companies with strong brands, franchises, marketing and cash flow but which may be temporarily out of favor because of investor fear.  This is certainly what happened during the Great Financial Meltdown.  Those who had the stomach for it and the cash to back it up could buy up many companies at bargain prices.

The key is having the cash and not being over-leveraged. There are lots of stories (most recently in BusinessWeek) about developers who are mortgaged to the hilt and unable to maneuver now as they are caught in a foreclosure squeeze.   Liquidity is really the key to crises.

If you have the cash and the stomach for the risks, you can buy into distressed areas of the market: tax liens, providing capital as a loan with equity kicker to an operating business that may be short of cash because banks are too timid to lend, real estate to fix up and rent (and later on use as a vacation property if you properly structure a 1031 exchange for example.

Some of these tactics can be done with non-qualified money. But one can even consider doing it through a self-directed IRA. Not every custodian is set up to allow this but there are some specialized non-bank custodians that will help set up such accounts. (One such custodian is PENSCO Trust). And the income that may be generated can be tax deferred allowing for more capital to be available for investment or to compound longer.

This is not a substitute for a broadly diversified investment portfolio but a supplement; you could call it the “opportunity” or “tactical” bucket.

The key is cash and an understanding of your personal risk profile. And most require a time horizon longer than a typical day trader’s.

Sure, the key to investing success is to buy almost anything low and sell it higher later.  But don’t limit yourself to just stocks.  There are opportunities beyond just stocks where astute and risk-tolerant investors can take advantage of what arbitrageurs call “information asymmetries.” And they may even be in your local market.

This is where a good financial adviser can help.

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It’s natural for investors who are still skittish after a decade-long roller coaster ride with the stock market and plummeting real estate values to be risk averse and seek out investment alternatives for protecting their nest eggs for retirement, college funding or simply their emergency cash.

And where there is demand, there will be supply.  So naturally, financial firms will design products geared toward satisfying this demand.

One such product that’s getting more attention recently are Market Linked Certificates of Deposit (CDs).

These are in essence a savings product designed to provide a minimum guaranteed interest rate plus the opportunity to increase the return by linking to the return of a specific market index or in some cases an index for inflation.

Such products are part of the larger class of “structured products” produced by investment banks that can come in many flavors and various strategies:  reverse-convertibles, principal-protected notes, Exchange Traded Notes.  They essentially are debt bundled with a derivative and marketed as a way to bet on stocks and interest rates as a way to manage certain risks. All offer in one package strategies using some sort of derivative and may offer a combination of principal protection, risk reduction and/or enhanced returns.

Recent surveys of more than 17 brokerage firms and more than 38 million investors show that most of these products are used by those with under $500,000 in investable assets.  For those with assets between $250,000 and $500,000, about 1.5% of their assets are placed in such products which is slightly higher than the 1.33% of assets for those with under $250,000 to invest.  (Investment News, 11/15/2010, page 52).

More than $70 billion of such products are held by investors with more than $42 billion bought in 2010 according to Bloomberg data.  And given continued uncertainty about the markets, the demand looks like it will not be abating any time soon especially as financial marketing organizations use investor fears as a selling point. Brokers and banks often receive higher fees and commissions for selling such products.

Keith Styrcula of the Structured Products Association said in a recent interview “these kinds of investments have become so attractive because people can no longer trust stock market indexes to go up.” He added that “there’s a lot of fear in the market right now, and a lot of investors don’t just want one-way exposure anymore.”  (Investment News, 11/15/2010, page 51).

But even though these products are marketed as a way to reduce risk they are not risk free.  There is no free lunch and this is no exception. Such products are subject to liquidity risk, market risk, credit risk and opportunity costs.

Market-Linked CDs are a form of principal-protected note offered by an investment bank.  These are not your Grandmother’s bank CDs.  First, such notes are offered as debt of the sponsoring institution so there is always the potential of credit risk.  Think of Lehman Brothers which was a large producer of such notes.  If the issuing firm fails, as Lehman did, the investment is at risk. While there is FDIC-protection on the principal, that may be small comfort when dealing with the time frame to get access to your money through a FDIC claim process.

They may involve a complex strategy which may be buried in the details of the offering’s prospectus.  For market-linked CDs, for instance, the issuer offers the downside protection by managing a portfolio of Treasury bonds (like zero coupon bonds to meet the projected maturity date of the CD).  The upside potential that is offered comes from investing in the bond yield through various strategies.

In such a low interest rate environment, these notes work only if provided sufficient time for the issuer to implement its strategies.  This is one reason that such CDs typically have long lock up periods that can be five years or more.

An issuer may guarantee a minimum interest amount but this is typically not FDIC-insured.  And this is really an obligation of the issuer so that’s where the credit risk comes into play. And you should note that the minimum guarantee usually only applies when the investment is held to maturity.  An investor will lose this guarantee by redeeming before the contract maturity date. And because of the nature of these products, there really is no secondary market around to allow someone else to buy you out early.

The upside potential is calculated based on the performance of the index chosen.  The CD investor does not own the index or the stocks in the index.  The issuer uses its money to invest and potentially reap the dividends issued as well as the appreciation.

What the issuer offers to the CD investor is a certain percentage of the upside gain of the index (called a participation rate) but limited by a ceiling (called a cap).  This calculation of the gain can be convoluted for an investor to understand. While it’s pretty simple to understand a typical CD (put $1000 in at an annual interest rate of 3% means you have $1,030 at end of the period), the same is not true for market linked CDs.

Your gain may be based on an average (so now the question is how are they calculating that average: monthly,  semi-annually, annually, term of the CD) or a Point-to-Point calculation. (Example: If the market index is 1000 when the account opened, went up to 2000 after one year but drops to 1050 by the maturity date, then the point-to-point is from 1000 to 1050 or 5% in this case).

In many ways these are similar to other structured products like market linked annuities (sometimes referred to as index annuities or equity-indexed annuities).

I addressed many of the same issues about calculating returns and possible risks in a post on the subject a while back.

Bottom Line:

Whether or not such products make sense for your personal portfolio really requires a good, long chat with a qualified financial professional. Like any other investment, the potential risks and opportunity costs need to be weighed against your personal goals, time frame, liquidity needs and the potential offered by other alternative options.

So if you are considering such products, just be aware of all the risks and look beyond the marketing brochure at the local bank.

Resources:

SEC Investor Education on Market-Linked CDs

MoneyLinkPro Blog Post on Market Index Annuities

Wikipedia Definition

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As noted in previous articles and posts, whether or not your student qualifies for federal financial aid for college will depend on the Expected Family Contribution (EFC) calculation.

Typically, almost all assets and income are included in this calculation by financial aid officers.  There are exceptions to all rules and in this case, federal aid formulas (under the “Federal Methodology”) exclude home or family farm equity, money accumulated in tax-deferred retirement accounts and cash value built up in a life insurance policy.  The cash values of fixed and variable annuities are also excluded.

Since these assets are not counted in determining aid, some families may be tempted to consider “asset shifting” strategies.  With such techniques, a countable asset like savings or investments through a brokerage account are used to acquire one or more of these other non-countable asset types.

Friends and clients have attended financial aid workshops sponsored by college aid planners or insurance agents who recommend purchasing annuities or life insurance.  Sometimes these strategies involve doing a “cash out” refinance or drawing on a home equity line of credit. Tapping home equity to fund a deposit into an insurance or annuity vehicle may benefit a mortgage banker and insurance agent but is it in your best interests?

Asset Shifting to Qualify for More Financial Aid: Is it worth it?

Well, that depends on what side of the table you’re sitting on.

Yes, it’s true that anything you can do to reduce your expected family contribution may help boost the amount and type of aid your student may receive.

On the other hand, remember these points:

  • Family assets are counted at a low contribution rate of 5.6% above the asset-protection allowance calculated for your family circumstances.
  • If you put money into a tax-deferred account, it’s locked up.  Access to the funds before age 59 1/2 results in early withdrawal penalties in most cases.
  • You may have to pay to borrow your own money.

Granted, socking away money into tax-deferred vehicles may make sense for you.  And as I’ve noted before, paying for college is as much a retirement problem as anything else so anything you can do to provide for your Golden Years can be a good thing.

But don’t get tempted into long-term commitments to cover short-term financing issues.

By shifting assets you lose access and flexibility for the cash.  If employing such a strategy reduces your emergency cash reserve, then you’ve increased your risk to handle unexpected cash needs.

Cash Value Life Insurance and the Bank of You

Cash value life insurance accumulates its value over time.  Starting a policy within a couple of years of your student’s college enrollment is not going to help you.  During the initial years of such a policy very little cash is built up as insurance expenses and first-year commissions paid out by the insurer to the agent are very high which limit the amount of paid premiums that are actually invested for growth.

But consider this:  For some who have existing policies or are looking for a way to build cash over time that offers guarantees and is potentially tax-free, then by all means use life insurance.  There are strategies commonly referred to as the Infinite Banking Concept or the Bank of You which champion life insurance as a way to build and access your own pot of money available to you to borrow for almost any purpose.

There are many attributes to life insurance that make these concepts useful

  • Tax-free dividends,
  • Access to money without credit or income qualifications or delays from a traditional bank,
  • Guarantees on the cash value from the insurer.

But one downside is the cash flow needed to actually build up a pot big enough to tap into for buying a car much less paying school tuition.  You would in all likelihood need to divert all other available cash and stop funding any other tax-deferred plans to build up the cash.  And then there is the time line needed.  To effectively build up the cash, you really need to bank on at least 5 years before you have a Bank of You to tap. This is why such a solution is not recommended for those with students about to enter college.

Bottom Line:

Don’t let the financial aid tail wag the retirement planning dog here.  Only use these tactics after consultation with a qualified financial professional, preferably one who has no vested interest in whether or not you purchase a particular product.

 

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The holiday season is almost upon us.  Before we all get caught up in the spirit of the season (or mayhem, depending on your perspective), consider taking time to get your fiscal house in order with these tips.

The Year of the RMD

Last year, required minimum distributions (RMDs) were not required as Congress granted a reprieve to not force clients to take distributions from severely depressed retirement accounts.

That free pass is not available this year.  So if you or someone you know is over age 70 1/2, you have to take a distribution from your IRAs.  This also applies to those who are beneficiaries of inherited IRA accounts as well.

Distributions don’t have to be taken from each IRA account but a calculation must be made based on the value of all accounts at the end of last year.  Then a withdrawal can be made from one or more accounts as long as it at least equals the minimum amount.

Think Ahead for Higher Taxes

In all likelihood, taxes will be higher next year.  As things stand, the Bush-era tax cuts are set to expire and marginal income tax rates and estate taxes will increase.

So look to booking capital gains this year if possible since tax rates on both long-term and short-term gains are certainly lower this year.

Reduce Concentration

There’s obviously enough going on to distract any investor but what I’m talking about here is concentrated stock positions.  Many clients may take advantage of company-sponsored stock purchase plans or have inherited positions concentrated in just a few stock positions.

Regardless of one’s age, this is risky.  This is especially risky to concentrate your income and your investments with your employer.  Remember Enron?  How about WorldCom?  Or maybe Alcatel-Lucent?

So given the lower capital gains tax rates that exist definitely now (versus a proposed but illusory extension later), it makes sense to reduce the highly concentrated positions in one or more stocks.

I know a widow who inherited the stock positions that her husband bought.  These included AT&T and Apple.  While AT&T was once a great “widow and orphans” stock paying out a reliable dividend because of the cash flow generated from its near monopoly status in telephone services, it broke up into so many Baby Bells.  The dividends from these have not matched the parent company and the risks of these holdings have increased as the telecom sector  has become more volatile.

And while Apple has been a soaring success for her (bought very low), it represents over one-third of her investment holdings.

Like most people I come across, she has emotional ties to these holdings.  And while she and others like her would not think of going into a casino to put all their chips on one or two numbers at the roulette wheel, they don’t find it inconsistent to have a lot of their eggs in just one or two investment baskets.

Since she relies on these investments to supplement her income, she needs to think about how to protect herself.  Although people may recognize this need, it doesn’t make it any easier to get people to do what is in their best interests when their emotions get in the way.

‘Tis the Season for Giving

Right now the highest marginal income tax bracket is 35% which is set to rise to 39.6%.  And capital gains tax rates are set to rise as well.  And come January 1, the capital deduction on gifts will be reduced from 35% to 28%.  All of this makes giving substantial gifts to charities a little more costly for your wallet.  So if you’re planning to make a large charitable donation, it pays to speed it up into this year.

To Roth or Not to Roth – Year of the Conversion?

This year provides high-earners an opportunity to convert all or part of their tax-deferred accounts to Roth IRAs which offers an opportunity to pay no income tax on withdrawals in the future.

The decision to take advantage of this opportunity needs to be weighed against the availability and source of cash to pay taxes now on previously deferred gains in the tax-deferred IRAs or 401ks. It also must consider the assumptions about future income tax rates and even whether or not future Roth IRA withdrawal rules might be changed by Congress.

Create an Investment Road Map

To really help gain clear direction on your investing, you really should consider sitting down with an adviser who will help you draft your personal investment road map (an Investment Policy Statement) that outlines how investment purchase and sale decisions will be made, what criteria will be used to evaluate proposed investments and how you will gauge and track results toward your personal benchmark.

This exercise helps establish a clear process that minimizes the impact of potentially destructive emotional reactions that can lead you astray.

Rebalance and Diversify

Just as you might plan on changing the batteries in your smoke detectors when you reset the clocks in the spring and fall, you should rebalance your investments periodically as well.

Now is as good a time as any to reassess your risk tolerance.  Research has shown that an investor’s risk tolerance is dynamic and influenced by general feelings about yourself, your situation and the world around you.  With the world’s stock markets showing many positive gains, this may lead some to become more willing to take risks.  This may not be a good thing in the long run so really question your assumptions about investing.

Armed with your investment road map and a risk profile, you will be in a better position to determine the mix of investments for diversification.  Don’t be afraid of adding to the mix investment asset classes that may not be familiar.  The idea of diversification is assembling investment assets that complement each other while potentially reducing risk.  And just as the economy has changed and the types of industries that are dominant rise and fall, it’s fair to say that what is “in” now may be “out” later making it important to reconsider your mix.

For this reason, this is why looking abroad to developed and emerging markets still makes sense.  Many of these economies are not bogged down by the after-effects of the great financial meltdown. And the rise of their consumerist middle classes means the potential to take advantage of demographics favoring growth sectors like natural resources, telecom, agriculture and technology.

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“The safest way to double your money is to fold it over once and put it in your pocket.” Kin Hubbard

Investing takes time.  As humans our brains are more wired toward the flight-or-flight survival responses that got us to the top of the food chain.  So we are more prone to panic moves in one direction or another and this is not always in our best long-term interests.

So to retire richer requires a little work on understanding who we are and what we can do to improve our sustainable retirement odds.

There are lots of things in life that we cannot control.  And humans in general are easily driven to distraction. We are busy texting, emailing, surfing the web, and all other manner of techno-gadget interruptions from phone, computer and office equipment around us.

It’s no wonder that folks find it difficult to focus on long-term planning.  We hear a snippet of news on the radio or watch a talking head wildly flailing his arms about one stock or another and think that this is the ticket to investing success.

For those who remember physics class and one of Newton’s great discoveries, you can just as easily apply the rules of the physical world to human financial behavior:  A body at rest will tend to stay at rest; a body in motion will tend to stay in motion.

For most investors, inertia is the dominant theme that controls financial action or inaction.  Confronted with conflicting or incomplete information, most people will tend to procrastinate about making a commitment to one plan or another, one action or another.  Even once a course of action is adopted, we’re more likely than not to leave things on auto-pilot because of a lack of time or fear of making a wrong move.

To get us to move on anything, there has to be a lot of effort.  But once a tipping point is reached, people move but not always in the direction that may be in their best interests. Is it any wonder that most people end up being tossed between the two greatest motivators of action – and investing:  Greed and Fear.

So while someone cannot control the weather (unless you remember the old story line from the daytime soap General Hospital in the 1980s), the direction of a stock index or the value of a specific stock, we can all control our emotions.

Easier said than done?  You bet.  That’s why you need to approach investing for retirement or any financial goal with a process that helps take the emotional element out of it.  And you need to develop good habits about saving, debt and investment decisions.

What Does Rich Mean To You?

So you say you want to retire rich?  Sure, we all want to.  But what does “rich” look like to you.  There are surveys of folks who have $500,000 or $1million in investable assets describing themselves as middle class.  There are those I know who live quite comfortably on under $30,000 a year and would never describe themselves as poor.

Be Specific

First you should get a good picture of where you expect to be and what kind of life you envision.  Be clear about it.  Visualize it and then go find a picture you can hang up in a prominent place to remind you of your goal every day.  (That’s why I have pictures of my family on this blog reminding me of why I do everything I do).

Appeal to Your Competitive Streak

We are better motivated when we have tangible targets for either goals or competitors.  Ever ride a bike or run on the road and use the guy jogging in front of you as a target?  Same thing here.

So assuming you know what your retirement will look like, you’ll be able to put a number to it.  Now find out how you’re doing with a personal benchmark.  One way is to go to www.INGcompareme.com, a public website run by the financial giant ING which allows you to compare your financial status with others of similar age, income and assets.  Or try the calculators found at the bottom of the home page for www.ClearViewWealthAdvisors.com. This might help give you the motivation you need to save more if needed.

Use Checklists

They can save your life.  And even the lives of your passengers.  Just ask Captain Sully who credits his crew with good training and following a process that minimized the distractions from a highly emotional scene above the Hudson River.

The daily grind can be distracting.  Often we may be unable to see the big forest because of the trees standing in our path to retirement.

So try these tips:

Mid-thirties to early 40s:

  • Target a savings goal of 1.5 times your annual salary
    • Enroll in a company savings plan
    • Take full advantage of any 401k match that’s offered
    • Automatically increase your contributions by 5% to 10% each year (example: You set aside 4% this year; then next year set aside at least 4.5%)
    • If you max out what you can put aside in the company plan, consider adding a Roth IRA
    • Get your emergency reserves in place in readily available, FDIC-insured bank accounts, CDs or money markets
    • Invest for growth: Consider an allocation to equities equal to 128 minus your current age
    • Let your money travel: More growth is occurring in other parts of the world so don’t be stingy with your foreign stock or bond allocations.  Americans are woefully under-represented in overseas investing so try to look at a target of at least 20% up to 40% depending on your risk profile

Mid-Career (mid-forties to mid fifties)

  • Target a savings goal of 3 times your annual salary
    • Rebalance your portfolio periodically (consider at the very least doing so when you change your clocks)
    • Make any “catch-up” contributions by stashing away the maximum allowed for those over age 50
    • Consolidate your accounts from old IRAs, 401ks and savings to cut down on your investment costs and improve the coordination of your plan and allocation target

Nearing and In Retirement (Age 56 and beyond)

  • Target savings of six times your annual salary
    • Prune your stock holdings (about 40% of 401k investors had more than 80% in stocks according to Fidelity Investments)
    • Shift investments for income:  foreign and domestic hi-yield dividend paying stocks, some hi-yield bonds, some convertible bonds
    • Map out your retirement income plan – to sustain retirement cash flow you need to have a retirement income plan in place
    • Regularly review and rework the retirement income plan that incorporates any pensions, Social Security benefits and no more than 4% – 4.5% withdrawals from the investment portfolio stash accumulated
    • Have a Plan B ready:  Know your other options to supplement income from part-time work or consulting or tapping home equity through a reverse mortgage or receiving pensions available to qualifying Veterans.

Don’t be afraid to get a second opinion or help in crafting your plans form a qualified retirement professional.  You can find a CFP(R) professional by checking out the consumer portion of the Financial Planning Association website or by calling 617-398-7494 to arrange for a complimentary review with your personal money coach, Steve Stanganelli, CFP(R).

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Investing Mistake #1: Treating Investments Like a Part-Time Job and Not a Business.

“When a man tells you that he got rich through hard work, ask him: Whose?” Don Marquis

While you may be investing for a child’s education, a vacation home or retirement, the common ingredient for success really is the process, approach and mindset you bring to making investing a success.  Take it seriously and you get serious results.  If you are fearful, your results will reflect it.  If you are a daredevil, your results may reflect that, too.

All your personal goals are important, aren’t they? You’ve worked hard for your money, didn’t you?  So why not find a better way to make your money work smart for you?

Why Mindset Can Really Harm You

Too often, investors simply think that what and how they save won’t really matter.  They don’t have enough money to make it worth it and they don’t have the time to really focus on the whole investing game. I know, life gets in the way when you’re doing other things and making other plans.

Thinking of this made me remember visiting an underground cave with my friends John and Lisa on a trip through the Blue Mountains. We entered the caves on a tour and saw all these fantastic, awe-inspiring formations created by the centuries of slow drips of water and mineral from the cave ceilings.  The stalactites and stalagmites formed bridges and statues of animals and even formations reminiscent of the craftsmanship used to build the cathedrals of Medieval Europe.  Small, incremental and consistent efforts produced such grand results.  If it can happen in nature, why not for something like a college savings account?

Too often, investors simply throw up their hands and take the easy road.  They do nothing, make no changes and for fear of making a mistake or because they don’t know who to trust, they avoid working with a professional.

They may hear the media report that a monkey throwing darts at a list of mutual funds or stocks may have beaten a professional money manager. Another favorite topic in the financial press is how most money managers do not bear their index.  But on the other hand, other stories will focus on the fantastic results of quick trigger investment schemes of the day-trader variety.

Let’s face it:  How well your investments perform from day to day will not likely make a big difference in your lifestyle now.  But how well you plan and invest may determine if, how and when you can retire, build a legacy to pass on and do all the things that are on your personal “bucket list.”

Two Categories of Investors

So investors will fall into two categories:  Those who focus exclusively on performance and those who focus on process.

Most investors, despite repeated warnings in small print at the end of the ads,  will focus on past performance as reported by the popular press and websites.  So despite the daily constraints on time because of family and work, these same folks will pick up an occasional financial newspaper or magazine or troll some financial websites and pick up a few ideas. They’ll see a Top 10 list of investments from last quarter or last year and then buy them because they performed well over some arbitrary time frame.

The Part-Time Investor in Action

Those who are more well-to-do or successful or affluent are either too busy making money to focus their time on investing or they believe that they have the skills to handle things on their own because they are successful in their careers.

I’m reminded of a woman I met on several occasions to discuss a way to bring some order to her investments.  She was a single mom raising a teen and worked in a fast-paced, deadline sensitive business.  Whenever we spoke, we were regularly interrupted by ringing phones and a buzzing pager.  Although she barely had time for lunch, much less research basic investment concepts, she ultimately decided that she would go it alone and master an online trading strategy to buy and sell stocks and options.

If you’re a successful surgeon or restaurateur or engineer or banker, do you really think that the same skill set that got you to the top of your profession, will also mean you can invest the time needed to properly manage and protect your wealth – not just your investments, but the whole set of tax, asset protection, retirement strategy planning, credit and cash management concepts?

Highly successful people may have achieved enviable incomes but can tend to be haphazard or casual about investing and integrating a financial plan.  Often, they may think that their incomes are secure, their career path certain, and they have skill and time to handle things on their own.

In reality, most may not really know what it takes to get to their goal.  For a 49-year old executive with a good $400,000 annual income and a $1 million investment portfolio trying to target for a retirement lifestyle at age 65 without much down scaling, he has to grow his nest egg to $6 million within a mere decade and a half.

And there is the equally disturbing statistic that the Great Recession has been hard on white collar professionals.  Those with college and advanced degrees make up more than 20% of the unemployed and long-term unemployed.

Be the CEO of Your Own Investment Company

Investing at any level and especially at this level requires a business mindset. The same sort of principles that apply to business success apply to your own investing. And just like any other CEO, you need to make sure that your assets are managed in a systematic, disciplined and prudent manner.

  • Business Plan: You need a business plan for your investments that covers the short and long term.  This means having a clear road map for your goals with appropriate benchmarks tied to achieving them. Instead of using the arbitrary indexes quoted by the media, you need to have a personal benchmark so you’re more likely to stay on target.
  • SMART GOALS: You need clear goals: Specific, Measurable, Achievable, Realistic and Time-Specific
  • Commit to a Realistic Strategy: You need a clear strategy for meeting those goals – a 20% annual return might sound nice but is it realistic given historical norms and your own experience and peace of mind
  • Don’t take it personally: As in business, don’t take the ups and downs in the market personally and don’t be afraid to review
  • Surround yourself with a professional team: If you’re serious about investing for success, then take the time to assemble a proper team of professionals who can help and who you can trust.  No business succeeds long term without a good team.

Don’t be too focused on your career to ignore this.  You can’t afford to treat your family’s future security as a part-time job or hobby.

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It is said that when the British surrendered to the Colonial Army at Yorktown the band played a tune titled “The World Turned Upside Down.”  True or not, it is a fitting sound track to a seemingly improbable situation: The defeat of a well-trained army and navy of the most powerful empire in the world by an under-funded, out-numbered and ill-equipped army of colonials. It was as if the Sun, Earth and stars had become unhitched leaving navigators without their usual bearings.

In much the same way, the Great Recession has shattered our views on what is ‘safe’ and what it means to be ‘conservative’ or ‘aggressive.’  Looking to preserve capital and produce income?  Invest in government bonds and maybe real estate.  Young and looking to score big on the potential upside of stocks? Go for small company stocks or overseas because if there’s a bust you’ll have time to recover. At least that was the conventional thinking. Everything that was traditionally considered to be ‘safe’ and dull turned out to be dangerous and ‘risky.’

There’s nothing scarier than conventional thinking in a changing market.  And what has evolved after the near melt down of the US financial system – indeed the global financial system – in the Fall of 2008 is certainly a changed market.

Household names including the bluest of the Blue Chips have entered and come out of bankruptcy.  The foundation for wealth for most people – real estate – has crumbled and is a long way from recovery to previous levels. Government debt of developed countries considered at one time to be nearly risk-less have been to the precipice as Greece neared default and threatened the entire Euro zone. Now, it’s not even beyond the pale to consider a future downgrade of the credit rating of the US Government.

Having an understanding of risk is important not just for investors but for the advisers trying to guide them.  In the past, an adviser (or your company’s 401k web site) would have you fill out a questionnaire.  Those eight to 12 questions would identify the type of investor you were and lead to an asset allocation reasonably appropriate for an investor’s Risk Profile, Time Horizon and Goals. This was sometimes considered a “set and forget” type of thing.

But commonsense and our experience tell us that things change.  Take the weather:  Some days it’s sunny and other times it’s rainy or cold.  What you wear on one day or even part of a day may not be right when the weather changes.  That’s just like investing.  A risk profile and asset allocation determined at one point might not be right for another.

So risk profiles are not static things either.  Invariably, they change based on how we feel. Hey, we’re only human. You need to reconsider your risk appetite regularly and now is a good time.  And it should be more than a few multiple choice questions.

After the run-ups in the markets in the late 90’s, people would tend to see things going up perpetually and say they would be more comfortable with risk.  On the other hand, after the two major meltdowns this past decade, the pendulum has swung the other way. Too far, in fact.

Faced with our own emotions and the vagaries of a global economic system, one might consider it to be less risky to sit on the sidelines.  Or maybe it’s safe to put all your chips on what you know – like your company stock.  Or just cash it all out and leave it parked in a money market or bank.

At first glance these strategies may be considered low risk but in reality – even the reality of today’s changed world – they are not.  Your company stock?  Consider Enron or Lucent and ask their employees how their retirement accounts held up.  Cash?  At the minuscule rates banks are offering, you’re already behind the eight ball with taxes and inflation.

There’s more to risk than the volatile nature of an asset’s price. And what should matter most is not which assets are owned but how well they perform on the upside and downside.

If you’re hungry, your goal is to not be hungry.  You say you like to eat steak and always eat steak.  Well, that’s great but the risk of heart disease may catch up to you.  So what you ate before may not be right for you now. Maybe it’s time to substitute more fish and add more vegetables.

That’s the essence of remodeling your portfolio now.  Government bonds still have a place in your portfolio – just like that steak – but it’s time to scale back on the developed nations of Europe with their risks of default and the US where another bubble is brewing and add those from emerging markets. If you own gold or want to buy it because it’s a “safe haven” for inflationary times and you don’t want to miss the boat, consider other more usable commodities like potash.  (As the world adds nearly 75 million people a year, there’s a growing demand for cultivating food for them and potash is a staple needed for fertilizers).  After seeing a huge multi-national like BP get hammered for its lackadaisical approach to employee and environmental safety, it may be time to add more small companies to the mix which have less bureaucracy and may be faster to respond to opportunities and troubles.

The risky stuff may actually be more safe than the traditional stuff.

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