As you may have heard, the Federal Reserve has said that it will guarantee investors have in money market funds (MM) for the next 12 months. This was prompted by one of the largest and oldest money market funds ‘breaking the buck’ = i.e. the net asset value of the fund dropped from $1.00 per share to $0.97 per share last week. In the past, MMs have diligently maintained the net asset value at $1.00, even when they had to add their own funds. Due to this limited drop, many investors became concerned about the money they had invested in MMs and started withdrawing funds. To avoid a run on these account the Feds stepped in less than 24 hours later and issued the guarantee.
The question is: is this guarantee enough?
I am personally concerned that the ‘bail-out’ package now before Congress is being politicized by both sides of the aisle. I think much of the problem is caused by media-generated hysteria magnified by politicians on both sides during this election cycle. There is nonetheless a serious problem which demands action by our leaders. Government regulation is tricky: if too little, it doesn’t address the problems adequately; if too much they trigger the ‘Law of Unintended Consequences. ‘There are two dangers: 1) that delaying the bill beyond the end of the week will precipitate a liquidity freeze and market impact; and 2) by adding too many provisions to the bill will lessen the ability for the Fed to address the liquidity issue. Personally, I have more confidence in Paulsen, Bernanke, & Co. than in Congress.
Based on research Jason and I have done, I believe that Schwab is very sound, since they have avoided investing in sub-prime mortgages and related products. We have reviewed the holdings of the regular MMs offered by Schwab. They are well diversified and not exposed to the default risks other brokerages have taken on to increase yield. They will be participating in this new guarantee of MM funds offered by the Feds, as it will be funded by the brokerages who participate.
There are some unanswered questions, however.
How much of an investor’s deposits will be covered? We assume the minimum coverage will be $100,000, similar to FDIC coverage, but it may be more like $500,000 similar to current SIPC coverage (not gov’t. guaranteed).
Will this cover deposit by foreigners? Generally the Fed’s don’t guarantee funds of foreigners. If that is true, it may be expected that foreigners will withdraw funds from the MM funds which could trigger a run.
How much will be covered? Right now, there is $50 billion set aside to cover these guarantees. The problems is that the total amounts in MM funds is $3.5 trillion, so less than 2% is covered. It is likely that the bailout bill would give the Fed more flexibility, which is one reason for the urgency expressed by Bush and his economic advisors.
What are the alternatives for clients? Schwab offers a Treasury Money Market, which invests only in Treasuries. The current yield on this MM is 0.56% as compared to 2.04% on the regular money market.
The answers to these questions will be more clear once the bailout bill is worked out. For now our recommendation generally is that Schwab’s regular MM fund is suitable for our clients. However we are aware that a number of clients are very concerned about absolute safety, so the Treasury MM fund is recommended if you are losing sleep over the safety of your savings. Also, if you have over $100,000 in MM funds, we recommend you consider moving the amount you have in excess of $100,000 to the Treasury MM.
If you would like us to make a change in the money market in your account, please send an email to your Cambridge Team, and we will handle it for you. Also, let us know if you have any further questions regarding this.
Regards,
Bert Whitehead, MBA, JD
Friday, September 26, 2008
Saturday, September 20, 2008
Holding Down the Fort When It's Raining Shoes
I started to write this update every day this week, and then another shoe or two would drop, so I keep starting over. Since this is a very fast-moving financial transition, I’ll strip this to the important details. Pam is also composing another email to all clients with a more general review of the situation.
Dangers: The biggest danger to clients individually is to panic. Mistakes of the past are unraveling, but this downturn is actually normal for a functioning economy with global growth. On average we have a recession every 5.5 years. We went through this in the 70’s with the S&L crisis, the market fell 25% in one day in the 1987, there was a real estate and international meltdown in 1992, then the dot-com bust in 2000-2002. Now, 5-6 years later, it’s time for another one. We have successfully survived financial upheaval before and we will survive this one.
For Wealth Management Clients, we are monitoring specific risks to your portfolio and acting when necessary. For example, when financial stocks are on the brink of collapse, we take discretionary action to sell them before they stop trading to assure that you will have a tax loss (if the bank goes into bankruptcy, you can’t take the loss until the stock is totally worthless which may be a couple of years). We have sold Fannie Mae stock, Lehman and Merrill Lynch in the past week in clients’ portfolios accordingly.
Other stocks, such as AIG and various money market funds, are being analyzed to determine what action is called for. At the current time, we are keeping Fannie and Freddie bonds in portfolios, as will as annuities, insurance, etc. held by AIG, and money market funds as it appears the feds are taking action to support these securities.
We are ‘watching your back’ continually, so you don’t have to worry about this, and we will continue to update you as needed.
Opportunities: We are generally recommending that clients with extra cash start Dollar-Cost-Averaging into the market. While we don’t know how low the market will drop, most assuredly we will look back in five years and recognize that today’s market was a terrific buying opportunity. It is not appropriate for all clients to be buying stocks now as individual situations may call for more liquidity (see below). Dollar-Cost-Averaging is overwhelmingly more profitable than trying to do market timing.
While US markets are down ~17% this year, international markets are down 25-30%, with virtually every country down over 25%. The Cambridge Global Growth Portfolio by comparison (down 18% YTD) demonstrates the advantages offered by FIM money management. The Cambridge Index Portfolio is tracking the US large-cap markets (such as the S&P 500) as they were designed to do. Unless there is a substantial market turnaround, we will likely have losses to reap which will carryover to future years
We are also cautioning clients in general to maintain liquidity by avoiding illiquid investments (e.g. real estate, partnerships, paying off mortgages, etc.). Because of the credit crisis, some banks are cancelling lines of credit and credit cards, not because the customer has been at fault, but because financial institutions themselves are having difficulty raising capital. We expect this will continue for the next 6-18 months and will advise clients on this individually.
Strengths: U.S. financial and economic foundations are strong, despite what the press says. Foreign markets in general have dropped twice as fast as ours as their economies adjust to new global realities. As Americans, we have unparalleled strengths in terms of education, innovation, and perhaps most importantly = experience. We have been through these crises before and have the leadership in economic matters (e.g. Paulsen, Bernanke, etc.) to respond appropriately. The solutions they have been implementing will not bankrupt the US – keep in mind we have had government intervention in the financial markets before, e.g. during the Great Depression, the RTC to buy assets of S&L’s in the 80’s, the loan to Chrysler in the past decade.
Of course it is a political football, which heightens public paranoia to attract votes. I don’t think that the politicians have a clue about these economic matters = interesting that no one on either side of the aisle saw this trainwreck coming a year ago! While our financial and economic leaders aren’t elected, they aren’t totally immune from political pressure. One of our society’s strengths is that we have very capable people in these key positions who are generally supported by both parties.
As your fee-only financial advisors, we are experience and knowledgeable, and know your personal situations. We have been planning for this possibility all along, which is why virtually all of our clients have US Treasuries in their portfolios to assure them of ample cash flow for 15 years. Interestingly, Treasuries have increased in value by a staggering 15.7% year to date during this market chaos as investors worldwide flock to them as the ultimate in safety. Yes, they have very low yields, but for this part of your portfolio, “Safety Trumps Yeild!”
Using Functional Asset Allocation concepts, you will also be in good shape to profit from the rebound. We do not sell off equity positions during market downturns, so when the market turns around, you will be poised to participate in the following prospertity. It is important to realize that market turn-arounds typically are leading indicators and begin 9-18 months before the economy starts to recover. Thus it is folly to try to guess when the market will shift: by the time you see the change in economic measures the market will have already bolted ahead.
We hope this update is helpful and comforting for you. If you have any questions please call us…we sell sleep, and if you’re losing sleep over this, we’re not doing our job!
Regards,
Bert Whitehead, MBA, JD
Dangers: The biggest danger to clients individually is to panic. Mistakes of the past are unraveling, but this downturn is actually normal for a functioning economy with global growth. On average we have a recession every 5.5 years. We went through this in the 70’s with the S&L crisis, the market fell 25% in one day in the 1987, there was a real estate and international meltdown in 1992, then the dot-com bust in 2000-2002. Now, 5-6 years later, it’s time for another one. We have successfully survived financial upheaval before and we will survive this one.
For Wealth Management Clients, we are monitoring specific risks to your portfolio and acting when necessary. For example, when financial stocks are on the brink of collapse, we take discretionary action to sell them before they stop trading to assure that you will have a tax loss (if the bank goes into bankruptcy, you can’t take the loss until the stock is totally worthless which may be a couple of years). We have sold Fannie Mae stock, Lehman and Merrill Lynch in the past week in clients’ portfolios accordingly.
Other stocks, such as AIG and various money market funds, are being analyzed to determine what action is called for. At the current time, we are keeping Fannie and Freddie bonds in portfolios, as will as annuities, insurance, etc. held by AIG, and money market funds as it appears the feds are taking action to support these securities.
We are ‘watching your back’ continually, so you don’t have to worry about this, and we will continue to update you as needed.
Opportunities: We are generally recommending that clients with extra cash start Dollar-Cost-Averaging into the market. While we don’t know how low the market will drop, most assuredly we will look back in five years and recognize that today’s market was a terrific buying opportunity. It is not appropriate for all clients to be buying stocks now as individual situations may call for more liquidity (see below). Dollar-Cost-Averaging is overwhelmingly more profitable than trying to do market timing.
While US markets are down ~17% this year, international markets are down 25-30%, with virtually every country down over 25%. The Cambridge Global Growth Portfolio by comparison (down 18% YTD) demonstrates the advantages offered by FIM money management. The Cambridge Index Portfolio is tracking the US large-cap markets (such as the S&P 500) as they were designed to do. Unless there is a substantial market turnaround, we will likely have losses to reap which will carryover to future years
We are also cautioning clients in general to maintain liquidity by avoiding illiquid investments (e.g. real estate, partnerships, paying off mortgages, etc.). Because of the credit crisis, some banks are cancelling lines of credit and credit cards, not because the customer has been at fault, but because financial institutions themselves are having difficulty raising capital. We expect this will continue for the next 6-18 months and will advise clients on this individually.
Strengths: U.S. financial and economic foundations are strong, despite what the press says. Foreign markets in general have dropped twice as fast as ours as their economies adjust to new global realities. As Americans, we have unparalleled strengths in terms of education, innovation, and perhaps most importantly = experience. We have been through these crises before and have the leadership in economic matters (e.g. Paulsen, Bernanke, etc.) to respond appropriately. The solutions they have been implementing will not bankrupt the US – keep in mind we have had government intervention in the financial markets before, e.g. during the Great Depression, the RTC to buy assets of S&L’s in the 80’s, the loan to Chrysler in the past decade.
Of course it is a political football, which heightens public paranoia to attract votes. I don’t think that the politicians have a clue about these economic matters = interesting that no one on either side of the aisle saw this trainwreck coming a year ago! While our financial and economic leaders aren’t elected, they aren’t totally immune from political pressure. One of our society’s strengths is that we have very capable people in these key positions who are generally supported by both parties.
As your fee-only financial advisors, we are experience and knowledgeable, and know your personal situations. We have been planning for this possibility all along, which is why virtually all of our clients have US Treasuries in their portfolios to assure them of ample cash flow for 15 years. Interestingly, Treasuries have increased in value by a staggering 15.7% year to date during this market chaos as investors worldwide flock to them as the ultimate in safety. Yes, they have very low yields, but for this part of your portfolio, “Safety Trumps Yeild!”
Using Functional Asset Allocation concepts, you will also be in good shape to profit from the rebound. We do not sell off equity positions during market downturns, so when the market turns around, you will be poised to participate in the following prospertity. It is important to realize that market turn-arounds typically are leading indicators and begin 9-18 months before the economy starts to recover. Thus it is folly to try to guess when the market will shift: by the time you see the change in economic measures the market will have already bolted ahead.
We hope this update is helpful and comforting for you. If you have any questions please call us…we sell sleep, and if you’re losing sleep over this, we’re not doing our job!
Regards,
Bert Whitehead, MBA, JD
Friday, September 12, 2008
Another Shoe Drops
The failure of Fannie Mae and Freddie Mac has resulted in an interesting bailout. Basically , the feds are now explicitly backing the bonds which Fannie and Freddie have issued, and throwing the shareholders under the bus.
Not to worry: none of our clients held any of their stock, at least in Schwab portfolios. If you have these stocks at another brokerage company you should call them. The shares dropped over 80% this week.
The feds actually had to back up the bonds because so many of them are held by foreigners, especially the Chinese, who were concerned about the safety of the bonds. Previously , the feds only provided an ‘implicit’ guarantee of the bonds. So to keep all the foreigners from dumping their bonds on the market, which would create major chaos, the feds have agreed to ‘explicitly’ guarantee the bonds.
We became wary of these agency bonds over five years ago, and have not purchased any for clients’ accounts. However, some clients have Fannie and Freddie bonds which were purchased earlier. With the ‘explicit’ guarantee, we are recommending that clients keep those bonds for now. There is a wide spread currently, which would mean a 10-20% loss if sold now, whereas the feds are on the hook for the full face amount if the bonds are held to maturity.
We will review this on an ongoing basis, and review your individual situation at your next appointment. At some point we expect that the spread will narrow enough to enable us to swap these bonds for treasuries, once the markets settle down.
If you have any questions about the current market situation, feel free to call your Cambridge Advisor. If you are in the Detroit area, you might be interested in a live seminar I am giving for PBS on Saturday, October 11 th , at their new Wixom facility. The seminar will address: “Yikes! What Do We Do Now?” Call Carrie if you want to attend = there is a $40 donation to PBS.
This is at least the third shoe to drop during this economic upheaval…how many feet do Financial Grinches have?
Regards,
Bert Whitehead, MBA, JD
Not to worry: none of our clients held any of their stock, at least in Schwab portfolios. If you have these stocks at another brokerage company you should call them. The shares dropped over 80% this week.
The feds actually had to back up the bonds because so many of them are held by foreigners, especially the Chinese, who were concerned about the safety of the bonds. Previously , the feds only provided an ‘implicit’ guarantee of the bonds. So to keep all the foreigners from dumping their bonds on the market, which would create major chaos, the feds have agreed to ‘explicitly’ guarantee the bonds.
We became wary of these agency bonds over five years ago, and have not purchased any for clients’ accounts. However, some clients have Fannie and Freddie bonds which were purchased earlier. With the ‘explicit’ guarantee, we are recommending that clients keep those bonds for now. There is a wide spread currently, which would mean a 10-20% loss if sold now, whereas the feds are on the hook for the full face amount if the bonds are held to maturity.
We will review this on an ongoing basis, and review your individual situation at your next appointment. At some point we expect that the spread will narrow enough to enable us to swap these bonds for treasuries, once the markets settle down.
If you have any questions about the current market situation, feel free to call your Cambridge Advisor. If you are in the Detroit area, you might be interested in a live seminar I am giving for PBS on Saturday, October 11 th , at their new Wixom facility. The seminar will address: “Yikes! What Do We Do Now?” Call Carrie if you want to attend = there is a $40 donation to PBS.
This is at least the third shoe to drop during this economic upheaval…how many feet do Financial Grinches have?
Regards,
Bert Whitehead, MBA, JD
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 www.bankrate.com 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.
Regards,
Bert Whitehead, MBA, JD
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 www.bankrate.com 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.
Regards,
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.
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.
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.
Monday, April 14, 2008
Economic Predicament (April 2008)
If It's Not One Thing, It’s . . .
. . . three or four things to make a real economic mess. What has caused the economic predicament we face today? Politicians are all pointing fingers, blaming the "Sub Prime Mortgage Fiasco," or the bursting of the housing bubble, or the falling dollar. It may be instructive to understand how these economic scenarios blow up from time to time.
The 'Great Depression' was variously blamed on Hoover/Rockefeller for not maintaining liquidity in the financial markets when runs started at banks. Others pin the fault on the Congress for the Smoot Hawley Tariff act, which raised our tariffs to protect American jobs, but set off a wave of retaliatory tariffs by other countries that decimated our exports. Often the stock market bubble of the 20's, where stocks were bought with only 10% margin, is fingered as the problem. The truth is, I think, that none of these events by themselves caused the Great Depression, but rather a 'perfect storm' where all these events happened in the same time period. Of course the record 'Grapes of Wrath' drought in the Midwest and plains states in the early 30's exacerbated and prolonged the depression.
This is true of other recessions too. In the 70's, the stock market also ended a record run-up at the end of the 60's, plus the Vietnam War was a huge financial drain. Inflation started rising rapidly, and was likely accelerated by Nixon's Wage and Price controls in the early 70's. Those factors were then aggravated by the increase in oil prices by the oil cartels, as well as the strategy of the Federal Reserve to cut interest rates to head off a recession. The result was 'stagflation' and the death of Savings and Loan companies, salvaged by the RTC.
There were mild recessions too. The late 80's had a brush with the junk bond collapse, compounded somewhat by the stock run-up in the Reagan years. But there were not enough negative whirlwinds to create a major recession. Housing hit some bumps in the early 90's, but again the national economics wasn't impacted by other forces, and in fact the increase in globalization and computerization propped up prosperity.
We were hit very hard in 2000-2002, when Greenspan finally broke the back of stock market’s 'irrational exuberance' which was then soon followed by 9/11. The dot.com era came to an end, impoverishing many nouveau-riche millionaires and decimating portfolios. It was the effect of these events happening together that produced the severe economic downturn, which in turn created huge unemployment.
Today we can see the bond market, which had become enamored of 'collateralized debt obligations' which were foisted on the investing public. This created another liquidity crises, and the stock market dropped as companies and individuals found they had committed to more debt than they could handle. The housing market, buoyed by speculators collapsed and now almost every region has a surfeit of excess housing inventory.
Will it get better? Yes, but maybe not right away . . . if there are other set-backs, we could face worse times. For example, if there is a string of
Municipal bond defaults, due to the overwhelming unfunded pension liabilities. Or even a severe earthquake along the California coast, or the overthrow of the Saudi Kingdom or other Middle Eastern political shift which interrupts the world’s oil supply. The economy can withstand one or two of these setbacks and recover quickly as it did in the 80's and 90's. However, if there are three or four of these storms which occur in the same period of time, we could see our economic situation seriously worsen.
The problem is that it is impossible to figure out the timing. It is a mathematical certainty that municipalities are not going to be able to pay the pensions they have promised to the baby boomers and beyond. Scientists agree that a major earthquake in California is inevitable. But no one knows when.
For each of us personally, we can protect ourselves from these outcomes by keeping a diversified portfolio. Treasury bonds are the stalwart buffer against deflation. If we encounter rising inflation and associated high interest rates, a long-term mortgage is our best protection. We will eventually see the dawn of prosperity again, and maintaining a diversified stock portfolio is what allows prudent investors to participate in long term growth.
So, even if it's not one thing, but three or four bad things that make a perfect storm, it's not a good idea to jump ship.
Regards,
Bert Whitehead, MBA, JD
. . . three or four things to make a real economic mess. What has caused the economic predicament we face today? Politicians are all pointing fingers, blaming the "Sub Prime Mortgage Fiasco," or the bursting of the housing bubble, or the falling dollar. It may be instructive to understand how these economic scenarios blow up from time to time.
The 'Great Depression' was variously blamed on Hoover/Rockefeller for not maintaining liquidity in the financial markets when runs started at banks. Others pin the fault on the Congress for the Smoot Hawley Tariff act, which raised our tariffs to protect American jobs, but set off a wave of retaliatory tariffs by other countries that decimated our exports. Often the stock market bubble of the 20's, where stocks were bought with only 10% margin, is fingered as the problem. The truth is, I think, that none of these events by themselves caused the Great Depression, but rather a 'perfect storm' where all these events happened in the same time period. Of course the record 'Grapes of Wrath' drought in the Midwest and plains states in the early 30's exacerbated and prolonged the depression.
This is true of other recessions too. In the 70's, the stock market also ended a record run-up at the end of the 60's, plus the Vietnam War was a huge financial drain. Inflation started rising rapidly, and was likely accelerated by Nixon's Wage and Price controls in the early 70's. Those factors were then aggravated by the increase in oil prices by the oil cartels, as well as the strategy of the Federal Reserve to cut interest rates to head off a recession. The result was 'stagflation' and the death of Savings and Loan companies, salvaged by the RTC.
There were mild recessions too. The late 80's had a brush with the junk bond collapse, compounded somewhat by the stock run-up in the Reagan years. But there were not enough negative whirlwinds to create a major recession. Housing hit some bumps in the early 90's, but again the national economics wasn't impacted by other forces, and in fact the increase in globalization and computerization propped up prosperity.
We were hit very hard in 2000-2002, when Greenspan finally broke the back of stock market’s 'irrational exuberance' which was then soon followed by 9/11. The dot.com era came to an end, impoverishing many nouveau-riche millionaires and decimating portfolios. It was the effect of these events happening together that produced the severe economic downturn, which in turn created huge unemployment.
Today we can see the bond market, which had become enamored of 'collateralized debt obligations' which were foisted on the investing public. This created another liquidity crises, and the stock market dropped as companies and individuals found they had committed to more debt than they could handle. The housing market, buoyed by speculators collapsed and now almost every region has a surfeit of excess housing inventory.
Will it get better? Yes, but maybe not right away . . . if there are other set-backs, we could face worse times. For example, if there is a string of
Municipal bond defaults, due to the overwhelming unfunded pension liabilities. Or even a severe earthquake along the California coast, or the overthrow of the Saudi Kingdom or other Middle Eastern political shift which interrupts the world’s oil supply. The economy can withstand one or two of these setbacks and recover quickly as it did in the 80's and 90's. However, if there are three or four of these storms which occur in the same period of time, we could see our economic situation seriously worsen.
The problem is that it is impossible to figure out the timing. It is a mathematical certainty that municipalities are not going to be able to pay the pensions they have promised to the baby boomers and beyond. Scientists agree that a major earthquake in California is inevitable. But no one knows when.
For each of us personally, we can protect ourselves from these outcomes by keeping a diversified portfolio. Treasury bonds are the stalwart buffer against deflation. If we encounter rising inflation and associated high interest rates, a long-term mortgage is our best protection. We will eventually see the dawn of prosperity again, and maintaining a diversified stock portfolio is what allows prudent investors to participate in long term growth.
So, even if it's not one thing, but three or four bad things that make a perfect storm, it's not a good idea to jump ship.
Regards,
Bert Whitehead, MBA, JD
Subscribe to:
Posts (Atom)