Looking Forward

It's that time of year when every economist, pundit and college bowl junkie starts making predictions for the new year, or at the very least figuring the over and under. I spent the week swirling saucers of soggy tea leaves so I could get a glimpse into the future and report back to you what's in store for investors next year. After the decade we've had everyone is anxious about what to expect. Should we pull the bed cover over our head when the clock strikes midnight or jump up and greet the new year like an old friend from the 90s we've sorely missed?

First let's look at employment. Everyone is making a big deal about how the government counts people that are out of work and accuses the politicians of making numbers look better than they really are. The government gives us one number and talking heads another. The NY Times reported that unemployment is not a tad over 10% as officially reported but more in line with 17%.

Employment is the last thing that recovers in any depression. The worst is over. If you have a job today you'll probably have a job next December too. If you don't have a job but are looking you may get a job by the end of 2010. This depression like half the marriages in America is not going to last forever and neither is the double digit unemployment numbers. Better numbers in 10 but nothing to get truly excited about.

Manufacturing - this sector had already swept out most of the excesses. A lot of people didn't think the government should have bailed out the auto industry but since approximately one out of every ten jobs is somewhat related to making cars they really had to. Things are and will be different. In the Detroit area I don't think anyone believes the car companies are dumb enough to go back to the old ways of doing business and building cars simply to keep plants open and people working. Those days are gone. Manufacturers should see the beginning of profitability starting late in 2010. One car company has already brought back some economic benefits for it white collar workers such as a 401k match. More and more rust-belters will be smiling in 2010.

Hyper inflation. The way the wonks talk on cable you'd think we were on the brink of becoming the twin of post WW ll Germany trundling wheelbarrows of Deautsche marks to buy a loaf of bread. Hyper inflation is defined as prices increasing at 10-50% per month. We are a far cry from hyper inflation. In fact in 2010 we may not experience a huge run-up in prices at all. After a decade of very little inflation you can expect a slight increase in 2010 starting in the second half, but more coming in 2011.

Unfortunately government spending will continue. Nothing stops our elected officials from standing at the urinal of public waste. It's not their money, they don't care, get used to it.

Real estate - new home building should see a very modest increase, which is good news and existing home values may have a slight pop before the summer break when folks start serious shopping. At worst we're looking at stabilization. Some areas of the country have already experienced increases for their markets. More residential real estate will be bought as consumers will finally figure out that prices are as good as they will get. Commercial real estate, on the other hand, has lots of excesses and there are serious issues in this sector.

Interest rates, according to the new Time Magazine Man of The Year, will hold firm for an extended period of time. I say until midway 2010 and then rates will start their systematic increases. When rates start moving up hang on because it will be a bumpy ride. Lock in your fixed rates now and eliminate all your variable rate credit cards asap.

The dollar could strengthen or just muddle along until a firm economic policy on dealing with how much money we've printed and shoveled in the world's economies is handled. The one thing to remember is that in a global crisis everyone loves the dollar. A weak dollar is still good for most of the S&P 500 companies as they do business here, there and everywhere. It's not so good for retirees shuffling for one last hurrah around the Piazza San Marco and slurping pasta e faioli, washing it down with Kaopectate shooters while on a fixed income.

The biggest thing that will happen in 2010 is the one thing that no one has yet thought about or prepared for. Most everything we do think, worry to death and prepare for never happens. The markets should do well into mid-year and then take a break, consolidate and resume for a decent 2010. If you're out of the market you should start to move back in. This depression was a global event seen only once every hundred years. We should not retrace to previous market lows, if that gives you some comfort. If you're invested you should review and bring your portfolio up to date. Too many investors stick with an allocation that they established when they were in their 40s and 5os and conveniently forget that they need to upgrade to reflect their current age and risk level.

Hopefully my insights will help you sleep a bit better. Nothing ever is as bad as it seems unless it happens to you. Wishing you all, dear readers, a wonderful New Year.

Racing To Win

Some money management firms view investing the same way they would a horse race. You read and hear their advertisements and they brag that their mutual funds outperformed their indexed averages over one, three and ten years, as if it were something that would make their product more attractive to investors. Yet, those same ads contain the warning that past history is no guarantee of future results. Confused? Me, too.

Matching fund to index is not an apples to apples comparison even though some would have you believe. Results are slightly different when comparing the S&P 500 index against mutual funds that invest in the same stocks for that index. A few of the indices have performed so poorly over the past one, three and ten years that a grade school investment club could beat them so let's not get giddy about beating indices.

Then there is the 'star' rating. Ever since independent analytical investment firm Morningstar emerged with its star rating system for mutual funds, stocks and now exchange traded funds investors buy only those four and five star rated investments. Morningstar has consistently written that the star rating is not something that an investor should base their entire due diligence on. Management, risk, history, total return and expenses are the other basics that investors should concentrate on.

Still fund companies advertise that many of their mutual funds have achieved star quality, much like a well-earned Michelin award. The problem is that the star is fleeting like the Michelin, and can be downgraded or upgraded by Morningstar at any time. But, many investors believe it is a star etched in stone like a Hollywood Walk of Fame hand print.

Do your fund company managers eat their own cooking? Nothing is more disconcerting to sit down at your local family restaurant, look out the window and see your chef enjoying his lunch at a competitor across the street. The same is true with investments. It has been proven that money managers who have their own savings and retirement assets invested in the funds they manage have a better investment track record than those that don't.

So maybe the fund companies would be better off advertising that more of their money managers have more of their money invested in their funds than any other fund company. Now that would impress me.

Buy & Hold Dead?

You've heard this and probably wondered if it was true since a lot of so-called financial experts have been saying it, buy and hold is no longer a valid investment strategy.

Buying and holding any investment for an exceptional length of time is certainly not a wise strategy except in certain instances such as art, rare coins, stamps, vintage autos, rare books and those painted 'collectible' dinner plates of dead Presidents advertised on late night cable. Okay, I'm kidding about those china dinner plates; but buy and hold being dead for mutual funds, stocks and exchange traded funds, which is what the new age market soothsayers are talking about, is something of a misdirection.

The hidden issue is not that buy and hold is dead it is that the so-called experts want you to sell your mutual funds, move all your assets to their side of the fence and buy ETF and index funds while they charge you a fee for this service.

In order to do that they need to convince and scare people to move money around. If this wasn't so sad it would be funny. They are telling investors to cash out active managed mutual funds to buy index funds. The fact is that the plain vanilla mutual fund that the self-crowned experts are telling you to sell is an active managed investment vehicle while the majority of ETFs and all index funds that they are telling you to buy are static. How can you confirm this? Simply check a Morningstar report by either going on-line, visit your local library or calling your fund company for a report and check the 'turnover' percentage. You'll be stunned to discover that some active mutual funds have a 100% turnover, meaning the total assets of the fund are bought and sold over the course of a year's time. You have to ask yourself how anyone of reason label active managed mutual funds with a turnover like that a buy and hold investment? The answer is to scare the uneducated.

The index and ETF funds change holding very little over the course of a year or two. These are the true buy and hold vehicles. They will only vary as some stocks are added and others deleted by definition of the index or sector but these are small modifications and do not make these active managed funds.

Buying and holding individual stocks for 10-20 years or a lifetime can be a smart move or financial suicide depending on what you bought, what you paid and why you bought it. Let's say you bought an automotive company stock and over the years the stock rewarded you with dividends and splits and you made a very tidy paper profit. At some point the stock either starts to stagnate or drops in value, perhaps the company even stops paying a dividend. Holding this stock and watching your gains go swirling down the drain is not a smart option. Why lose all your gains? Depending on where you hold the stock (price paid) and what account either retirement or individual, the time may be ripe to take some if not all of your profits, Buy and hold for some individual stocks for a lifetime may never make sense.

Let's put things in perspective. There is nothing wrong owning ETFs, index funds and mutual funds along with individual stocks. There is no rule that says you shouldn't. You'll get active management on one side plus indexing in specific sectors to round off your portfolio. Not taking advantage of all the tools to grow and keep your savings is just silly.

The next time someone in the investment business tells you that buy and hold is dead ask to see their portfolio and what they own. You may be surprised that what they own is exactly what they're telling you to sell.

Fibonacci

If you think baseball fans are freakish over numbers you haven't been locked in a room with an investment analyst. We've all seen the stock charts with colored lines tracing up, down and sideways patterns and an investment analyst is a person who deciphers what this means to an investor and whether or not they should buy or sell a particular stock or index. Charting involves using a significant history of past patterns and making sense of that history to project forward where the analyst thinks the individual stock or the markets will go next. Chartists go as far back in a stock's or index's history to trace a pattern as they are able. There are many books detailing basic charting that the novice can read and learn the basics, but there are so many complex derivatives of charting that only the most experienced chartists is given credibility and that's because he or she also has had a history of being right more times than not.

Getting it right is what it is all about when charting. Making even one small mistake and a chartists can cost a firm millions. if not billions of dollars.

One of the mathematical formulas used by today's investment specialists is something discovered almost 1000 years ago by Leonardo Pisano or Leonardo of Pisa, an Italian mathematician that brought the Arabic disovery of the decimal system to Europeans. He also wrote a book entitles, 'Libar Abaci', and in that title he used filus Bonacci, translated to mean, son of Bonaccio and over time students of his simply morphed his name into Fibonacci.

The basic Fibonacci numbers are a series where the next number is the sum of the previous two: 1,1,2,3,5,8,13 and so on. From this series scientist and mathematicians have derived what they call the Fibonacci Sequence and the amazing quotient of proportions which is known as the Golden Ratio or 1.618. This ratio of 1.618 is natures building block. For example if you divide the number of female honey bees in a hive by the male bees you get 1.618, if you measure your arm from shoulder to finger tips and then divide by the length from your elbow to fingertips you get 1.618. Need more, measure your height and divide by the number from belly button to the floor. If you examine sea shells you'll see the 1.618 relationship between swirls. But more importantly Fibonacci brought to modern technical analysis the golden ration translated into three percentages: 38.2%, 50% and 61.8%. There are other numbers in the sequence but for this discussion we are only interested in the above as they are the significant numbers in an investment market retracement.

And here is why today some chartists are alarmed that the markets are indeed readying themselves for a retracement. The chartists proclaim that historically the markets will retrace down to the next level of support.

This is how it works, if you take any chart of an index or stock and apply the following numbers to it you can see what worries the technicians. The high value is marked at 100, the low at zero and in-between lines of support are drawn illustrating 61.8%, 50% and 48.2%. Fibonacci decrees that retracement is at the next lower level unless that level should fail to hold and then the markets will continue to retrace to the following level. The stock price or index will continue its descent until it finds a level of support for its price or value. The economic tailspin of 08-09 followed the Fibonacci formula exactly, from high to low the numbers and ratios were spot on.

Before you start liquidating all your holdings the analysts are not saying that the markets will falter if they should reach a certain significant number. On the contrary the technicians are not close to calling a Bear market, but when and if it happens, chart from where we are at that moment to the next point on the Golden Ratio and you will see that nature works even in investment markets.

The Dollar Bubble

A lot has been written and said about our weak dollar. Advocates state that a weak dollar is good for our export business and rotten if you happen to be a retiree planning a vacation overseas.

That said, I say, 'Phooey on both.' I'll explore what I mean in a later blog. The big thing with the beaten up dollar, that Treasury Secretary Geitner is attempting to shore up or at least stabilize, is the carry trade. Carry Trade, you say? It sounds like something from a 1920s movie. No, that was carriage trade. Carry trade is when investors, usually banks and sovereign funds, borrow cheap dollars and buy higher yielding assets somewhere else. With interest rates at or close to zero our government is basically giving away money, and it doesn't look like they'll change their philosophy any time soon.

Investors use the difference between what they pay to borrow and what they buy to make billions of dollars in profits, almost a no-brainer. It is a form of arbitrage with virtually no risk.

The last time investors enjoyed such a run was when the Japanese yen was kept at artificially cheap rates and ran for a period of 12 years. The dollar may do the same, according to Richard Franulovich, a senior currency trader in a November 11th Forbes interview. In fact, Franulovich doesn't think that even if the United States hikes rates it will take years to get competitive with other countries. The carry trade may continue all the while.

Unwinding such complicated currency trades would be a global event and if circumstances changed quickly it could have serious implications. That is the real risk for everyone who is unmindful of global investment reality.

The sudden strengthening of the dollar would have carry trade investors scrambling to liquidate holdings. They would have to sell what they own to pay back the dollars they borrowed. The fallout from such a massive liquidation would have the same repercussions investors experienced in the 2008-2009 market sell off. Unwary investors would see their holding plummet in value, and for them it would be for no explicable reason. This added, unseen and unmindful risk is something investors with short-term goals need to be aware of. The problem is most investors, broker and 'so-called' planners are clueless to global economics. And, just in case you still don't get it- this is a new global economy.

Wall Street Shares Blame

• Time Magazine had a recent cover piece on why Main Street hates Wall Street. This certainly didn't take too much research since more than a few brokers are not too thrilled with the past and current shenanigans of certain banks, brokerage firms and government officials. Let's face it, writing about the poor relationship between Wall Street and the rest of the world is as easy as explaining why California hates Detroit. But it's wrong. The scribblers paint with a wide brush and not everyone in the business is culpable.

  This is like assuming every broker, planner or advisor is a Bernie Madoff. While its easy to blame someone else a lot of times people need to be responsible for their own investment actions. They lose money because they don't know what they're doing or place their trust with people that have no business investing other people's money.

  Let me share some of my experiences with you. One of my current best clients came to me because his neighbor moved. I am not making this up.

  When I first met Tom and his wife it was the mid0-90s and they had a tech-Internet heavy portfolio that when I met them they wouldn't let loose of until someone pried it from their cold...well, you know the phrase and then one day I got the phone call because as Tom explained, their next door neighbor moved and the neighbor had been giving Tom tips on what dot com junk to buy and sell. The neighbor sold aluminum siding or something for a living and was simply following the herd in his dot com recommendations and sharing his world of knowledge with Tom. What did the neighbor care what he told poor Tom what to buy and sell, it wasn't like it was his money to lose after all. When Tom and his wife discovered exactly what they owned and the risk they were taking with all their retirement money it was easy to convince them to move to safer more stable investments.

  Or, how about this one -Years ago I held a seminar and after the meeting a woman approached me with a huge welcome home, sailor, smile on her face, and told me she was planning on getting into the business (the investment business, dear reader) and she was going to do it as soon as she retired and offer her services to her friends and neighbors. I am really very good at picking solid investments, she boasted, showing me some top notch dental work. 'Really," I said, "who do you follow?' She gave me a blank look and finally after what must have been a full minute turned a lovely pink and said, 'I read Money Magazine.'

  And a few weeks back a senior client who has been with me for 15 years fired me because their 40-year old son had suddenly morphed into a financial genius, graduating from tightening bolts on stuff for a living, and was taking over their retirement plan investments. He helped pick our Medicare insurance,' the wife almost in tears told me as they were leaving. (That's a qualifier, huh?) Can anyone spell future disaster?

  Then there was, many years ago, a woman I was referred to who showed me some fancy annuity brochures and paperwork on several limited partnerships she had invested in. It was all the money she had in the world. I asked who was her broker and she told me it was a Detroit fireman who moonlighted as a broker. Ah ha! Which wasn't as bad as the school teacher who gave $100,000 to a fast food manager to invest for her. He too was moonlighting in the investment business.

  Finally there was the lady I had coffee with the other day who wanted me to be aggressive with her portfolio and buy Exchange Traded Funds. Why, I asked. 'People are getting rich buying ETFs,' she said. She had been an aggressive investor her entire financial life, she said, but lost big when the dot com bubble burst and again in 2008. But this time she knew it was different. When I asked he what she knew about ETFs she was stumped and didn't know the first thing except buy and hold was dead. The sad fact is someone will find her and take whatever is left of her retirement fund.

  So there are just a few examples of poor judgement and people who could blame Wall Street but Wall Street had as much to do with their losing money as I have qualifying for the next Olympics. Here's a few tips for finding someone qualified to help you:

  Make sure they work full time in the investment business and have a series 7 license to sell all products not just insurance and mutual funds.

  They carry Errors and Omission insurance and make them show you the certificate. Lots of people lie, unfortunately.

  You never write checks payable to the broker no matter what they say.

  Never simply buy a product, invest for the long term with a plan. Preferably it's a plan that you articulate not what they say you should buy.

  Finally, don't do business with someone that obviously makes less money then you do. Let the new brokers practice losing money on someone else.

Mutual Funds, The Supremes & Fees

By the time you read this the Supreme Court may have already decided on reducing the fees that the mutual fund industry charges its customers for managing their money.

The case is all about how much is too much. The entire magilla began when three shareholders of a certain mutual fund family filed suit stating that the average retail fund customer paid twice as much for the fund's management services as did the same fund's pension and institutional clients.

The mutual fund management responded that they did more work for the retail customer and therefore the higher fees. And, when you think about it if you manage a one million dollar pool of money versus a ten thousand dollar account it does make some sens that the larger account is the same amount of work, earns substantially more in fees even at the smaller percentage of assets.

Not so, pipes Jack Bogle, founder of Vanguard Funds, and a consumer advocate for low fees and index fund management. Fund fees have taken the wrong road and have gotten totally out of hand.The higher the fees the less the client is able to retain. Even the smallest increase becomes substantial over a period of 10, 20 or 30 years. This coming from a man who earned millions and millions selling the American investor on indexing; or what I call charging a fee for no active management. To me this is no different then Michael Moore poking fun at rich people while banking hundreds of millions from his books and movies.

Now before you get all giddy that the load mutual fund industry is getting their comeuppance I should mention that the mutual fund in question is a no-load. The lead manager of the fund took home $12 million dollars in 2002 as compared to the average fund manager who earned some $800,000. The year in question was a rotten year for investors who lost 22% if they had invested in the S&P 500 but lost 14% if they had invested with the fund in question. So was the fund manager worth all that money? Probably not, but that's a question for investors and the Board of Directors to deal with and not the Supreme Court.

Giving a win to the shareholders is going to open a Pandora's Box of misery for the entire fund industry. Lawyers will declare open season on all funds before you can say Jiminy Cricket. And Harvard law professor Jesse Fried agreed by saying the Supreme Court victory would keep costs down by having plaintiff attorneys monitor fund company compensation structure. That's a nice way of saying it'll be feeding time at the shark pool.

This could be more about clamping down on income earned by money managers then it is about mutual fund's expense rations. If that is indeed the case the money management talent will move to where they will be fairly compensated.

In the end you have to wonder why these fund shareholders picked this fight when there are thousands of fund choices out there where they could invest their money, many offering identical services at less cost? Make no mistake if the activists win the average fund investor will lose with higher fees going to lawyers to protect the fund's interest.

Navigating Inflation

If you didn't study history you would think that inflation would have been the fallout during the Great Depression of the 20s and 30s. Inflation was actually non-existent from 1920 through 1939. In fact the average annual inflation rate for the 1920s was a measly 0.08% and a negative 1.94% for the 1930s.

Inflation, defined as an increase in the price of goods and services, wasn't a problem through WWII, the Korean conflict, the decade of the hippie(Puff the Magic Dragon) until the decade of the 1970s when it soared in excess of 7% per year and continued through 1982. It coincided with the Nixon decision to remove the dollar from the gold standard.

The primary benefit of the Gold Standard was that it guaranteed long-term price stability. In other words real monetary policy could not be manipulated by central banks as long as they were on the Gold Standard. Unemployment was an issue under the Gold Standard but inflation wasn't.

Consumer Price Index is not the same as inflation even though people quote and even confuse the CPI number as the rate of inflation. The CPI math calculation uses sleight of hand in crunching the numbers. The government uses an arbitrary year as a base year to set the base number 100. Everything is then calculated off that base year. Currently it is 1984 but a few years back it was 1967. The CPI is calculated every month based on a basket of products but does not include food and energy which gives a false reading as both are items used by all of us including those living on fixed incomes.

Government like a little bit of inflation. It shows the economy is growing. Wages almost always lag all other inflation indicators which is the biggest reason that people never feel like their making headway or living any better today then they did yesterday even though they have bigger cars, homes and toys then they did a decade or two back.

Contrary to wide spread belief inflation will not drastically impact every lifestyle when it does arrive. Those most affected will be those that need to buy goods and services such as the young and middle-aged adult with children. College education, health care, new mortgage interest, energy, utilities and food will increase in cost. But if you are retired and do not need to buy new appliances, cars and furniture while not sending kids to college, inflation will impact you modestly.

Retirees can prepare themselves for an almost certain inflationary period by eliminating all variable debt in exchange for fixed (including home mortgages), purchasing needed major appliances, cars and furniture now and making sure they do not lock in long-term fixed interest savings.

Energy and food expenses will certainly be problems for many retirees. However with some adjustments to current savings and investments those increases can be nullified. The biggest challenge will be for retirees to recognize and accept changes in their investments and savings. Something probably more difficult then anything peace negotiators in the Middle East have encountered.

Market Correction?

It's a confirmed Bull market, baby, you can take it to the bank. The guys in Washington have said the recession, depression, whatever they call it is over and all signals are that this running Bull is going to continue until it blows right through 14000 on the DJIA and head to 36000.

Really, Paul?

Nah, I'm having a little fun, dear reader, because there's been a lot of euphoric talk and whenever I hear grown men giggle and politicians starting to take credit for a job not yet finished I know something not so good is about to happen.

There was a recent article in one of the financial newspapers I receive written by someone who said he knew what he was writing about and he predicted a straight line recovery, an express to the penthouse, because, he said, the market collapsed nose first and it is only logical to assume it'll do the same coming back. It's the old straight down-straight up theory of investment management.

I am here to tell you that this was not a nose first market descent but it took almost a full year and a half. It didn't happen overnight, though we may think it did.

The same was true with the 2000 Internet bubble. It took two years to find a bottom and almost five to move back up before it started to fall apart again.

How do I know this? All you need to do is look at a chart of the S&P 500 and in March 2000 the index was 1527 before it tumbled and in October 2007, its most recent high was 1565 before making the trek down to where it is today. Whoever said that the markets nosedived and would quickly recover the same way has been too lazy to simply look at a chart that clearly indicates a market that took almost 1 1/2 years to find the most recent bottom.

Students of our domestic economy know that recessions last on average 16 months and periods of economic expansion average almost four years before pulling back.

We're almost a decade beyond the folly of the Internet bubble and we've yet to see the return of the NASDAQ high of 5132. No sharp V recovery for that market.

In 2008 the stock market didn't just fall off the cliff in one day. It started in 2007 and weakly crawled into 2008. Back in early 08 we were told that we'd be out of the mild recession by the elections. The experts were wrong and what we had was a bigger mess than 1987 and 2000 combined. This wasn't a sharply etched V but a slow slide that took almost two years to get to where we are.

Expect this recovery to slowly work its way through the mess banks and government created. It took years to make and it'll take another few years to get back where we once were. How do I know this? History, especially in markets, always seems to repeat itself.

A Bit of Good News Goes A Long Way

Professional money managers base their decisions on what to buy and when to buy on cold hard facts. Amateurs, for the most part, do their buying on hope and what their gut tells them. So far the amateurs are leading the markets higher, or so it seems because professionals shouldn't be acting like this.

Lat week the Aussies raised their interest rates and the markets responded by pushing equities, bonds and commodities higher. It's not supposed to work that way. Yes, we've seen the dollar get crushed lately, which should make oil sparkle, since it is traded in dollars. But, we shouldn't be seeing everything going up all at the same time, certainly not bonds and gold.

To give the investor their due their is a lot of money that has been idling on the sidelines and looking to be put to work. Any excuse to jump in seems to work. My concern is that gold is trading at all time high this year. This increase is signaling inflation, and seems to be sustainable while bonds are also holding their own. Bonds, if there is inflation, should be pulling back while gold should keep on trucking. That's not what happened and something has to give. Either we're seeing the a glimmer of inflation or we're not.

Our domestic equities have also held their own, moving higher as the dollar losses ground. Stocks in the S&P 500 are multi-national, meaning they make money here and there and everywhere. A weak dollar works just as well for our domestic based companies as it does for our overseas friends when the dollar goes kaput.

Geithner and Bernanke both agree we need more stimuli to get our economy percolating rather than a rate hike. Unemployment is predicted to hit 12%, home sales and prices are weak, commercial real estate is near life support, retail sales are anemic, workers have not seen their wages increase even though manufacturing had a touch of an increase but just a touch, and to be blunt we're not out of the woods by any stretch of the imagination. Increasing interest rates at this point is probably the last thing on this administration's mind. The economy is still fragile and while the investment folk like to point out that they 'look ahead' six months when making their buying or selling decisions there doesn't appear to be a lot of really great news on the horizon unless you do what the Wall Street folk appear to be doing which is squinting really hard and keeping their fingers and toes crossed.

The Aussie rate hike doesn't look like it'll start any stampede to higher rates by other central banks, although it did give a boost, of a sort, to the markets for a day or so.

Capital Marx

Back in the day, I'm talking 1960s not the dark ages, a lot of professional ball players had to have off-season jobs in order to make a living. They just couldn't make ends-meet with what they earned playing baseball, hockey, football or basketball. When the season ended they painted houses, worked construction and a few even sold life insurance. If the team won a championship it was highly unlikely the player could take the rest of the year off and bask in their celebrity status.

Detroit Tiger Hall of Famer Al Kaline, during his peak years, turned down a contract for six numbers because he didn't think he was worth it. Today some ball players get paid that much in a week and couldn't carry Kaline's dirty socks.

Which brings me to today's rant and the compensation of some corporate CEOs and the lack of value they bring to shareholders. These are the leaders that only know how to increase their corporate bottom line by firing employees, slashing benefits and selling off divisions. For this the top-level execs are compensated extravagantly and totally out of whack with reality.

Neill Minow, co-founder of The Corporate Library, an independent research firm, met with Treasury Secretary Geithner this past summer to discuss this exact subject of executive compensation.

She talked to Geithner about what the management at Citigroup was planning, earlier this year, to increase compensation to certain employees by 50% because of government mandated reduced bonuses. This was sort of a mulligan for loyal execs. Citi, which was close to first in line for TARP, and now a wholly owned government subsidiary, is not the only company not caring about shareholder value. Minow proclaimed that what Citi planned on doing was, '...doing more to destroy capitalism than Marx.'

A.I.G., another bailout poster child paid out $165 million to employees in the financial services division, the same folk who helped bring us the 2008-2009 recession. How does anyone justify this, asks Minow.

Many of us remember the lack of responsibility and run-away destruction at K-Mart that destroyed the retirement of thousands of employees and left shareholders with nothing. Not only was the leadership incompetent the same was true of the Board of Directors that did nothing to stop the corporation's eventual bankruptcy.

Minow has made significant leadership changes at American Express, Kodak, Waste Management and confronted Sears to implement improvements in their company's stock plan.
Manow cannot do this work alone. As investors it is our responsibility to ensure that we invest in companies that are responsible in all phases of their business and if we buy mutual funds to make sure that fund management is pro-active in demanding CEO and Board of Director accountability.

Failing that as consumers we vote with our pocketbooks and that certainly is something all businesses understand.

Sophisticated Confusion

There is a lot of talking head quasi-professional-technical advice being given on how the average investor should manage his or her savings. The difference between success and failure it seems is in the minutia. From talk radio to cable television here are some of the things being said on how to manage our money: Buy and hold is dead. Exchange Traded Funds are better than mutual funds. Watch bonds for signals to where the economy is headed. The Transport Index is a leading indicator of the future. Tech is always the bellwether indicator. Bio's surge when the market falters. The list goes on.

Most successful investors keep things simple, understand what they own and don't drive themselves nuts by checking their accounts every day. Warren Buffet once said that he doesn't look at his personal investments but a few times a year. He said you don't check the value of your home more than that then why do it with your stocks and mutual funds?

One of my pet peeves is running into someone who's asset allocated their $25,000 401(k) portfolio into about eight slices, and wants each piece to be a consistent winner, each and every day. When I explain they would do just as well with one good world fund that pays a dividend they look at me as if I just escaped a padded room.

The truth is most average investors can do just as well be settling on a portfolio of domestic, foreign and bonds funds. If you want to simplify it more create a design using a world fund that pays a dividend and add an intermediate bond fund. If you're 50-years of age a basic 50-50 allocation into those two funds will do just as well as anything complicated some money management firm cranks out and charges a huge annual fee.

No matter what anyone tells you, dear reader, there is no such thing as a perfect investment plan. Keep it simple, adjust it as time goes on and understand what you own.

Investing, in some ways is like romance. There are those that spend their entire lives looking for their soul mate and there are others who simply find someone they can be comfortable with. Those that spend their lives looking for their soul mate are consistently disappointed while those that settle never are.

Understanding Risk

Defining investment risk us as nebulous as defining time. We can get our minds around the basic concept but have trouble communicating what we mean.

For one person defining themselves as being a conservative investor may mean that they invest their money in cash and cash equivalents. Another investor it may mean burying money under the front porch in an old mayonnaise jar. Still another it could be to invest in equities that have significant less risk than the market. When attempting to communicate exactly what they mean by their definition of being a conservative investor to their stockbroker or financial planner the differences in risk and volatility can be significant even though they all use the same word it means something different to each of them.

To define the amount of risk an investor is comfortable assuming there are helpful methods that money management firms have designed. The most common are professionally designed risk questionnaires. The problem is that investors have to answer the questions, and that involves individual subjectivity.

And it's that subjectivity defining their investment risk is what gets investors and their planners in trouble. People with conservative tendencies have told me that their planner thinks that they should be investing in an S&P 500 mutual fund and that will achieve their goals in actual return and in relative emotional comfort. That's planner subjectivity, or ignorance, and is a time bomb waiting to explode.

To clarify what we mean the entire process of understanding risk to return can be dealt with by simply asking, 'How much return on investment am I happy making on a consistent basis and how much am I willing to lose if the markets suddenly go south?'

It should be that simple. And if more people did just that we would have a lot less problems, arbitrators and lawyers clogging up valuable investment management space and time.

Here's what you do - write your goals on a 3x5 card and tape it somewhere where you can see it everyday to remind yourself what you want to earn consistently on your investments and what price you're willing to pay when things go wrong. Stick with your written goals no matter what, during good times and especially bad. And, in case you still don't get it, things will go terribly wrong many times in your investment lifetime no matter how many rules and regulations the government creates and enforces.

What Roubini Said

Nouriel Roubini, a well-respected economist, who, some financial experts say, correctly predicted the magnitude of the financial meltdown, is not too optimistic about our economic growth for the next few years. Roubini, who spoke at the Reuters 2009 Investment Outlook Summit in New York, said the United States would experience a U-shaped recovery, where growth would remain relatively flat, or below the historical trend, for several years and then recover. He is, however, bullish on emerging markets.

Attending the Reuters conference were 51 economists from around the world. About two-thirds of those agreed with Roubini while the others felt we would be having a much more robust recovery, representing a V shape rather than a U. According to Reuters, the forecasters expected little inflationary trends but a 'stubbornly' high unemployment rate through 2010.

In the September 7th Barrons Myles Zyblock of RBC Capital Markets said of the past markets move that, 'The market is digesting a lot of gains and it won't take much to trigger a correction.' Barclay;s Barry Knapp believes that a possible 8.5% downside before year-end is in the offing. Others thought a possible 15% correction by the middle of October was in the technical charts.

But, the good news and consensus is that the possible correction will be shallow and short. The S&P 500 low of 676 will be, according to the experts, a 'generational' threshold. Which is a nice way of saying it won't happen again any time soon and we can tell our grandkids where we were when the markets almost imploded.

Still, looking forward, the experts are factoring in higher multiples, saying that the market can indeed go higher.

And, what if you want to make a mutual fund investment in a non-qualified account for this quarter? I would wait until after any capital gains were paid out by the mutual fund before making that investment. It doesn't make sense to buy a fund have to pay taxes on the capital gain distribution and see you money take a possible hit before the end of the year. Also, if the experts are right you may be able to buy that fund later at a cheaper share price.

Schmart Too Late

It seems like only yesterday that investors and investment managers were fawning over the Harvard Management Company, the folks who manage the endowments for one of America's premier universities. Businessweek magazine, among others, bragged on how the geniuses at Harvard Management spread the money among a wide range of exotic assets including hedge funds, commodities, foreign bonds, TIPS and their favorite - timber.

Articles gushed how private investors could learn a thing or three about allocating their investments like the folks at Harvard Management.

Recently financial planning magazines exhorted the lowly registered representative (meaning me and a few other people) to adopt a similar allocation policy entitled 'Tactical Asset Allocation', the new-new thing that is surely the answer to what failed us recently and similar to the Harvard model. Only Harvard got hit just like everyone else. Losses were in excess of 30% in the past 12 months and the university was forced to borrow 1.5 billion dollars because of hard to sell assets - just the kind of assets they loved to pieces a few years back.

Now Harvard and their new management team is back at the drawing board, pulling in their far-flung investment managers and thinking liquid, less expensive and liquid.

It's times like this that Jack Bogle, found of the Vanguard Funds, seems like a genius, buying bonds and domestic stocks in two mutual funds and allocating his fixed income by the same percentage as his age. Cheap. Liquid. Effective.

There will always be new fangled ways to manage money. For a time some of these methods will be able to make gains but in the end it's the basics that count. Harvard Management, with some of the smartest people in the world on their staff, is just coming to that conclusion.

Simple often works better.

Who's at Fault?

How did the economic meltdown start and who started it? Lawrence McDonald, author of 'A Colossal Failure of Common Sense,' explained it was the fault of our government and especially Bill Clinton.

As we learned in high school the Glass-Steagall Act of 1933 was the great depression post legislation preventing commercial banks from merging with investment banks. It was the guardian that prevented the cowboys associated with the investment firms from raiding the savings and deposits of the average banking customers. Some very smart folks back in the day of Franklin Roosevelt wanted to prevent investment people from getting their hands on an seemingly unlimited supply of money belonging to the everyday saver.

As the years passed bankers and investment firms considered Glass-Steagall as old-fashioned and depression 'era' thinking and wanted the law to be repealed.

In 1988 several attempts were made to circumvent, even abolish, the act. One group thought that mergers between investment firms and banks would strengthen the financial industry. The other side composed of smaller banks was afraid that elimination of Glass-Steagall would lead to the larger firms crushing their smaller cousins.

The bombshell that started it all happened in the spring of 1998 when Citicorp bought Travelers Insurance that also owned the investment bank Smith Barney. Congress attempted to stop the purchase but the banking lobby prevailed and on November 12, 1999 President Bill Clinton signed into law the new 'Financial Services Modernization Act' that effectively removed any barrier between banks and investment houses.

McDonald concludes that within a decade the act would be directly responsible for bringing the entire world to the brink of financial ruin.

And now you know.

Stock Moats

Morningstar describes wide moat businesses as those that can't be hurt even if you allegorically shoot, strangle, poison and drop them off a tall building. Wide moat firms are those that enjoy an almost monopoly in their field.

No moat firms, on the other hand, are those that have an almost impossible time getting an edge over their competition. That doesn't mean that they're not profitable or bad companies it's just that they are in a highly competitive sector with lots of other firms fighting for the same consumer.

For example if ten years ago you were looking to invest in a software company the name Microsoft would spring to mind as a wide moat firm. It still enjoys a strong monopoly today.

On the flip side is DuPont, a giant in the chemical and just about everything else or what I call the kitchen-sink business. It makes a bunch of stuff from radiator coolant, seeds, plastics and bulletproof vests. It has a no moat rating because all the businesses it is involved in are loaded with fierce competition.

Bringing this to an investment perspective is that in 2009 investors are ignoring the wide moat businesses and are favoring the no moat firms. This is also being reflected in mutual funds that own wide moat companies and seeing less than stellar returns so far in 2009.

No moat firms are being well rewarded in 2009, as are their investors and the mutual funds that own them.

Which brings me to my point, or better yet to the point Morningstar made when they wrote about firms with wide and no moats.

Many investors who study this bit of arcane information will ignore firms that have a no moat rating. But, as you can see from my example of two quality companies with great products they operate in different markets. One enjoys a wide moat and the other no moat. Owning either one could possibly enhance your portfolio and over time both have returned value to investors. But, from an asset allocation viewpoint they perform differently during certain economic periods because of their different moat status.

We've been taught that to have a pure asset allocation we should buy investments hugely different from each other, such as foreign and domestic or bonds versus common stocks. Now here is something much more subtle and we can create an allocation simply by buying either a wide moat or a no moat stock, or both or finding mutual funds that do.

The next time you review your mutual fund or stock portfolio you may want to double check some of those holdings to see what moat-category they fall into if their lagging the market, What you may find is that you do not own a bad stock or mutual fund but one with a moat rating that is currently out of favor. You can use this to your advantage with both domestic and foreign stocks and be assured of identical results.

You learn something new every day.

What's Holding Back the Recovery?

Germany and France have emerged from the global depression faster and in better shape than Great Britain and the United States, according to the WSJ August 14Th. The biggest reason is consumers are spending in those countries something the Brits and Americans seem loath to do. Fear still grips us as home foreclosures keep rolling right along even as the Federal Reserve stated this week that the recession is near the end. July was another record month for people losing their homes with the Sun Belt leading the way and rust belt states Illinois and Michigan also in the mix. Unemployment continues its slowdown, and we're in double digit territory not counting folks who have given up looking for work. There are a lot of unemployed who've simply said, 'enough is enough' and retired or resigned themselves to odd jobs or off the books part time employment. Even illegal immigrants have tossed in the towel and stayed home.

If you're an investor who's bailed and put your retirement and investment money into Treasuries you're probably as nervous as a pickpocket at a police convention. You know what you want and have to do is to get back in to the market only you don't like your chances of getting caught if the stock market decides to suddenly reverse direction. You don't care what the Fed, your broker, the New York Times or your crazy aunt's tea leaves say, you don't want to chance losing your hard earned savings by moving into the stock market too soon. There is still a chance of a substantial sell-off such as what we experienced Friday as the markets dropped during the trading day triple digits and closed almost 80 points down on fear of deflation.

To be fair there are a lot of smart people on your side of the fence. The other's are on the other side waving you over and telling you things are fine and now is the time to be making some money.

Who do you listen to?

The best thing I can think of is to start dollar cost averaging into the market. Take your money and divide it into 1/12Th's and simple start buying what you once owned. Over the next 12 months you'll catch different prices both high and low but it'll be a comfortable way to get back in without the shock of diving in all at once and then maybe seeing the markets move back to their lows and laughing at you.

Finally, get more aggressive with your money. If you were invested in balanced or Target funds look for growth, growth-income or world funds to get more bang for your money. Those funds were hit hard and off some 40% and not because they were poorly managed, they just didn't expect the huge sell off that drove all prices down.

Getting back into the market is tougher than getting out. Any excuse is good enough for you to sell; you need some compelling reasons to venture back into the unknown.

Dow Theory

If you're an average investor you probably haven't heard of it but it's been around for over 100 years and is the basis of technical analysis in use today.

Charles H. Dow started publishing his theories on how the stock market behaved beginning in 1900 until his death in 1902. He never completed his work but others have stepped in to polish and finish what Dow started.

In a nutshell Dow believed that by analyzing the overall market an investor could accurately identify the direction of not only the market but of individual stocks. His theory was based not in individual securities but the movement of the broader markets.

Several problems have emerged over the years with the Dow Theory. One is that by its conservative analysis investors who follow may miss out on significant gains. The other is that the indices that Dow used to base his calculations have changed significantly.

That being said the Dow is again sending buy signals on August 11th based on Charles' Theory. One correlation is that as industrial firms profits increase so their output. And, because goods need to be transported to the marketplace the transport index must also rise. In other words for a bull market confirmation with the increase of one so should the other index rise.

The problem is that today not everyone is buying the Dow Theory. While some economists point to a definite buy others are not only skeptical but also worried the markets are due for a sell off. Skeptics argue that rather than using the Dow transport index as a confirmation analysts should be using the Baltic Dry index, which tracks international shipping rates of dry cargo. That index is falling like a stone.

So while the Dow industrial and the Dow transports have indicated the confirmation of a Bull market many economists believe much of the market's energy has been used up.

There is just enough bad and good news to confuse the best analyst and most cautious long-term investor. Making this not a market for the faint of heart.

China '09'

If you have China anything on your investment wish list you may want to wait a bit. So far the Asian giant's stock market has soared some 80% because the Chinese government has thrown everything including the kitchen sink, at stimulating an already hot economy. Beijing has shoveled so much money into businesses that it has artificially propped up employment and manufacturing. According to Time Magazine so much money has been poured into Chinese companies that they have invested some of those proceeds into the equity market for lack of better alternatives causing the markets to skyrocket.

Americans, on the other hand, have closed their wallets to spending and instead have increased their savings from virtually zero to 7% of gross income. The Chinese consumer is on a spending spree. But, and there is always a but, the Chinese remain a relatively poor people with an average per capita income of $6,000 compared with $39,000 in the U.S. Even middle managers in downtown Beijing average at best $12,000 a year. So the Chinese are unable, as yet, to pull the world economies out of the current economic recession by the sheer force of their consumer spending; something the United States consumer can and used to do without half trying.

So while China is building and experiencing its own bubble, of a sort, it has not become a dominating world player that can uplift the world's economies like the United States once did and still can. The Chinese are more like the French, and no one looks to the French to do much economically.

The Chinese were caught in the middle of a massive infrastructure buildup when the 2008 depression hit. Those projects could have been shut down or continued, which is what Beijing did to stimulate the economy and keep it growing.

Spending continues to grow even as corporate profits are shrinking, which leads some economists to think that the Chinese may be seeing the beginning of the end once the stimulus of their spending wears thin.

The question I have is what happens when the economy really sours in China? Will the Chinese government continue to buy our debt or will they sell what they already own and to whom?

Or, am I needlessly worrying and by the time the Chinese economy sours the United States consumer will ride to the rescue and spend again like nobodies business?

Recession End Game

'I said it! I predicted it! I was first. Not you, me!'

Yes, it's the old who predicted the end of the recession first game. Pundits and so-called financial experts are queing for the front of the line to get credit for seeing the recession horizon. Forget that just about everyone missed predicting the meltdown, except for Jimmy Cramer who showed up on the Today show and started one of the largest mass exoduses in modern investment history. Some 7 trillion dollars evaporated by the time markets closed that day October 6, 2008 when earlier Cramer urged anyone who needed money over the next five years to get out of the market. He predicted that stocks would fall by 20%. In typical Cramer-like fashion he was wrong.

Cramer said he thought long and hard before opening his mouth on national television. Obviously he didn't think long or hard enough. Too many people were and are tied to stock investment income for college and retirement; millions of investors were crushed minutes after Cramer finished his warning.

Markets are still substantially off their highs (Can I write substantially one more time just so dear reader gets it?) In my lifetime I probably will never see the NASDAQ get back to where it was in March 2000.

It really doesn't matter much if the recession ends today or next Thursday, or if it really ended in June 2009. Unemployment is not going to snap back in a nanosecond, nor is housing going to immediately get back to where it was before the meltdown. Manufacturing is being artificially stimulated with 'Cash for Clunkers', and banks are still hoarding cash as if auditioning for Scrooge. The good news is now being prefaced with 'not as bad as the previous quarter', or 'we're not losing as much money as we were'. In other words, if this were a normal economy things would really be bad but since this is such a terrible economy the bad news is not as bad as it could be.

If you've been out of the market you may want to start doing some serious thinking about getting some assets back in. If you have extra cash on the sidelines you may want to do some homework and think about buying some stocks that are severely discounted and will make money once the recovery is humming along.

I don't care who takes credit for predicting the end of the recession. I do know it is going to be a long recovery and with special problems all its own.

The Impossible Plan Part 3

The thing is how do you go about designing an investment strategy when markets are in a free-fall? The answer is always in the timing and no one can say when or how far things will tank. For historical perspective we only have to look over our shoulder and see how well some of our esteemed economists predicted this latest mess.

My friend and client Jack wants a plan that allows him to minimize his losses during a market meltdown and, at the very least, be able to take advantage of lower stock prices. I finally decided the best possible plan was to establish a cash account far in advance ear-marked specifically to be used to buy funds, ETFs or stocks when the markets fell.

This simple idea solved several problems. It created an emergency fund; it also settled the tax question and the timing question. Jack would not have to sell anything and it allows him to buy on the cheap more of the same holdings or whatever that would be deemed special at the time. He wouldn't have to commit all his money but could dollar cost average as the situation merited.

The only question to answer is when to buy. The solution I locked onto was to use the VIX. VIX is the symbol for the Chicago Board Options Exchange Volatility Index. Basically it is a composite that measures the S&P-500 index over the coming 30 days. The number the VIX provides is a percentage to expected annualized changes in the S&P 500 index. When the VIX hits numbers higher than norm, lets use 30 for now and that can change depending on a variety of factors, than this indicates major moves either higher or lower, but historically lower values in the S&P index as investors have labeled the VIX as a measurement of investor fear.

When there is a sudden spike in the VIX I know to expect a sell-off in the markets, and I have not been disappointed in the past. A spike doesn't necessarily mean to buy that day but by following the VIX an investor can determine when to start buying quality at cheap or reasonable prices.

It wouldn't hurt to do some historical footnoting and see how well the VIX and the S&P 500 index have worked in the past. You can graph both the VIX and the S&P 500 and see how they work together to provide an investors with a strong indicator of when to buy or sell.This is not only a sound idea for uber-market collapses but also when things run sour temporarily and provide you with an idea of when to enter or leave the market.

I just hope Jack appreciates everything I do.

The Impossible Plan Part 2

Jack inherited a lot of his money and it's higher in value today even with the meltdown than when he first got his hands on it. I don'r say that to clients because clients don't want to hear what you did for them they only know what you didn't.

Anyway, I agreed with Jack that we should do some things and then after we hung up thought some more and asked myself what things? If, for example, I agreed to park his money in cash each time the market lost 10%-15% I would be facing the re-entry problem of when to move back in. Jack, knowing him as well as I do, would be calling me every hour on the hour asking me if it was time yet. I could see myself selling his investments several times a year or, at worse, several times a month. And, when moving back in, how would I know that I wouldn't be waltzing into a typical bear trap and sending my client's money deeper into the abyss?

Then there is the tax thing. Every time we, the collective me, pull the plug we have to pay taxes on his non-qualified account and that could get expensive if you pay ordinary taxes without the capital gain benefit.

Or- maybe we can just set the parameters at an extremely high percentage before 'we' sell say when the market falls 20% or 25%, but what good is that? We're down 20%-25% for crying out loud and that's what old Jack is trying to avoid and if the market pops up before we're ready to move back in we miss whatever upside there could be - maybe for the entire year.

Then we have the pay thing. How much do you charge someone to live with his or her account? If I know Jack he doesn't want to pay me a cent, simply having his account should be psychic income enough for me is the way he usually figures.

This delimma, dear friends, is that there is no easy answer when designing a plan that tries to reduce risk while maximizing return and taking advantage of economic depressions.

It truly gets complicated and my head hurt thinking about it but I finally go my little grey cells a purring and before long had an answer for my friend Jack.

The Impossible Plan Part 1

I got a call from a long-time client. We'd been through a lot, Jack and I, there have been a lot if very good times and a few not so good. One of the worst was 2002 when absolutely nothing worked and everyone should have stayed in bed for the entire year. Then New Year 2003 brought joy and a very nice double-digit some percent return across the board making everyone smile - a lot. But the rest of the 21st century was not a cake walk and every point gained seemed strained right to the end of 2007 when the markets petered out in December and fell into January 08 like a drunken sailor stumbling out of a New York taxi at three in the morning. Little did we know what was in store for us later that year.

In the early days of the new century I'd get folks come to the office expecting to chat me up for 20% something returns with little risk or volatility. They'd read about it in some magazine or point to some cousin or friend who did spectacularly during the 90s betting on dot coms and telecoms and say to me, ' I want you to do that for me.' Unfortunately the only thing I could show them was the other side of my door with the admonishment that I wasn't the broker they were looking for. ' You're looking for someone who likes your money more than you.'

Today people know better and the unrealistic pipe dream returns of the 90s are long gone and folks now simply want return of principal and get back lost profits.

Speaking of lost profits, and I am, I have people repeat to me what they hear on radio and television. One of the things is that investment risk gets less the longer one stays invested. A client will say, 'I've been with you for 20 years and still lost money in 2008 and I want to know what's with that because smart people say that by now I shouldn't have any risk at all!' Then they pull out a Morningstar report that illustrates risk decreasing as the years roll by.

I try to explain that yes, risk on equities decreases on the principal invested as time goes on but if you consider your appreciated principal your current value than the risk is the same as the first year you originally inv ested. Got all that?

Getting back to my phone call. Jack said that we had to do something so the next time something like a global economic crisis hits he doesn't get financially hurt. I wanted to say something like the last time we had this deep of a depression was about 80-some years ago and unless he knew of the whereabouts of the Ponce de Leon's fountain of youth neither of us would be around facing this similar problem ever again. But, like a good soldier I simply bit my tongue.

I had some serious thinking to do. There were a lot more things to consider that simply moving money in and out of the market.

MPT Part 2

There is no mystique about an investment portfolio that is simple. Brokers and management companies can, however, do a lot of hocus pocus and charge big fees if they get you to buy into a complicated asset allocation plan.

I've seen people during this economic crisis who've asked me what they should be doing now and I've said, 'Buy more, reinvest your dividends or go to cash if you cannot stand the pain.' But, people don't want to hear that. Give me magic is what folks want. Failing any mystical sleight of hand, give me something different is what disappointed investors want to hear, even if it could be the worse thing for them.

Asset allocation doesn't work when the whole world went to hell in a hand basket. It didn't protect one dollar when the day of reckoning came in 2008. It just didn't work! You know it, the broker knows it and the investment firms know it. When a pandemic in the order of 2008-2009 hits all bets are off and every single sector went into the toilet. Margin, cash calls and redemptions ripped the stuffing out of investment plans. I, and perhaps you, had a taste of it in 1987 but in 08/09 it was worse. It was monetary panic unlike anything anyone alive had ever seen.

People lost big time with asset allocation and Target Funds (another pet peeve of mine) that were suppose to keep them away from harm.

Warren Bufett doesn't cotton with asset allocation. He buys on discount, officially known as a value investor. He could care less if he owns 100% of something and it's all the money he has in the world as long as he bought it for less than its real value. You can always find something to buy cheap that'll get cheaper. The trick is to find something on sale at a price less that what its real value is. It takes a lot of work to do what Warren does; asset allocation is easier and more profitable for the folks selling the concept.

In a meltdown - asset allocation just doesn't work.

So- what would I suggest?

Here's just one idea. Buy a good dividend paying domestic stock fund and a solid foriegn or world divident paying mutual fund and pick some short term corporate bonds and mix up one-third all or 20-40 or 50%-50%, equities to fixed. See what happens in a year, maybe two.

This is simple; you'll probably have about 600 different stocks in your portfolio with the 2 mutual funds plus a handful of corporate fixed income bonds. The results will be you will have more time to play, less to worry about your portfolio and find it's cheaper and more efficient in the long run.

MPT Part 1

Modern Portfolio Theory, it sounds like a jazz trio but it's how a good many of today's investors manage their money. Harry Markowitz is the fellow who picked up a Nobel Prize for economic sciences for his pioneering work in MPT. Unfortunately Harry, now 81, doesn't pay much attenton to MPT when investing his own money. Harry admits he doesnt think about his own money all that much and as a result his portfolio is pretty much a hodge-podge of this and that.

MPT is a lot more complicated than the simple asset allocation most people use when working with their investments. There are computer programs designed to do nothing else than manage money-using MPT.

The average investor doesn't need all the bells and whistles of a complete MPT plan and only the basics, which include diversification and asset allocation to build portfolios.

MPT and asset allocation are like drugs for certain investors. Find yourself among a group of serious middle-aged amateur investors and Sharpe ratio, beta and alpha are passed along in the same serious vein as the names of new teeth whiteners. Me? I've sort of moved aside to a kinder, gentler place where I keep things simple for my clients and myself. For MPT junkies this is the worst sin of all. Acccording to them people like me should be taken outside the city wall and stoned.

Professionally designed asset allocation progarms sometimes run 20-to-30 mutual funds or half a dozen pages of individual stocks and bonds. The reality is you don't need all that. I read where you can effeciently asset allocate return and risk with as little as a dozen stocks. One mutual fund and a handful of individual bonds can do the trick too. Unfortunately this doesn't do for the true asset allocation purist. 'Where is your micro-cap, your REIT? OMG!'

So why the big push for asset allocation? As one mutual fund wholesaler explained to me, it sells. Clients love it. They like to see pages of individual mutual funds on their statement. The more complicated the better. It's like a Tom Clancy novel. The story is in the minutia not in the plot. Investors feel that with all that bulk in their investment portfolio something good just has to be happening. Certainly after the 2008-2009 crash you will see more and more creative asset allocation plans being touted by investment firms and I dread the disappointment that investors will have when they discover it doesn't do them any good than simply owning 2 or 3 mutual funds and a handful of individual bonds.

Another advantage of selling asset allocation plans to investors by some money management firms is that investors get a piece of some real bad funds that they wouldn't have purposely chosen if they had their druthers. Every mutual fund family has its share of dogs. These are funds that should be taken to the pound and skip the 10-day grace period and go right to the needle. Unless you're stuck in one of these awful funds because you bought it from a long-forgotten brother-in-law you wouldn't be buying it now. The fund company knows this and understands that not a new penny will hit those fund's ledgers by today's sophisticated investor unless the management company does some sleight of hand, mainly make the woof-woof fund part of a 'comprehensive asset allocation' portfolio. The reason fund management doesn't want to close a crummy fund or combine it with something else is because managers still get a handsome fee for just hanging on to investors who haven't looked at their statement in ages or lazy pension managers who haven't pulled the plug and replaced the woof in their menu.

The mutual fund company isn't stupid and won't put a substantial amount of your total investment into this woof. But, it will invest one-percent of your total investment into it, just to keep the fund doors open and allow the portfolio manager to play with some new money.

If you own one of these creations take a peek at the most minimal percentage funds and ask yourself how 1% invested in anything is going to affect your return or overall risk? Why did someone stick you with one-percent of whatever it is you got? It probably can't buy a cup of coffee but it sits proudly on your statement supposedly there to do something especially make you think it is meaningful.

It's a shame but it happens and that's that.

How Is It Possible?

I was on vacation and reading the financial news when I noticed that a company that had filed for and emerged from bankruptcy had its old company stock traded up 37% for the previous day. If you do the math someone made a lot of money. I mean a LOT of money!

How does a company that doesn't exist still keep trading even though there is nothing backing the stock?

The company, General Motors, its stock is still being traded, a phenomenon not unlike what happened when K-Mart filed for bankruptcy and emerged as the new K-Mart. People kept buying shares of the old company until one day it disappeared like the closing scene of the black and white television show, 'The Twilight Zone'. Over 91 million shares of the old K-Mart stock traded hands before the lights were finally turned off.

I remember scratching my head and wondering if someone knew something that I didn't know. The answer was no.

Folks either are clueless or think there is still a connection to the bankrupt company and there is some potential in the old company shares. I think this myth springs from the Chrysler bailout and how some people bought shares in the company and they soared in value under Iacocca's leadership. But, Chrysler never filed for bankruptcy!

The trading of valueless stock wouldn't bother me if the people buying the shares were rich folks with money to burn. Unfortunately many of these investors have no financial advisor, are looking for a quick rich scheme and cannot afford to lose one penny let alone the possible thousands they are throwing away.

Just as investors were embittered with the K-Mart fiasco today's bankrupt GM stock investors will also complain. There is plenty of warning to stay away- if they would only look.

Ignore Rebalancing

One of my gripes is the push that some financial firms have to rebalance their client's investment portfolio. I got an e-mail from a client who asked if I rebalanced client's investments and that got me started. Rebalancing is nothing more than selling your winners and holding your losers.

How does it work? Let's say you have a portfolio with one-third bonds, one-third in domestic equities and one-third in foriegn. Not everything is going to go up and down in the exact same percentage. The theory is to maximize the possibility of reducing risk and increasing the opportunities for gain that an investor removes excess profits from the winning portions and replaces the losing sectors until everything is in the same exact percentage as originally designed.

Lets keep it simple and say you have 50% in bonds and 50% in the S&P 500 Index. At the end of the year the bond portfolio has made money and the equity side has lost. The theory is that equities may have their turn next so get the allocation back to where it was so that an investor can maximize their return. What really has happened is that over the past 10-years the bond portfolio has consistently outperformed the equity side and the investor ended up feeding the losing end with more money that could have increased their profits.

If left alone the bond portfolio would have had more money each year and would have enjoyed more profits. Over a longer period of time the equities would have returned the favor but why reduce the chance of making money in a winning sector and plowing them into a loser?

Rebalancing is doing exactly what smart profitable investors don't do and almost every structured asset allocation plan implements. Rebalancing sells winners and puts more money into losers. Wall Street in its attempt to add bells and whistles to client's portfolios (and higher fees) have simply increased the chances of clients losing more money whether they invested in variable annuities or designed asset allocation plans by mutual funds or retirement plan sponsors.

Forget rebalancing. Buy good quality mutual funds, ETFs and ride your winners and cut your losers. You'll be surpirsed how much better you'll find yourself doing.

Buying On The Cheap

There are some basic investment rules. Unfortunately, human nature being what it is, people do the opposite of what they should.

For example, a major rule in investing, as in other things in life, is to buy good expensive things when they go on sale. It's like when Albacore tuna fish goes on sale at the supermarket. Folks buy a lot of it because they know the price drop is only temporary and in a day or two the price goes back to where it was. Smart shoppers stock up by the case, or certainly as much as they can.

During the economic depression everything got knocked down in price. Some stocks were already depressed and went even lower and some very good companies got crushed, along with most great mutual funds and ETFs. Great companies got sold off because hedge funds and investors were selling at any price just to get liquid or to pay their bills. It was a pandemic and common sense went right out the window.

The people who kept on buying and are buying through a systematic investment plan, such as a company sponsored 401k, will eventually find, probably sooner than later, that their accounts will be back to where they were before the folks who stuck their head in the sand or those that stopped buying completely when things got ugly- and cheap.

The simple rule is to keep buying funds and ETFs, especially during dips and down market cycles. You don't get many opportunities in life to buy quality cheap.

What If The Economists Are Wrong?

The second quarter ended with all sectors still off for the year. Bad news finally caught up to what had been a stellar quarter and tipped the scales as the markets sold off on the last day of June and had another horrible triple digit sell-off before the 4th of July holiday weekend.

Morningstar wrote that if we wanted to get a recovery moving faster the consumers who were working had better start spending. This bit of information is about as wrong as one can expect from a respected financial information service. Working consumers are scared still and salting away savings and curtailing their spending. More shopping malls will be biting the dust as more stores, both independent and chain, are closing outlets. In a few months we'll be having back to school sales and I dont expect the news to be good. With national unemployment close to double digits only a slowdown in layoffs is realistically the best possible welcome news. To see a turnaround any time soon on employment is wishful thinking. Employment is the last thing to recover in any economic downturn.

One of the major fund companies dusted off one of their all time conservative growth allocations and used it as a measure against the S&P 500 index over the past 10-years. That conservative portfolio showed a total return of 2% for the entire decade. That beat the stuffing out of the S&P 500 index which lost 39% over the same period of time.

After the boom of the 90s and as we began the 21st century some astute investors predicted that bonds and cash would be the leading sectors going forward. They were right. Equities not only lagged the most conservative portfolios over the past 10-years but begged the question if equities would at any time in the near future become once again attractive to the average investor. A pure bond portfolio returned close to 150% over the same period of time.

The global meltdown of October 2008 only exacerbated what once was a recession that began March 2000 into a full blown depression.

On the heels of this depression lurks a future inflationary period unlike any we've ever experienced. There are those of us who remember Jerry Ford's WIN button, whip inflation now, and the days of Jimmy Carter and his double digit inflation and interest rate years. We'll not only see it again but this time it'll be worse. Much worse.

Uncontrolled inflation will bring housing values roaring back like nobodies business, give everyone a huge pay raise and increase your taxes along with food, utilities and transportation. Add to this the possibility of a new energy law and the current depression may seem like a cool breeze compared to the nasty jolt we'll all get in our pocketbooks. We'll be earning more but living with far less.

Locking in your money in long term bonds, CDs or fixed annuities will just as surely destroy the purchasing power of your money as night follows days. If inflation lasts for the full future decade you can expect the cost of most goods and services to increase by 50%. Putting it another way if you plan on buying a $20,000 car today, it'll cost $30,000 in 10-years. Fixed long-term income investments will destroy your wealth just as easily as did the 2008 economic meltdown with equities.

The best that you and I can do as we approach these uncharted waters is to invest in fixed securities no farther out than 12 months and plan on establishing an investment inflation survival strategy in what may be the most challanging future decade ever.