Friday, July 18, 2008

Looking for the High Ground July 2008

Looking for the High Ground

The faltering financial sector has raised awareness of the importance of keeping our money safe. This email will review the safety of brokerages as well as banks, with Treasuries as the benchmark. We are primarily looking at short-term options, comparing relative safety with yield.

Attached is a recent analysis to compare yields of various short-term options for cash which Chad Silver prepared in our office.

In comparing CD rates offered by various banks, keep in mind that the shakiest banks offer the highest rates. We use to evaluate the soundness of banks, if you are interested in using it. The CD’s we list are examples offered by banks rated 4 and 5 stars (5 is the highest rating). They are all available through Schwab and are still FDIC insured if held in your Schwab account.

Since some clients use brokerages other than Schwab, you might be interested in this analysis which Jason Moore prepared, comparing stock prices of various wirehouses. A steep drop in stock value doesn’t necessarily mean the company is headed for bankruptcy, but companies which go bankrupt all have dropping prices.

July 13, 2007 July 14, 2008
Charles Schwab $22.22 $19.04 -14%
Merrill Lynch $86.54 $25.93 -70%
Citigroup (Smith Barney) $52.52 $15.47 -71%
E-Trade $1.41 $.25 -82%
Morgan Stanley $73.26 $32.25 -56%
UBS $61.49 $18.72 -70%

All major brokerages, including those above, are covered by SIPC insurance. In the past 50 years, no customer of a brokerage company has lost money due to failure of the company which wasn’t covered by SIPC. Brokerages which failed and required SIPC to pay off their customers are usually small companies with bad recordkeeping, or tainted by fraud.

The only way you could lose money or securities in your Schwab account is if securities were stolen, and Schwab went bankrupt, and SIPC was unable to cover the losses. This is extremely unlikely. (Note that than limited partnerships, futures, foreign exchange transactions, commodity contracts, precious metals contracts, etc. are not considered securities).

Our general recommendation for clients is to use a FIDC insured checking account for general cash needs, and an SIPC insured money market for other cash reserves. For short-term cash, generally we only use Treasury Bills for very large amounts of money which would be beyond FIDC or SIPC limits.

We hope this information is helpful to you. Please let us know if you have further questions.

Bert Whitehead, MBA, JD

Monday, July 7, 2008

The Bear has arrived (supplement)

Now, however, we are in a global economy so it is instructive to note how the US compares to other countries’ markets (on a YTD basis through 7/3/08 except as noted). I have also noted how the holdings in most of our Wealth Management portfolios have performed.

US Markets:
Dow = -14.4% (large cap)
S&P 500 = -14.0% (large cap)
Nasdaq 100 = -12.9% (large cap)
Russell 2000 = -13.1% (small cap)
S&P 400 - -8.3%
S&P 600 = -10.9% (small cap)

International Markets:
MSCI EAFE = -15.6%
Dow Jones World Index = 13.7%
DJ Euro Stoxx = -25.0%
DJ Asia-Pacific = -11.0%

Popular BRIC ‘Emerging Markets’
Brazil = -7.3%
Russia = -11.2%
India = -33.7%
China = -46.8%

Typical WM Holdings:
Cambridge Index = -14.1% (large cap)
Cambridge Active = -7.9%* (mid cap)
CGGP (Cambridge Global Growth Portfolio) = -8.7%* (small cap + intl)
*(as of 6/30/08)

10 yr. US Treasury = +14.03% (52 wk. average).
Gold = + 9.0%
CGM Focus = +11.2%
CGM Realty = +3.1%

Utopia Growth = -10.1% (small cap and intl)
Royce Value Plus = -6.0% (small cap)
First Eagle Overseas = -4.2% (intl – unhedged).

Virtually all equity classes (i.e. stock market indexes) are down in the double digits YTD. The stock holdings in most of our WM portfolios are down considerably less than their corresponding indexes except for the Cambridge Index. In large cap, the Cambridge Index is mirroring the three large cap indexes as it was designed to do.

We are concerned about Utopia fund, which has fallen over 10% YTD. However, since all of this drop occurred in the last month, we are not recommending any changes at this point.

In summary, your overall portfolio is performing as it should. Overall the losses in values of stocks have largely been offset by increases in the value of Treasury bonds. We do not believe that any changes need to be made due to market conditions.

As your investment managers, the hardest recommendation to make in times like these is to “do nothing.” But, as the data shows, we are weathering the storm. I have found that reacting to short-term moves in the market is seldom worthwhile, and only increases investment expenses and taxes.

However, if you are feeling particularly uncomfortable with your investments right now, we should discuss your situation. I have found that often when clients are upset with their investments, they are experiencing endogenous changes in their life. These need to be addressed and if may well be appropriate to review your overall investment allocation to take into account other changes in your life.

Please let us know if we can talk about this, either at our next phone call or regular appointment. If you want to talk sooner, just let us know.

Warm regards,

Bert Whitehead, M.B.A., J.D.

The Bear has arrived

It’s official now: we are in a bear market, i.e. the Dow closed down more than 20% from it’s peak in October 2007. Interestingly, it was at this level in Oct. 2006.

As your financial advisors, we’re keeping a close eye on what’s going on. After a comparison of the market in general to the funds we recommend, we would not suggest changes at this time.

Stocks are down across the globe, with most indexes down in the double digits. The worst hit, as usual, are those that were the ‘hot’ markets in the past couple of years, e.g. emerging markets. This is why we don’t try to chase performance, or ‘shoot where the rabbit was,’ in structuring your portfolios. Our investment selection are performing as well as or better than their corresponding indexes.

Often clients who once thought they had a ‘high risk tolerance’ suddenly want to dump all their stocks in a bear market (which is officially where we are now). This is a principle reason we don’t base your asset allocation on ‘risk tolerance.’ Rather we try to structure your portfolio so that it is congruent with other risks in your life, and advise you on how much risk is appropriate in your portfolio.

For clients in retirement, who have followed our recommendations, you will see that there has not been much change in the total value of your portfolio over the past year, even if you are taking distributions from your investments. This is because 40%-50% of your portfolio is in Treasury bonds, and the increase in their value is largely offsetting losses in the stock portions of your portfolio.

For clients who are in the “accumulation” stages, this is the time when you are in the best position to significantly strengthen your portfolio. Not only should you stay in the market, the best move you can make in these times is to continue to add money to your stock portfolio. “Dollar-cost-averaging” (i.e. investing some money each month automatically on a monthly basis) is the best way to take advantage of a bear market.

Five years from now, you will look back and see that the investments you made during this period are among the best investments you will ever make in your lifetime.

However, if your personal circumstances have changed it may be appropriate to re-evaluate your asset allocation. If you feel ‘stock market anxiety’ right now, give your Cambridge advisor a call to review your personal situation.

Warm regards,
Bert Whitehead, M.B.A., J.D.