Summer Doldrums May Spell Profits Ahead

The financial markets have improved since my last blog at the end of June.

By most measures, stock prices are higher; Dow Industrials, +4%, Nasdaq Composite, +5%, and S&P 500, +1%. Some areas groups are lower, such as utility, energy and commodity-based stocks. The same groups that outperformed prior. The range of prices, spelled volatility, has been rising, which I think indicates the start of standoff between buyers and sellers. I'm not certain of this, but if the lows of mid-July can hold, we may not get another chance to buy at ‘sale’ prices this year. If the “worst case” is a 30% bear market, then we’ve seen two-thirds of that pain already by mid-July. A run to the former Dow high of 14,200 from here would be a 20% gain, so it would be worth the wait, even if it took 2 years to get back there. Look forward, not back, and you’ll no doubt enjoy the ride with less stress.

Still not comfortable with stocks? Try to dip your toe in gradually, adding to your retirement account or mutual fund account with any idle cash or money from your tax rebate (if you got one). In a falling market, you will lose less if you spread out your investing. For example, investing equal amounts at months end from Dec. 2007 through July, 2008 would have lost you 6.5% vs. -13.7% if you lumped it all in year-end 2007. Now it's easier to be made whole again.

Financial Media Reporting Alert

I enjoy reading, especially anything financial, and turn to both on-line and hard copy newspapers and periodicals. Including Barron's, The Wall Street Journal, Investor's Business Daily, USA Today, and the local Fort Lauderdale News / Sun-Sentinel. But...let's get the facts straight, reporters, TV and radio hosts! I see more sloppy reporting and errors in the daily media with stock prices, financial calculations, interest rates, etc. In the past few months, radio hosts have scared the bejesus out of my morning commute by reporting on the prior day's crashing stock prices, only to find out that the program was a replay of a show the prior week. Or the numerous mis-prints in the local paper; gaining stocks with minuses before their prices, down and up arrows mixed up. USA Today columnist John Waggoner's Friday column reported that "A 10-year Treasury note, for example, now yields 3.93% ... your $100,000 bond investment would pay you about $393 a month". Oh yeah, John - my calculator shows $3,930 a year in interest would be $327.50 per month, about $65 per month less. (Hint, use 12 months in the year, not 10). If you're bought some Treasury bonds today, you're getting 17% less income based on his calculations. Buyer beware.

Generally, the financial-only based news sites and weekly papers are very much more accurate thant the dailies. Maybe they are less-stressed with their deadlines. Bottom line, media - when dealing with markets, finances and lots of numbers, get a good proof-reader or better calculator before you go to press to millions of your readers. Bottom line, read your financial news with a skeptical eye.

Next blog: Wall Street’s Free Lunch - Diversification

The First Half of '08

Little to Cheer About so far in 2008 - but stocks are on-SALE!

The second quarter closed out on Monday, ending the first half of 2008. I hope your life perspective was productive and energetic. The financial perspective hasn't been very pleasant,
however. In all likelihood, we are in the midst of a recession in the U.S. economy, evidenced on main street and Wall Street. The popular stock market averages, as of today, have entered a 20% correction, and a bear market is upon us. A good indicator of a diversified portfolio for many Americans' savings and investments (IRA's, 401-k's, brokerage accounts, etc.) the popular market averages have fallen hard year-to-date, even if the April to June period saw a slowdown in the damages. The Dow Industrials and S&P 500 fell 7% and 3% in the three months, and 14% and 12% respectively for the first half of 2008. Unless you were positioned in Gold, Silver, or Energy and Commodity investments, your portfolios fell in value. Bonds gained a respectible 1-3%. Financial stocks of all stripes were off 25% plus.

The financial newsmakers most always create a big buzz on such events. "We are in a bear market, a recession - the worst in eons". As alarmists, they are sure to draw in viewers to their almost 24/7 blathering. The mute button is a great feature. I'm not saying to be Mr. Sunshine and dismiss the real problems facing us: lower interest rates for savers; rising inflation (at the food counter and gas pump mainly); along with falling home prices. But let's be somewhat realistic. The U.S. economy has entered 10 recessions since WW2, two in the 1970's, two in the '80's and one each in 1990 and 2001. The market's perform very well coming out of recessions-before you feel better, stocks are ahead nicely ahead.

Don't forget about where we've been, after the 2000-2002 recession, stock prices doubled the next 5 years. Today's markets may trend lower, but if you're up 100% then down 20%, your're still ahead nicely, eh? Remember, no one rings a magic bell at the low to signal when to buy. Generally, the words always and never will get you into trouble more than not, in life and investing. Staying the course within the limits of sleeping well at night is prudent now.

So here are my lesson-points to lessen your stress, and keep your cool with your money when you open your June statements.

1> Don't base your performance on the highest values of your monthly statement - you will be disappointed. You can rarely predict the highest price to sell; the markets are too tricky to allow that. Instead, review things every 3-4 months and set parameters on how you are going to re-allocate your monies. Say, 60% stock mutual funds, 25% bonds, and maybe 15% cash or money market funds. If stocks do well, and are now 70% of your mix, sell some and get back in balance. If stock values decline to 50% of your total, buy 10% more stock. An old, good conservative rule to follow for your allocation; take 100 minus your age, and devote that to stock-based investments. Time will make you wealthy, not your timing or gut reactions. Hope and prayer are admirable in your faith, but aren't good as investment strategies.

2> Seperate your money into various pots, based on risk and objective. Sometimes having just one account makes investing more confusing, and you may make moves that get you into trouble without realizing it. By using 3 accounts, you could allocate some money to a riskier aggressive stock or mutual fund account, and then hold bonds or fixed income in another safer account, and finally have a "safe money" flexible annuity account that you can put away savings for retirement in 10,15 or 20 years with no risk of loss. Move money from a riskier pot to more conservative pots as your "pots" grow in value.

3> Learn how to read a stock or mutual fund chart. "If you can't measure it, you can't manage it", says a saavy investor this week on the television. How true. Looking in the Sunday newspaper for a quotation is not enough. You need to understand supply, demand and a few other indicators that the big boys use with stock and mutual fund charts. I use TC2000.com for my fund charts and Investors.com for my stock charts.

Concerning retirement, as I've blogged in the past, you should fund a retirement account with mostly "safe money" that you won't lose to Mr. Market if you are not a good money manager, or just have a streak of bad luck to blame. Which would you prefer to earn with your money over a 5- year period: +7%, +6%, +0%, +4%, +9% ... OR +11%, +6%, -7%, -3%, +22%? Guess what, they both end up at the same point, about a 29% gain. In the latter string, volatility and a two year loss may force you out of the market in the fourth year, missing year 5's gain of 22%.

Retirement Planning Hotline

I've started a 24/7 telephone call-in line to further inform my clients and friends between my blogs and e-mails. You can call it anytime, and listen in on a recorded topic each call. It will be mainly focused on retirement planning, income planning, and "safe money" strategies; I won't discuss individual stocks or give specific investment advice. You can call me to meet you for a no-fee consultation. If you call and leave your name, I'll send you a free 101 page book on the topic*. The first two callers get the goods.

The call in number is: (641) 715-3800, enter 22509# when prompted. Updates will be sent to you by e-mail when I have a new recording. Tell me if it was helpful to you. Have a great and safe Independence Day. *prior winners ineligible.

Taking a Mulligan With Your Retirement Investing

A Mulligan (do over) Strategy to Investing for Retirement

I couldn't but help feeling a little melancholy over Tiger Woods feeble attempt to rally back in the final round of the Master's Golf Tournament last month. I thought of the term "mulligan"; coined after a fellow so named who took to re-playing his errant shots on the course with the hope of a better score. Without Tiger's 3 bogies on Sunday, he may have caught the leader and sent the match into sudden death. His role as underdog was rare. As to investing, wouldn't it be great to re-do our investments after a bad year, wiping the slate clear to a more promising outcome in year 2? As retirement becomes a larger and more important goal of so many of us, I have a solution to accomplish such. It’s called the "annual reset", and is a feature made available inside a fixed index annuity (FIA). With a little explanation, I'm sure you will agree that it is a valuable benefit to grow your savings, while avoiding any loss of your principal along the way.

The annual reset feature allows you to earn index credits, similar to interest, on a one year time frame. Each one-year time frame is “reset” using the last value of the index. Prior interest gains in your annuity are locked in. Let’s work through an example and follow how the numbers hit the page.

Year .........Start.... Finish...... %...... Credit...........Balance
2008-09; 12,000 - 13,000 +8%, +$8,000....$108,000
2009-10; 13,000 - 11,000 -15%, +$0 ...........$108,000
2010-11; 11,000 - 13,000 +18%, +$8,640... $116,640
2011-12; 13,000 - 13,650 +5%, +$5,832... $122,472
2012-13; 13,650 - 14,333 +5%, +$6,123... $128,596

Explanation: The stock market, Dow Jones Index (DJIA) starts at 12,000 and moves to 13,000 in three years. Without the reset feature, you would gain credits of about 8%, or $8,000 after year one. In year two the market loses 15%, as the market retreated from 13,000 to 11,000. Your credit was zero, since you are guaranteed no losses in a FIA. Since year two’s close is 11,000, and you started the program at 12,000, under normal conditions, you would still be losing money at the start of year #3. But with the “no losses in down years” feature, you are up 8% after two years. Because of annual reset, you start year #3 at Dow Jones 11,000. The market does well, rising 2,000 points to 13,000, an 18% gain. Your credits are $8,000 since the cap rate is 8% in any one year period. Remember, the crediting cap is needed to protect your account in the down years. If we took this illustration out for another two years, where the market gained 5% in years 4 and 5, your account would grow to $128,600 using the reset feature. Without it, you would have $119,400. That’s quite a difference, $9,200 more money by my count.

In summary, the combination of annual reset and a guarantee of no losses in down years, make this benefit within a fixed index annuity valuable for investors worried about market risks, while trying to keep their investments growing before retirement. Now maybe I can convince the P.G.A. to apply this concept to tournament play – that would indeed be interesting to watch.