The 7% Solution; Should We Consider it Now?

The 7% bet ... is it prudent now?

This blog post was last updated the end of 2009, but the basic strategy is still very relevant. The market continues to reach new highs in stock prices. If you've invested in stocks, in retirement accounts or otherwise, you should be ahead nicely year over year. But what now? Perhaps employing a "safe money" strategy is prudent now with a portion of your money. Read on.

Investing has always been a trade-off. Making choices with your money involves weighing the potential risk and rewards to determine the best course of action to achieve your desired goal. So, in a way, investing is akin to odds-making. In America, wagering is never a sure thing, but you can weigh the odds by using past data. This is fairly easy to determine in the stock market since reliable statistics and performance are readily available for past sessions going back at least to before the Great Depression, or about 1925.

I thought it timely to undertake this market study now, as the stock market has fallen about 20% since its high last October (2007). I'm using this 7% figure to compare stock price performance vs. a hypothetical 7% rate of return, what's available in a fixed index annuity. The answer sought: is it generally better to accept the market risk of stocks (gaining above in any one year/decade, and also losing money), or to bet with the a less risky maximum 7% annual return with no risk of loss when the stock market is down for any year. To get started, I took the annual Standard & Poor’s 500 Index* and compared this with a fixed index annuity that would credit you interest annually based on the performance of the S&P 500 Index with a cap of 7%. The cap is the maximum you could earn in any year. The floor is zero in the down years. You would never lose money in a down year with your principal. Dividends were not considered for ease of calculations. Eight decades of data were used, starting in 1930, and ending in 2009. This covered all of my available data, and represented co-incidentally about the lifetime of an investor, 80 years.

The data presents itself as follows:
1930’s Stock market lost 41%, the 7% strategy gained 31%
1940’s Stock market gained 34%, the 7% strategy gained 40%
1950’s Stock market gained 257%, the 7% strategy gained 65%
1960’s Stock market gained 53%, the 7% strategy gained 50%
1970’s Stock market gained 17%, the 7% strategy gained 49%
1980’s Stock market gained 227%, the 7% strategy gained 66%
1990’s Stock market gained 315%, the 7% strategy gained 68%
2000’s Stock market lost 24%, the 7% strategy gained 40%

Well, the tally is pretty easy to figure visually: being a long term investor in the stock market paid off more than the 7% annuity plan, but you needed a strong stomach to stay in during all the bad markets periods (25 years were down years). Using the 7% maximum gain in any one year, and all down years counted as zeros, you would have beaten the buy and hold market one-half the time by decade, ‘30’s, ‘40’s, ‘70’s, and ‘00’s. The other 4 decades your stock portfolio would have bested the 7% strategy. Note also that all decades were winners for the stock market, except the '30's and '00's just completed. But - the 7% plan beat the market in the '40's and '70's due to truly bad years that reduced the average gains over the 10 year decade.

Taken all together, you earned about 2X more by following the market as a buy and hold investor. You may say, "that’s all history now, what do I do today?" My reply; if you are 10-15 years to retirement, keep ¾ of your money in the market, and ¼ in the 7% plan. If you are older and closer to retirement, keep less with Mr. Market, and more in the safer 7% plan. With the recent stock and credit market turmoil, you should look at your money allocations to determine your risks as you inch closer to retirement.

If you can't eat or sleep well, you probably need to consider changes. Call me and I can help you with that.

Barry Unterbrink, C.R.P.C.
(954) 719-1151
* source Ibbotson & Associates SBBI yearbook

Gold, Your Portfolio, and Your Money

Gold, Your Portfolio, and Your Money

The recent fall in commodity prices has raised more than a few eyebrows on the validity of owning these types of investments, particularly gold.
Much advice out there centers on just diversifying among Stocks, Bonds, and Cash. Their plan has led to heavy losses in the past, taking years to get back to even. Our recipe requires gold, silver, other natural resources that protect and diversify your investments. Depending on the client, we can also provide for physical ownership of bullion, funds that hold physical bars, and when warranted, mining and commodity companies that produce the metals.

Do you believe commodities, gold and the stock market are risky places to invest? We answer: YES, in isolation. However, when combined with other non-correlated investments, over time the combination increases the returns but decreases the risk.

Let's talk gold: the mixing of gold into your portfolio of stocks did have a dramatic and positive effect on your overall portfolio performance year by year for 40 years. Gold has the qualities to act as a hedge in a portfolio to lessen the negative effects that a bad stock market can deliver. So, just as investing in the yellow metal alone could cause sleepless nights. When mixed with stocks and bonds, it greatly mitigates larger draw downs (falls in your portfolio value) and contributes to the overall portfolio performance. What is critical is not how each component of your portfolio preforms but what is the PROFIT or LOSS at the end of the year - and the volatility or drawdown of your portfolio during that time.

Two major actions / beliefs that investors cling to that I feel can hurt your pocketbook. First, if you are viewing your portfolio line-item by line-item, looking at each holding, you are missing the boat and need to change your outlook. It's a portfolio of investments, to be gauged as a whole. Don't nit-pick this and that. Second, view your results over time, not from their peak. Few can time the markets and you'll be disappointed if you use this gauge of performance. Instead, what is your 3-5-7 year average performance? Did it meet your expectations based on your level of risk you (or your advisor) recommended?

Historically when stocks turned down, gold delivered. Gold helped boost your results of an actual portfolio of stocks, bonds, cash and gold in 1973, 1974, 1977, 1990, the 2000-2002 bear market, and the most recent 2007-2009 ugly bear market when stocks fell 50% in just 17 months! Gold rose $200 an ounce or 30% during that stock meltdown.. That’s the diversification or balancing effect Gold will have in the next bear market which could be imminent.

Barry L. Unterbrink
Chartered Retirement Planning Counselor
Fort Lauderdale, Florida
(954) 719-1151

Note: We have just received the performance report on the largest portfolio managed by our research department. For the 10 years we have managed this account we have had an average annual return of 11.84% per year. This performance report has been verified by the major brokerage firm who is the custodian.
Although I cannot quote individual client performance in this space, the benefits of staying diversified and adding Gold the last two calendar years for those investors in this program: +10.5% in 2011 and +10.6% in 2012.

Spreadsheets Can Destroy Your Investment Portfolio

Spreadsheets Can Destroy Your Investment Portfolio - by Larry Unterbrink, Dir. of Research

  A lot of portfolio back tests (and their resulting charts) are just silly. Any
moron can go into a spreadsheet to find what worked best in the past
(especially when cherry picking dates). But it takes some real thinking to
work out a strategy that can deal with future unknown risks.

  You can't optimize for returns going forward because you don't know what those returns will be. So anyone designing a portfolio based only on what worked best in the past is making a major tactical error with their investments. A mistake that could destroy a retirement plan.

  What I liked most about our "Forever" Portfolio is that it eliminates most risk. As a lifelong entrepreneur, I really believe that after 50 years of trading and investing, I understand the nature of the unknown and investing RISK. It's not about going into a spreadsheet, hand
picking some dates and blend of assets to see what did best, and then going out and
buying those investments. If investing were that easy we'd all be filthy rich!

  Rather, back-testing can really only show you what DIDN'T work well in
the past, so you can avoid repeating those mistakes, or at least be aware of
those risks. Back-testing can never prove something will work best going
forward. Also, back-testing will never show you extraordinary events, such
as civil unrest, unprecedented government intervention in the markets, inflation, etc.
These risks need to have some diversification applied as well and the
Forever Portfolio actually considers these risks that spreadsheet-only
portfolios do not.

  This is why I find it so absurd when some analyst or pundit claims that an
asset like gold is "worthless" in an investing portfolio because of some
biased spreadsheet work they did. I wonder if these people have ever gotten
far enough away from their spreadsheets to see how the world markets
really work?

  I have travelled to over 79 countries evaluating markets and
searching for investments and I can tell you that economies can move
quickly from good to bad and governments do stupid things all the time.

  Having some portfolio insurance like gold around is a really splendid idea.
YES, the Forever Portfolio holds gold, silver and diversifies with other
assets likes stocks (mainly ETFs) , bonds and cash. But what in history
suggests this is not a good idea? Show me the flaw!

  It doesn't matter what your chart is showed working best over a particular time period. The fact is that concentrating your bets is dangerous, and sometimes your stocks and bonds don't
payout on your timetable. This is just how life works. I am finding out more each day after
almost 80 years. Diversifying a little bit is prudent.

Using Charts Intelligently

  Investing charts are one tool investors have, but I think they need to be
used within their limits. Charts can't predict the future, but maybe they can
guide you away from notably bad ideas. Likewise, they can also be useful to
test out theories for big flaws you might have missed. Even then, they need
to be used with some judgement about the unpredictable future and the idea
that history has many ugly details buried within it that aren't simply
explained in a chart of spreadsheet data. When looking at investing charts,
just keep in mind that pretty colors and compelling growth patterns may not
be enough to prevent disaster if you don't use the data intelligently.

Give us a call if your would like a review of your investments and plans.
Larry Unterbrink, Director of Research
Stetson Wealth Management
Fort Lauderdale, FL
(954) 719-1151

Market Linked CD's

                                                                                     

Certificates of Deposit are paying interest at an all-time low! All except one: the Market Linked Certificate of Deposit.

Stetson Wealth Management is now offering Market Linked CDs to our clients. These CDs are issued by some of the world’s largest banks, are FDIC insured, and principle protected. The interest they pay is variable, often with a minimum guaranteed rate.

If you have CDs coming up for renewal, you owe it to yourself to check out Market Linked CDs.

To learn more about how you can keep the safety of a traditional CD while getting some upside market potential, please take a couple of minutes to watch this brief presentation by clicking the link below.
Thank You. ~Barry Unterbrink, (954) 719-1151

http://adisusa.net/Video/Consumer%20Direct.wmv
Here are the stocks for the JP Morgan Market-Linked CD for February.

Partying Like it's 1999

“…I’m gonna party like it’s 1999.” Music rock star Prince’s lyrics

 The stock market is again the talk of the town, evinced by the top billing news story on your network and cable news channels this week, along with the constant scrolling factoids across the financial channels CNBC and Bloomberg TV. It’s hip-hip-hooray that the stock market is approaching the all-time high set back in 2007; just above 14,000 on the Dow.

  Noticeably absent from the news and discussions, is that the NASDAQ stock market average is still 2000 points below its high set in March, 2000 - thirteen long years; it remains 40% below the 5,000 level posted at the painful end of the “dot-com” craze. So, if you had $100,000 on your statement then, you now have about $60,000; that’s not nice.  Negative news is often ignored by the media when a better story exists. Is this time ‘different” than the recent tops in prices in 2000, 2007? Those two near 50% declines were soul-searching. We have no crystal ball predictor on premises, but do advocate risk reduction strategies for our clients' money. So how can we learn something useful here?

  First off, be skeptical. I didn’t say negative or pessimistic. Just weigh the facts with your money against that. Admit that you are not perfect; not in your life, finances, relationships, etc. Nobody sells all out at the top, and then buys in at the bottom. Many had big money and big gains in 2000 because they took large positions and risks in stocks during a spiral, out of control, greed-fed market.   

  Second, realize that you don’t invest solely in a stock market index like the S&P 500 stocks, or the Dow Jones Industrial stocks, or NASDAQ stock index and hold the same investments year after year, so your "results may vary".  You could, but it’s not feasible and you may have limited options in your 401k or retirement plans, or maybe you think it is boring. Many times you won’t know what you actually own if you’re invested in stock mutual funds (hint: stock mutual funds normally hold some bonds and cash too).
 

 Once you ‘stray away” from the popular stock market index investing strategy with any of your money, you’re kind of back in the “wild west”, subject to different dangers – and opportunities – depending on your “bets” in this or that stock, bond or mutual fund. There often isn’t enough time to do the homework involved in this – that’s why money managers and mutual funds exist.

Third, it is critical to know what and how much you own - on a broad basis. Have the basic allocation of stocks/bonds/cash that comprise your investments in your head and written down. Almost 90% of your investment returns are due to the allocation of your money; not the individual securities. Don't assume that things will take care of themselves.

 You probably have the information at hand now from the December and year-end statements filling your mailbox the past couple weeks. It’s a good time to review them, putting the numbers down on paper or in a spreadsheet. Ask if I can help you set this up for you or review your statements/performance. No doubt, improvements can be recommended.

  I’ll soon be unveiling some new management programs that we’ve developed over the past year or so that should benefit you. They are low-cost, using a combination of index funds, bonds and alternative assets, metals, foodstuffs, etc., that have proven to reduce volatility, provide some income, and grow your money.

Be well and safe,
~Barry
https://twitter.com/allthingsmoney
www.linkedin.com/in/retirementplanner/
 

Year to date markets tally

                                                                                                20 Dec., '12

Year-to-date: Stocks +16%, Gold +7%, and corporate bonds up about 10%. A mixture of the above is up +8.2%. Nice for a conservative portfolio plus a dividend yield of 1.7%; the same as a 5 year CD !

December Market-Linked CD's

12 December 2012

On my last e-mail to clients and friends, I referred to the December Market-Linked CD's in brief detail. The term sheets for the CD's was not attached.

This link will take you to my web site, where the two term sheets can be accessed on the right side of the services page. http://www.stetsonwealthmanagement.com/Services.html

This month's commodity-based CD looks promising, as it covers 10 commodities including energy, metals and grains, and a minimum 7% cap. For more information, please contact me by e-mail or phone.

Barry Unterbrink, CRPC
(954) 719-1151

Year-end Planning for Investors

Year end Planning for Investors
2013 is rapidly approaching, and this gives investors just a few weeks to get their "ducks in a row" in two important areas; recordkeeping and tax planning.

My biggest bugaboo is that investors must face these year-end challenges just as the holiday season hits. Let's face it - the time between Thanksgiving and New Year's can be hectic and stressful. Travelling, visitors arriving, shopping - I can't think of a busier (must get'r done) time of the year. If you are a big corporation, you can pick your fiscal year - most retailers end their year January 31st. Where can I sign up for that?

So perhaps with a bit of fog on our mirrors, and a natural inclination to avoid money topics this time of year, we should at a minimum have a "to-do" list written up as an actionable plan.
So here's my short list, and I've checked it twice1:

* Review your bank and brokerage / investments. Do you have gains and losses taken this year? IRA's and 401-k's don't count as they are not taxed this way. Can you utlilize some more gains or losses to improve your taxable income and pay less tax? If your advisor or C.P.A. isn't planning a meeting to discuss tax issues before year-end, call him/her and have this discussion.

* Mutual Funds - it's been a rather good year for stocks and bonds, so many mutual funds could distribute capital gains to you by year-end. Before buying any mutual fund before year-end, check to see when and how much they plan to distribute in capital gains and income. You may end up paying tax on newly purchased mutual funds even if you don't have any profit on the shares - not a nice outcome.

* Recordkeeping - help your tax preparer and yourself by having your bank and investment records in good order. This means getting the data from your paper statements, or on-line from their web site. Be careful of the deadlines and scope of their datafeeds. Some keep just 6 months of data - a hassle if you don't remember to pull it in the summer. Most carry one year, so get to it early January. If you use tax software, it's pretty slick to download your tax form data: interest, dividends and other transactions right into their program. Check to see if your financial institution supports the tax software you use (Turbo Tax,  H&R Block at Home, etc). Check also when the final data will be released by your financial entities; they often issue "corrected" forms after you get the first copy which is normally early February. Most data can also be downloaded in a spreadsheet format (called a csv file), making it easy to print and then checking off those expenses that are tax-relevant.

* Tax payments / filing - remember to pay your estimated tax payment due January 15th for your 2012 tax return. Also, if you don't owe Federal income tax, you can file your tax return late; there is no penalty for filing late. But please file so the IRS knows this. They may send you a letter to remind you.

* Retirement accounts - You have until your tax filing deadline, normally April 15th, to fund your IRA and take the deduction for 2012.

If your taxes seem to get more complicated each year, you are not alone. There are numerous changes to know and then use. I suggest to use a tax professional. With just one good idea/strategy, they could save you money in tax. By waiting until after December 31st, your planning becomes very limited indeed.

I believe that the fiscal cliff will be avoided or at least mitigated in it's effects on our economy and your taxes. Whether the decisions work well longer term is anyone's guess. If you have a financial topic that you want discussed, just leave a comment or suggestion by clicking below, and I will try to discuss it in my next posting. 

Happy Holidays!
~Barry Unterbrink, CRPC

1 For more complete information and advisement on your taxes, please see your C.P.A. or tax professional.

The Election Cycle & Stocks; Does it Deserve Attention?

The Election Cycle & Stocks: Does it Deserve Attention?

Markets are mixed in October
Hurricane Sandy through America a curve ball in the waning days of October, as the financial markets were re-opened on Halloween for a full session after two days of closure. Prices and yields were little changed. Historically, Octobers are difficult to pin down as to direction; but important inflection points do occur more often than not. Two months to go in this horse race.

The national election just adds to the uncertainty going forward. Here are some interesting election market stats* that I’m sharing this blog post. Of course, to base your voting on this one stat would be silly; vote based on your values and beliefs.
The one reliable indicator dating back to 1900 is that when the incumbent party wins the White House, the stock market rises quite nicely the next year.

                                                                         3 months after     12 months after
All Presidential elections since 1900                    +1.7%                 +6.4%
Incumbent party wins (17 times)                          +4.1%                 +9.8%
Incumbent party loses (11 times)                           -2.0%                +1.0%

Why is this? Mark Hulbert of MarketWatch theorizes that the numbers are influenced by the state of the economy; and whether it is IN, or about to SLIP into a recession as of Election Day. My take: Election Day is JUST a DAY. The economy ebbs and flows from expansion to contraction, boom to bust. To infer that a particular candidate would influence this cycle between specific dates is far-fetched. Every administration “inherits” the baggage of the prior team in Washington. That will not change. Surely credit will be claimed if it helps your cause. I have not heard it being used lately however by any candidate.

Be safe out there; remember to take your ID’s, polling address, reading glasses and other important stuff with you to vote. Good luck.

~Barry Unterbrink, CRPC
Fort Lauderdale, Florida

* Excerpts and data from Mark Hulbert; MarketWatch, Inc.

How To Bake a Better Investing Cake

How to Bake a Better Investing Cake
Designing an investment portfolio can be accomplished with success if you have the correct ingredients, follow the instructions, and remain disciplined. If you have a “homemade” recipe that’s been proven to work time after time – you are indeed ahead of the curve. Successful investing uses many of the same skills as baking a great cake.
I have never baked a cake from start to finish. I’ve helped people prepare to make a cake, and armed with bowls of sticky stuff and mixing whisks , assisted them with the work. A quick Internet search tells me I need sugar, eggs, milk, flour, etc. plus frosting to finish the job.