Account Updates

The high yield bond funds (junk bonds they are sometimes called) we bought in our Flexible Income* and Balanced* accounts in March have been performing wonderfully since we bought them.  Wonderfully is a not-so-technical term that includes collecting a 9% dividend plus a share price increase.

Junk, despite its terrible name, trends very smoothly, so when they turn up they go up in a nice smooth ride, unlike stocks which can be a wild ride in either direction.  And that is precisely what is happening, a nice low volatility uptrend. 

Our Careful Growth* accounts also are performing well, with big gains so far in April putting us within a whisker of being positive for the year.

I occasionally have clients ask why I don’t get more specific in my comments on account activity, so let me tell you.

First of all, clients with the same strategy will often have different performance numbers for a variety of reasons.  Accounts can have different securities for the same type of investment.  Larger accounts use more exchange traded funds (ETFs) which have low expenses, but which incur a $17.95 transaction charge for the buy and the sell. 

Smaller accounts whose smaller holding size is impacted more by transaction charges will see greater use of no-load, no transaction fee mutual funds, especially in times of rapid turnover of investments like the past year or two.  The ETF and the mutual fund may have similar objectives but may have different methods of pursuing that objective and therefore produce different results.  For that reason, one single performance number rarely fits all accounts.

Also, many clients have differing cash levels in their accounts than the “model portfolio” has.  Some clients ask me to hold a legacy stock in their account along with the money I actively manage.  Both of these factors change actual account performance from the model.  And the way I track performance in the model account, which assumes a constant $100,000 investment may produce slightly different results than an actual account of similar size.  For instance, if the model invests ¼ into 4 different investments, one being the XYZ fund, that is a $25,000 investment in XYZ.  If XYZ gains 20% by growing to $30,000 and is sold and reinvested into ABC the ABC investment will be calculated to be only $25,000 because the model holds ¼ of its constant $100,000 in each category.  In your account the reinvestment in ABC would be $30,000, or if only $25,000 of the sale proceeds was reinvested, the extra $5,000 now held in cash begins to skew the percentages in all investments slightly away from the model.

I apologize if that is a bit complicated, but the reality of each of your accounts is slightly different from the “model” I have created to track things uniformly.  There is no perfect system when accounts involved may be dissimilar.

What’s coming up?

I am heading to Denver at the end of this week to preside over the Uncommon Knowledge conference of the National Association of Active Investment Mangers (NAAIM), my last act as president of the organization for the last year.

NAAIM is a group of about 150 independent registered investment advisers that collectively manage over $14 billion, and all have one thing in common.  A belief that buy and hold only works half the time, and wise investors have a plan B. 

NAAIM members are mostly entrepreneurs, very creative, and usually really bright.  One newcomer called us a roomful of throbbing brains, and several large mutual fund complexes use us as an incubator for ideas.  I think NAAIM is the most stimulating group I have ever belonged to. 

It has been a privilege to serve.  Although I turn over the gavel, I will continue to stay active in NAAIM as chairman of the board.

Gold and Inflation Update

The price of gold has been widely expected to rise strongly as we watch the government print money, but it is not.  Gold is down over 10% from its all time high a year ago and has established a clear downtrend since its recent high in February.  

Right now gold is acting exactly as it is expected.  Gold is pretty to look at, but relatively useless except as a store of value in uncertain times.  People buy it knowing that in rough times gold can always be sold for something.  Right now we are seeing tough times, and gold is being sold in larger amounts than a year ago depressing the price.

The potential for inflation rises with every new dollar the government prints, but the US Bureau of Labor Statistics reports that the first quarter of 2009 saw an annualized inflation rate of just 2.2%, with the last 12 months being a minus 4/10th percent.

During my career I have learned that when I expect something to happen, like a rise in inflation or the price of gold, and it doesn’t happen, I can choose to do one of two things.  One would be to insist that the market is wrong in not recognizing my brilliant deduction, but must soon come around and I can make a killing by holding my ground.  This brings to mind the old adage that the market can remain irrational longer than you can remain solvent.

The other alternative is to get my ego out of the way and acknowledge that something is unfolding and affecting things in ways that are not yet evident.  Something is holding both gold and inflation in check at the moment.  We may not know what that force is, but we can surely see that IS.  To deny what IS causes more losses than anything else I can think of in investing. 

I am concerned about inflation down the road, but that is not something to be concerned about now.

I Appreciate Your Referrals

I have enjoyed a steady stream of new clients so far this year, and many come from your referrals.  I deeply appreciate the confidence your referrals show in my work.

Last year, business was so good, that my staff and I seriously discussed the possibility of no longer accepting new clients.  However, instead, we made some changes over the past 6 months that have increased our capacity so that we can continue to smoothly integrate new clients into our processes for a while longer. 

If you know of someone who has had a rough time in the markets, and doesn’t quite know what to do, now is the time to get them in to see me, not later when we may have stopped accepting new clients.   Call the office at 778-4000 to set up an initial consultation.  It is free.

As an icebreaker, forward this newsletter to them.  Subscriptions to Money Matters have also been growing fast, and has become the preferred way to introduce friends to my services.  I don’t Twitter, blog, do Facebook or MySpace, but I do have a great email newsletter, and it’s free, too.

*    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.