July 19, 2011
Too Much News Can Make You Crazy
The Investment View from Prescott, Arizona
If you are concerned about the future of our country, or at least its economy, join the club. You've got a lot of company.
With the high-level game of chicken going on in Washington over the debt limit, most of the country has the jitters. Add in all the other scary news items, and it is easy to be worried.
Thinking back to 1987, the year I came to work in Prescott, I remember several clients who were frozen with fear over the Oliver North testimony about the Iran/Contra affair. They were sure the country would collapse with a constitutional crisis.
Then there was the stock market crash of 1987 - a 23% loss in one day - that scared folks away from investing. Saddam Hussein shocked the world when he invaded Kuwait in 1990 (with the 6th largest Army in the world at the time), starting the Persian Gulf War. During the 1990s we had a collapse in the Peso, the Ruble, as well as the "Asian Contagion" as those markets collapsed.
Each of these things made observers worry that the world as we knew it, or at least the economy as we knew it, was coming to an end.
But, none of those events came close to causing 50% drops in the stock markets like the bursting tech bubble combined with 9-11 did, or the mortgage bond crisis in 2008. And I haven't even mentioned the Junk bond scandals that brought down hundreds of Savings and Loans in the early 1990s, Bankruptcy in Orange County, terrorist bombings in London subways, Spain, Mumbai, Bali and other places.
My point is that the problems today are certainly different from any we have faced as a nation or a world, but I really don't think they are worse. After all, what could be worse than the specter of immanent nuclear war that we lived with while staring down the Soviet Union for 40 years.
I have guided my clients through all of those crises without any major mishaps, and I am confident that I can continue doing that for you. After all, the current debt limit debate is just a political issue which can be solved with a political solution. And it will be.
Never forget that anyone who has ever bet against the future of the United States has been wrong.
The in-your-face nature of the 24-hour news coverage by ratings-hungry media outlets makes current issues hard to ignore. This is easy to get excited about, especially when they are laced with opinions that are presented as fact, and have more shock value than accuracy.
That is why I never turn on the sound on the financial news station at the office. Too much of that "stuff" can make you crazy.
It is not easy to get used to the idea that there is no investment that works well all the time. Even fixed dollar investments like CDs and annuities have risk. You might get your dollars back but what if those same dollars buy less than when you invested. That is a loss in value. You have the dollars, but can't do as much with them.
Let's say you have a gasoline budget. With gas prices at $2 a gallon, where they were a couple of years ago, you can buy a year's supply of gas for $1,000, so you set aside that amount. But if gas jumps to $4 your $1,000 will run out before the middle of summer. You have $1,000 worth of gas alright, but you still can't continue to drive.
Inflation works against all "guaranteed" investments in that manner. Your fixed dollar investment might return your original $100,000 dollars, but you just can't buy as much with it. That loss from "inflation risk" is just as real as a stock market loss.
The best protection you can have in a market like we are in now is flexibility, because every six months the whole set of problems seem to change. Many investments lock you in for a period of time, but who knows what the situation will be in 6 months or a year, and this is why I only invest your money in things that can be cashed out in minutes.
The $64,000 question is what happens to our money (I say "our" because most of my money is invested the same way yours is) if the whole world collapses around us? If we get to the point where the most valuable currency becomes canned goods and bullets, I'll be happy to cash you out so you can buy some.
Between now and then, however, I believe the best protection you can have is to keep your money in a flexible plan that systematically moves your money out of areas in trouble and into investments that benefit from the current situation. That is what I do for you over and over, so you don't have to worry about your money.
And, if the shares of bullet manufacturers and canned goods begin to soar, I'll let you know.
However, if Elvis really dies . . .
A Slice of Life
The battleship USS Missouri was the flagship of the US Pacific Fleet, and was the site of the surrender ceremony in Tokyo Bay that marked the end of WWII in the Pacific. Right now, the Missouri is anchored in Pearl Harbor, maintaining a vigil next to the USS Arizona Memorial. The Missouri's big guns, each barrel weighing more than the space shuttle, have been silent for a long time.
But the USS Missouri was not quiet at all on the evening of July 4th. My wife Cathleen, and the Angelorum Choir she is part of, was invited to join a big 4th of July celebration on the deck of the USS Missouri.
This world renowned choir from Yavapai College has been together for 13 years and sadly conducted its final performance in the 2500 seat Blaisdell Auditorium in downtown Honolulu. College budget cuts have brought an end to an era.
It was a great show, great memories, and a fun trip.
I'm sorry, but the only video I have right now is this short promo clip Angelorum did on Honolulu TV. Cathy is in the front row, center, in case you'd like to watch it.
How's The Market Doing?
The market had a nice rally between June 24th and July 7th but, as of this writing on July 17th, the market has already given back much of those gains.
We were not very invested in stocks during the run up because my work showed we were in a very high risk environment and I avoid investing when risk is very high.
Those that did invest in stocks during that time were paid well for taking that risk - for about 8 trading days at least. Then the risk manifested itself and the giving back phase set in.
The S&P 500** stock index is in a sideways "trading range", yo-yoing up and down but not being able to establish either new highs or new lows. This means, that at the moment, there is no clear uptrend or clear downtrend beyond the short term (days to weeks) gyrations. But the overall mood feels negative.
I expect a compromise over the debt ceiling debate to elicit a great sigh of relief after all the loud headlines about it lately, but we continue to remain in a high risk environment that warrants caution from investors.
We are in the traditionally weaker period of the year, and QE II is now over. A look at stock market performance in the weeks and months after the three previous times the Federal Reserve stopped injecting money into the economy is not encouraging at all for stock investors. Another reason to be cautious.
Q: Runs over fields and woods all day.
Sits under the bed at night but not alone,
With long tongue hanging out, waiting for a bone.
A: A Shoe
Does Your Group Need a Speaker?
A number of national media outlets know me as someone they can count on to have timely comments on the market and investment topics.
If your community group or investment club would like to have a speaker for a meeting, just let me know. I can present on a number of topics, and would be happy to do so. Often I can present on short notice if your group finds itself in a bind.
Just call the office at 778-4000. Any of my staff can schedule me. Or just pass this note along to your group's program chairperson.
What's Going On In Your Portfolio?
The high risk nature of the stock market kept our Careful Growth* strategies from jumping into the market rally in late June and the first few days of July. We missed those gains, but we also missed the losses that stock investors suffered last week when one of the worst weekly returns in a long time was posted.
Careful Growth* has a light 25% exposure to the stock market right now with a 25% holding in gold, some government guaranteed mortgage backed bonds, and a hedged mutual fund making up the balance of the holdings there.
Our Flexible Income* accounts have bounced back from a couple of small losses in May and June when a weak gold market held us back but is garnering nice gains so far this month. Gold, which represents about 25% of this model is at all time highs. The currency portion of this portfolio is in cash at the moment with high yield bond funds making up the bulk of our holdings.
When you opened your accounts with me, you told me the risk that you wanted to take (or avoid), which led to your choice of investment strategies. Flexible Income*, which avoids growth stocks, is the lowest risk strategy I offer. Careful Growth* is the highest, and Balanced* is in the middle, using a mix of growth and income.
After your initial strategy selection, I take care of everything for you, making changes to the investments used within each strategy. But I cannot move you from one strategy to another without your OK because that selection defines how much risk I take for you, and only you can determine that.
As odd as this sounds, Flexible Income*, my lowest risk strategy, continues to be our best performer. In lousy markets for stocks like we have seen for over 11 years, conservative investments often work the best. The S&P 500** Index is still 8.85% below where it was on October 9, 2007 according to the FastTrack database. With the average stock down that much, it makes successful stock investing much more difficult, and I don't expect that to change for a while.
So, if you have Careful Growth* or Balanced* strategies in your accounts and would like more consistency, and perhaps even better returns by using lower risk strategies for a while, please call the office and let me know. Making that change is easy, but you have to request it.
Our Spotlight Strategy
The FLEXIBLE INCOME STRATEGY seeks high total return consistent with preservation of capital.
* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.
** The S&P 500 and Nasdaq Indexes are unmanaged lists of stocks considered representative of the broad stock market. Investors cannot invest directly in the S&P 500 Index.
This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.