That Was The Week That Was-2nd Week June

Risk. Investors understand that return in the equity and bond markets means accepting some risk. This may seem almost comical in explaining but some investors are still in a time-warp from the ‘70s’ where they would like twenty-percent return on their money with zero risk. A few folks out there think that there’s some investment secret. They’ll scour the earth, bend an ear to talking heads and believe anything anyone will say to them that is close to what they want to hear. People who first started investing around the 1970s were soon surprised to find that what went up also comes down. There is, however, a secret to controlling volatility and that’s Measuring Risk, using something called Beta. Beta compares risk in an investment portfolio against a definable index. In most cases an equity investment portfolio is measured against the S&P 500 index. If the portfolio has a historical performance of volatility less than the S&P 5oo it will be given a number less than One. If more it will be a Plus One. If it matches the index it is given a 1. An investment plan with less risk could have a number such as point seven-five or .75, or anything less than one. At point seven five (0.75)this is telling the owner of the investments that his or her investments have 25% less volatility than the S&P 500. Investments that are more volatile can be explained with numbers higher such as a 1.25 or twenty-five percent greater risk than the S&P 500. Every investment has its own Beta.

Risk Decreases As Time Goes By. Historical projections illustrate that the longer one holds the identical investment allocated portfolio the less risk one assumes. This measurement is based on the original contribution and Not on gains earned.

Investors Get Proprietary About Gains. It isn’t your gain until you cash out and put it in your pocket. Investors buy $1000 of stock and it may, over time, grow to $2,000. Mr. Market may take away the growth on the investment in one fell swoop and investors assume that it was their money they lost when in fact it was the gains on their money they lost. They may very well have their original investment intact but it is the gain on the investment that they lose.  It isn’t any less painful to lose gains but measurement of risk on gains plus principal can be illustrated using the same criteria illustrated over time.

Understanding Risk & Investment Efficiency are important components of managing an investment portfolio. Once an investor measures a portfolio against a known index then they can fully appreciate how well or poorly they are performing against the market as a whole.

Sell-Offs…The week before last markets on Friday tanked miserably. There were few ‘sweet’ spots and almost every index was down for the day. Only the pure Treasury and long-term corporate bond was able to gain a little or hold its own. Income associated investments that were allocated with stocks, bonds and cash were also hit but not as hard as pure equity investments. Utilities also saw some softness but not for the reasons that most would think. In a sell-off there is nothing sacred and positions are unwound with little thought as to losses, gains or safety of specific sectors. Leverage plays a huge part of professional managers positions. This along with options just aggravates the volatility of the market. Sell-offs, such as what we’ve experienced, have nothing to do with quality of holdings but fear.

 Secret to investing? If there was some hidden investment secret folks wouldn’t have to cheat and steal. Lately some of the biggest names in the business headed for the hoosegow as they were involved and caught in insider trading. There is always the goof that thinks there is some hidden trick to managing investments. There isn’t! Buying and holding quality at reasonable prices always wins in the end. Dividends reinvested during good times and bad usually account for, historically, 30% or more of the total return on investment.

If a stockbroker brags that they clear trades through a discount broker it ‘doesn’t’ mean that his customer’s trading costs are cheaper. It simply means the broker’s cost is less than going through a full-service or traditional brokerage firm. ITS NOT WHAT SOME SALESPEOPLE SAY- IT’S WHAT THEY DON’T SAY THAT HURTS… And a full service or traditional brokerage firm can and almost always discounts some trades to their bestest customers.

Monday Laura Metaj at Franklin Templeton called and asked if I needed some printed info on what was happening overseas to distribute to my clients. I said no, thanks, and that my clients were already over-loaded with information. Then I asked what Franklin Templeton’s thoughts were on the EU situation. In a five minute conversation we both agreed that the information from Europe was sketchy, the major players (France and Germany) cannot afford to see the euro fail and the smaller debt ridden countries cannot find themselves out of the Union. The loss would be catastrophic to all involved. In the meantime fear rules and the smart players are slowly buying quality to add to their portfolios.

 

Subtle was Monday last as Markets ended up mixed. Dow was off slightly as was oil. Everything else was up- slightly. To be honest it felt like it was the eye of the tornado. There has been too much fear too fast that has ripped a swath through portfolios that may take the rest of the summer to repair. Negative connotation is such that Mark Hulbert at MarketWatch writes that the correction phase is close to being over. He calls this the Hulbert Sentiment Index and it measures investor grief.

Our Friends at JP Morgan (the investment side not the banking side) sent us a news report illustrating a chart that shows even though, since 2009, markets fell and rose, the rose was always higher after every fall.  

Barrons and Others Report Starbucks is Buying a Bakery Chain with a ‘secret’ French recipe. The company is also hiring French baker Pascal Pigo to revamp  and refine the menu. Shares of Panera Bread may soon be feeling the heat. 

Zacks came out with the above allocation suggestions. Note no bonds, cash, high yield, emerging markets, mid-caps, real estate, commodities (gold, oil, etc). Nor is there a place in the allocation for option protection.

and, yes, Professor, they even spelled aggressive wrong!  

Facebook = $20.00 Yes, friends, that’s where whispers say the markets will knock it down to before starting to scoop shares up. Still folks at Allianz RDM Tech Fund offers up other Tech bargains to buy: Microsoft, Apple they like to $750-$800 a share, Google could see $650-$700 in the next 12 months. Finally they suggest Intel. 

The best kept secret in the Eurozone is Estonia. The country has worked out its debt, has a surplus and the economy is booming at 7.6% growth. When questioned they answered how they did it was through austerity and cutting everything. In three years they worked their way out of debt and into success.

Finally! Best week markets enjoyed in 2012 was last week. This was in anticipation of Spain asking for help and both sides of the Atlantic pitched in for a $125 billion bailout. This would not reduce Spain’s awful unemployment numbers of 25% or create anything other than quelling unrest among world stock markets.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.