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09/09/2010

My View On The World

SEPTEMBER 2010 INSIGHTS

…from the desk of Brian Carden, Financial Advisor

     Satchel Paige is quite an athlete and a great story in the annals of professional baseball. He was pitching in the major leagues well into his 50s. And like Yogi Berra and Casey Stengel, he was very quotable. Of my favorites is “It’s not what you know that hurts you. It’s what you know that just ain’t so!” Given this as a mantra, I have a huge bias against most of what YOU are exposed to regarding money, investments, and all things financial. It is continually amazing to me how the media continues to confuse virtually everyone. Let’s list them shall we?

  • Jim Kramer ranting on CNBC about how picking US stocks is the way to financial success.
  • Everyone else on that station reporting every single bit of minutia that might make a difference to one’s portfolio…and generally doesn’t make a bit of difference…but sells a lot of ads!
  • Sam Waterston telling you that you can have financial freedom by doing it yourself with TD Ameritrade.
  • Wall Street based wire houses telling you that they know how to invest, when to invest, and that you should trust them because they are who they are…period. (Can you say credit default swaps...I know you can?)
  • Financial entertainers spouting their own brand of disoriented and invalid information to the masses that seem to think they are credible because they have a camera or microphone.

    Now, the second part of this…after 28 years of “reading between the lines” I continually shake my head at what the mutual fund industry puts out there for advisors to use to convince YOU to invest your money with them. Let’s look at a few of these:

    It’s an industry statistic that almost 70% of all advisor based mutual funds are placed with one particular fund family. This one has a bias toward investing in large US based companies and one that sells its funds based on historical performance and lower than average management fees…but has to put in every brochure or publication for you to read “Past returns aren’t predictive of future results.” Its insane how many people come into our office thinking they are well diversified and all they own are 4-5 funds entirely in this investment firm. This one piece they published for the advisor community went as far to say that this wasn’t a “lost decade”. This because their flagship funds actually had a positive average annual return for the decade ending December 31, 2009. The comparison point was showing that the S & P 500 Index had a negative 1% return. This wasn’t a “lost decade”? Okay, let’s see…I bought this fund and held it through all of the cyclical bears of the last decade and all I have to show for it is 2-3%? Right…still felt lost to me!

    In the period from 1982-1999, if you threw money at the market, the prevailing winds blew it to an average annual return of 16.8%. It was easy. Open your sails wide just put money in an account and watch it go. I actually lost a client because his portfolio only returned 30% in one year and he read in Money Magazine that he could have gotten more if I had invested him in specific fund. Obviously, he didn’t see that I didn’t have a crystal ball in my office, nor do I have one now. This was the biggest run up in our country’s history…from start to finish a total return of 1409% (Source Ned Davis Research). Almost 40% greater than the last bull market that lasted from 1942-1966…but who invested in the market in those days? My Dad and Granddad both had pensions provided by their employer back then, so who needed to invest their own money for retirement?

    What caused that huge run up? Let’s look and see. If you’re going to look at historical performance, you need to look at what caused it. Ronald Reagan and “Reaganomics” cut income tax brackets to the lowest they had been since Roosevelt took office. Here’s a trivia question for you. What was the highest marginal tax bracket in our country’s history? 94% during the tail end of WWII. Roosevelt may have turned our country around with the New Deal and other programs, but he taxed the country to death to do so!

    In 1982, in addition to the Reagan tax cuts, 100% of the baby boomers were fully employed which meant that the largest demographic group in the history of the country were earning wages and paying taxes. Unemployment was at an all time low. In addition to this, in 1980, the Individual Retirement Account and the 401(k) plan were introduced to Americans….and also at that time, the mutual fund became a very popular investment tool for those accounts as they created automatic diversification and lower entry costs into equity investments in lieu of individual stocks. So here comes a huge influx of new dollars into the market invested directly into those US companies. Demand drives up price, so off we go…the bulls are running hard!! Oh yeah, back then, we still made stuff! We proudly said “Buy American” and we did it. It was later in the 90’s that the US stock market growth began to skew corporations to look more toward shareholder returns and overrode employee loyalty. Back in that time, the rule on investing internationally was “never invest in a country whose food you would not eat”. China and India were still third world countries…not the global economic engines that they are today.

    Enter the dot com era of the late 90’s. Computers had replaced thousands of workers. Exporting the manufacture of consumer goods to the Far East and other countries that provided cheap labor replaced thousands more. Initial Public Offerings (IPO) of technology driven companies were happening hourly and even though many never had a dollar of earnings, public demand for them drove their prices through the stratosphere. Even a chat room went public…how does that happen? Well, easy dot com…easy dot go…

    Alan Greenspan, who was the head of the Federal Reserve…the overseer of US monetary policy…said very clearly “The market is showing signs of irrational exuberance”…meaning it’s still going up and I don’t know why!!! So in March 2000, after we survived the millennium scare at New Years, BOOM…We enter the start of our current bear market in March 2000. Tech companies tank…corporate spinoffs with no sustainable growth model goes down with them…bubble burst big time!

    The running joke around Nashville was that if you compared buying $1000 of Northern Telecom stock to buying $1000 of Anheuser-Busch…the beer, not the stock…drank the beer and recycled the cans…the profit of the recycled cans would have been worth more than the NORTEL stock. Moral of the story…don’t invest…drink responsibly and recycle. (As Larry the Cable Guy says, “That’s funny right there, I don’t care who you are!)

    Enter 2010. President Obama has passed what looks like the first of several new laws that sound a lot like socialized healthcare. Income taxes are going up in 2011. The first of what people think will be several going forward. George Steinbrenner, the owner of the New York Yankees, died recently with a $1.1 billion estate (that’s $1,100,000,000.00) and paid ZERO in Federal Estate taxes because the government couldn’t make up their mind about what to do with estate tax laws because they were so wrapped up in healthcare. Almost all of my investment managers that I look to regularly for true unbiased advice are negative about the next 3-6 months. Some are surprisingly neutral, and only one is optimistic, but they are a globally biased money manager and they still see opportunities on the planet.

    For the last 10 years, for “staying the course” for doing what you didn’t do the last time the market tanked and you might have actually stayed the course and didn’t disinvest into cash…for all of those sleepless nights, you were rewarded with a negative return of .2%. 2008 was a reality check for everyone as we had seen 10-20% volatility in the markets…but 40-50%? That’s a hard pill to swallow. So what have investors done since then? Well, if stocks don’t work, then bonds must right? So we’ve seen a huge shift of new dollars into bond funds…80% of all new dollars going into bond funds to be exact in 2009 and year to date 2010.

    So, let’s see…instead of risking dollars in stock funds, people flock to the false sense of safety in bond funds. Per Peter Lynch, the creator of the Fidelity Magellan fund, bond funds can be more volatile than stock funds because they don’t have the upside potential of stocks. For a true stock fund manager, bond funds are designed to do one primary thing: reduce the overall volatility of the portfolio…period. They serve no purpose other than that to an equity minded investment manager.

    Bonds, however, do have the downside issues with interest rate risk. With interest rates at historical lows, and with US government debt at an historical high, if the government increases bond yields to meet the demand of those that buy our debt…namely BRIC countries (Brazil, Russia, India, China)…if they increase the interest rates on newly issued bonds to entice the purchasing of US debt, then existing bond funds with lower yields will decline drastically. Guess what…another bubble yet to burst! So…how are you feeling so far?

    So let’s talk about my new favorite investment metaphor “SAILING & ROWING”. Here’s the simple truth. If we are back in the years of 1982-1999, the winds of fortune were blowing. The bull market was running. If you were fully invested then, you were using a “SAILING” strategy of investing. The winds blow…you’ve got a full sail, and your account goes up…simple. Just like the phrase “a rising tide floats all boats”…a strong wind blows all sails. Regardless of asset class, large vs small, growth vs value, domestic vs international…it didn’t matter…the prevailing winds blew your stock mutual funds went up.

    How about the last decade from 2000-2010? Those winds weren’t blowing…in some years like 2008, the unforeseen headwinds blew you backwards 40-50%. Sure, you might have had a year like 2007 where you caught some breeze, but it was fleeting. All the momentum you thought you had going into 2008 quickly dissipated. If you are participating in a company retirement plan, 401(k) or 403(b), IRA, or a 529 college savings plan…you are in a sailing strategy...PERIOD. Even if you are in a bond fund, given the current climate, you are in a sailing strategy. Your only alternative to this is disinvesting into cash…and logically you know this is not a viable strategy…but trillions of dollars are disinvested there right now.

    One of the problems with SAILING strategies begins with the way that their fund managers are compensated. If I am managing a large cap US stock fund, my performance is measured against my benchmark, which is normally the S & P 500 index. So if I can outperform my benchmark, then my picture will be on the cover of Money, Kiplinger’s, and Fortune magazines, and we will then have a huge inflow of new dollars chasing those returns…oh, I’ll get a big bonus for taking more risk with your money…but then again, you gave it to my fund to reduce your volatility and diversify your portfolio, didn’t you? How does that statement make you feel?

    Enter “ROWING” strategies. Those money managers I mentioned earlier that I rely on for viable non-sensationalistic and logical information understand this. They tell me that we might be on the backside of this Bear market…that’s encouraging…but it still means that we could be in it for another 8-10 years as from their vantage point; they do not see any positive economic indicators that tell them otherwise.

    What are ROWING strategies? What do you do when you have to move your money forward regardless of market conditions? If there are no winds of fortune for you, you have to have oars in the water. I call this an “Absolute Return” strategy. Bonds won’t do this. Cash and Money Markets will not do this either…they may not lose money, but in this economic climate of all time lows, bank savings accounts, CD’s, and money markets aren’t even coming close to even equaling inflation…which at present, is lower than its historical average of 3%.

    A great example of an Absolute Return strategy that is very accessible to you is the cash value account inside an ordinary dividend paying whole life insurance plan. The dividends are subject to change on an annual basis, but the minimum guarantee on the cash in the contract is 4% and it’s also guaranteed to never go down. There you have it…a perfect example of something of which you’re probably very desirous…but you wouldn’t want that would you? Those financial entertainers who are always 100% correct think that is a horrible place to put money!

    Where are ROWING strategies needed; where money is on the sideline for a future use, such as operating capital for a business owner, for college planning where the student is less than 5-7 years away, for diversification against a Bear market with no end in sight, for people who are either close to retirement or who are in retirement who need their assets to keep up with and possibly exceed the cost of living for seniors.

    It sounds fairly simple, doesn’t it? However it’s not. ROWING strategies require considerable skill and work in search of value. Unlike SAILING strategy managers, ROWING strategy managers manage to a different benchmark. They manage to a “zero loss objective”. Simply put, they “win by not losing”. If they don’t lose money, then they are more likely to earn their bonus. You might think you are doing this yourself by not being invested at all…choosing to keep your assets in money markets and cash. Well, these managers are “winning by not losing”…you are “losing by not playing”.

    So let’s recap. Stocks are not the place to be for the foreseeable future…long term, yes, as we will see another Bull market…short to intermediate term, probably not so good. The stability of the US economy has become a servant to the new global powers of China & India. Bonds aren’t much more attractive. Interest rates are at historical lows, and any increases will cause a huge drop in existing bond prices and account values. Money market and savings account yields are virtually non-existent. Income taxes have nowhere to go but up given government spending and a deficit increasing by the second.

    Most of what you are exposed to in the media might not be in your best interests. Financial entertainers are just that…and most of their information is, and has been horribly wrong. SAILING strategies might sound good, but will not work in a secular Bear market. ROWING or Absolute Return strategies are available to you, but not through normal channels…not just any advisor or advisory firm can offer them.

    However, it just so happens that I not only can offer them, but can tailor them to your specific economic desires. As I always leave each writing, I would love to learn more about you, your family, your wishes, dreams, wants, desires, values, and everything that you are saving your hard earned money for. If you wish to learn more about me and my practice here at Peachtree Planning of TN, please hit the contact button on this page, or call me directly at 615.506.0300. I’m betting that Starbucks latte that you won’t…but maybe it’s time to prove me wrong.

 

Regards,

Brian

Brian_Carden@PeachtreePlanning.com

Copyright, 2010, Brian E. Carden

Posted by Brian Carden at 01:10:14 PM in Financial

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