avoid getting lured in by false investment performance claims

I grew up with two grandfathers who loved to fish.  From a very early age, I learned not only how to bait a hook but also how to craft a story around that hook.

You know the kind: Man, the fish I caught and released was *THAT* big.

Every bit as important as what actually occurred on the boat was the story that followed.  As a first-hand participant in the investment community, I understand now that the investment community has its own form of fish-y story.

Joshua Brown’s got quite an interesting post today on his blog, The Reformed Broker.  The Interview with Johnny Upside is a parody of hedge-fund types, claiming to always be ahead of the game, positioned perfectly to make a mint.  When backed into a corner, it’s clear that investors are only getting part of the story.

Well, you’ll say, what about their marketing materials?  They say that they’re up X%.   While not outright lying, funds conduct performance smoothing, taking returns and sprucing them up by comparing them to favorable benchmarks or specific to particular entrance dates into the fund.

While not outright lying, funds do good marketing by trying to make their performance look as good as possible. As Bernie Madoff has taught everyone, sometimes too good of a story turns out to smell like fish.

So, how does one avoid getting lured into investing with someone too-good to be true?  I think answering this question requires framing the problem: how does an investor truly size up performance of a fund manager? Can you really believe performance quoted by managers?

Couple things:

1. Investor communities create better visibility.  Investment newsletters are great at giving selective performance numbers.  They aren’t audited and they typically claim that they’ve made 3000% on a trade (without saying how all their trades have panned out — check out Stock Gumshoe to dig deeper on newsletter teasers).  Companies like Covestor (read here for more coverage of Covestor) are comprised of communities of investors submitting their trading to real-time auditing for performance. Performance and metrics are completely above board and when looking at a manager, what you see is what you get. If all funds participated in investor communities, we could have avoided a Madoff-like scandal.
2. Broker performance is by nature hard to quantify.  Any advisor who creates personalized portfolios doesn’t have an all-encompassing performance metric to tell you how good his advice is.  So, it’s difficult to really assess performance.   Instead,

• • Ask how his best clients have done
  • Ask how his worst clients have done
  • Ask if new accounts are coming in
  • Ask if people are pulling their money

Do some extra homework when looking at performance to ascertain whether performance is as good as it looks or just another tall tale.

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Avoid the big fish story from a financial advisor

One of the first things you need to do is build a “recession proof” portfolio. This begins with focusing your investments on the things people have to buy. For instance, no matter how difficult the financial markets get, people will have to buy food, pay to heat their homes, and buy basic toiletry necessities. The companies that provide these kinds of services or products are the ones you need to have in your portfolio. You can mix in some other more risky investments, but these “safe” stocks, known as “consumer staple stocks,” are the backbone of a recession proof portfolio.

Another trick to protecting your portfolio during difficult financial times is investing in companies that do not have much debt. Also, you need to keep your own personal finances as free from debt as possible. Companies and individuals who do not have tremendous amounts of debt can pull in and weather just about any financial storm.

If you fear a recession looming, make sure your portfolio and other investments are balanced. In other words, make sure that you invest in a variety of assets, including stocks, bonds, and mutual funds, but also non-traditional investments, such as gold or real estate. This means that you will still be afloat if one branch of your investments suffers.

One temptation to avoid is the temptation to bail on your investments. While a recession will make it appear that you are losing tremendous amounts of money, stick with your investments. Remember, the market may recover. Even after the Great Depression in the early 1900s, the market did, eventually, recover. Unless you are facing retirement very soon, keep your money in the markets, choose low-risk investments for a while, but avoid the temptation to sell everything and hold onto the cash. Cash cannot grow, so be patient and wait for the market to improve.

With these tips, you can build and manage a portfolio that can weather most financial storms. Remember, no investment is guaranteed, so build a diverse portfolio and stick with it in difficult times. You are likely to come out a winner if you do.

Denise Bergeron writes articles for single moms in need of financial help and advice.  You can visit her site at www.singlemomfinancialhelp.com  for additional information on education, career and business issues, home matters, relationships and education.

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Managing a Stock Portfolio During a Recession

In this scenario, one of the questions that I am most frequently asked is, “How do I make my money back?” My answer to this question is simple - don’t try to make your money back. If you try, chances are that you are going to take unnecessary risks and end up losing even more money. For this reason, the best advice may not be something that many investors want to hear. It is probably better to forget about the past and concentrate on the future. While the markets are getting hammered, stocks are selling at a discount. Although no one can predict when the market will hit bottom, buying at a 40% off discount is something that rarely happens.

Asset Allocation

Creating your asset allocation, or the mix of stocks, bonds and cash in your portfolio, is the single most important task that an investor has to face. Many studies have shown that the proportion of stocks, bonds and cash held in a portfolio has a greater effect on its returns and volatility than the individual investments that are chosen.

That is why after assessing one’s investment goals, it’s of the utmost importance to create an allocation that can help you achieve the aforementioned goals. Once you have fixed your asset allocation, you can start considering what to buy. “Be greedy when others are fearful,” is one of investor extraordinaire Warren Buffet’s favorite sayings. Many economists believe that the United States is in the midst of a recession. While this does not sound good, there may be a silver lining for investors. Though you need to always remember that past performance is no guarantee of future returns, consider this: According to a report in Smart Money, “Stocks tend to rebound before the economy does. Over the past nine recessions, the S&P 500 has gained an average 13% during the second half of the downturns and another 13% the year after they ended. Even during the Great Depression, the S&P rose 33% from the market’s trough to the end of the recession. And while it’s folly to try to predict a bottom, with the market down 40% from its 2007 high, it may not be far away.”

Buy Low/Sell High

During more stable times, clients ask me which stocks I think may have big upside potential. Usually, they are looking for small companies that have the potential to move up rapidly. I like to refer to this as “being a hero.” These clients expect me to wade through loads of information to pick out a company that no one has ever heard of. (Whether that is realistic or not is for another column!) In today’s climate, however, there is no need to be a hero. It is not necessary to speculate on risky companies. It is enough to look at large companies that continue to pay or even raise their dividends as a place to start. These are usually companies that make products that we all use in our day-to-day lives. For example, come what may, consumers are still going to use shampoo, toothpaste, soap, and other necessities.  Obviously there is no guarantee that your money will be doubled within the next week. But if you have a long-term investment horizon and you can withstand continued volatility, then investing in stocks now will have the potential to reward you in the future and help you rebuild some of the wealth that you have lost.

With the current market volatility, it is worthwhile speaking with your financial adviser to make sure that your portfolio is well designed with your financial goals in mind. Then, if your financial plan allows for it, have a talk about trying to take advantage of a once-in-a-lifetime opportunity.

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Rebuilding Your Wealth

Case in point, take the dramatic fall of one of Wall Street’s alleged top brokers Bernard Madoff who, as we have recently learned, bilked billions from countless ultra net worth (and supposedly highly sophisticated) investors through an intricate, multi billion dollar Ponzi scheme–one of the biggest cases of securities fraud in modern history!

(From the Wall Street Journal on December 12, 2008)

“Mr. Madoff’s asset-management business appealed to investors for its remarkably steady returns for investing in the stock market. His investors consistently enjoyed small monthly gains, usually between zero and 2%. Mr. Madoff told investors his strategy was to trade in and out of large-cap stocks and buy options on those shares to help smooth the ups and downs. When he failed to see opportunities in the market, he would shift to U.S. Treasuries, according to fund marketing documents and people familiar with his strategy.”

“Mr. Madoff’s Fairfield Sentry Ltd., a hedge fund run by Madoff Investment Services to invest in shares in the S&P 100, claimed to be up 5.6% through the end of November, a period when the Standard & Poor’s 500-stock index was down 37.65%. In October, Fairfield Sentry was said to be down 0.06%, a month when the S&P 500 lost 16.8%. Since its inception in December 1990, the fund averaged a 10.5% annual return, according to fund documents.”

“Bernie Madoff’s returns aren’t real and if they are real, then they would almost certainly have been generated by front-running customer order flow from the broker-dealer arm of Madoff Investment Securities LLC,” Mr. Markopolos wrote to the SEC in November 2005.The SEC declined to comment on the matter.”

As a financial advisor, please heed my suggestion–never do business with a financial professional who does not separate the custody function from the advice function. More importantly, if you do not know what the advisor is buying on your behalf, find out. This lack of transparency, or “black box model” of investing is one my biggest reservations about investing in hedge funds. I suspect that many investors are going to start asking many more questions of their managers and might be much less tolerant of black box managers in the future.

The WSJ article continued to say:

“Mr. Madoff’s investors described their shock and panic on Thursday. Susan Leavitt of Tampa Bay, Fla., said she had several million dollars of inherited money invested in the firm and added $500,000 earlier this year. A stay-at-home mother with two children, the 46-year-old Ms. Leavitt says she is considering going back to work. “That was my nest egg for the children, and my future. I’ll never see much back, I’m sure,” she said. Ms. Leavitt said she recently discussed her investment with a friend who told her he was suspicious about the firm’s ability to generate such profits amid the economic crisis. “I thought, ‘He’s probably just jealous,’ ” said Ms. Leavitt. “We’ve been with [Mr. Madoff] for 15 years, and it’s grown every year at 10%.”

I’ll close this entry just as I started it:

If it sounds too good to be true, it probably is!

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

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If It Sounds To Good To Be True, It Probably Is

Diversify
To understand this concept more easily, we first need to define the meaning of diversification. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment. Diversification tries to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. It’s important to remember that diversification does not assure against a loss.

If you include bonds or FDIC-insured Certificates of Deposit (CDs) in your stock portfolio, it may take away some of the volatility of the portfolio, allowing for potentially, more stable returns over the long run.

Don’t Panic
Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down, and if you made a financial plan, it would have taken this type of market volatility into account. The worst thing you can do as an investor is panic and sell everything and then wait for the market to recover. The market tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance. Remember the famous investing principle of buying low and selling high. Investors who panic often end up selling low.

Rebalance
The third principle is for investors to update or rebalance their investment portfolios. Rebalancing is necessary for two main reasons. First of all, it keeps your asset allocation in line with your risk level and, secondly, it keeps your portfolio in line with both your short- and long-term goals and needs.

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3 Tips on Investing During Tough Markets

* Lower gas prices

In a time where already cash strapped consumers are witnessing the evaporation of their retirement accounts and house values, a little relief at the pump will be a welcome change. Gas prices have tumbled from their July highs of $4.11 a gallon down to just under $3 in many U.S. cities, due in large part to shrinking global demand. A happy by-product of this is the negative financial impact it will have on psycho oil-rich dictators like Chavez (Venezuela) and Ahmadinejad (Iran) who are now scrambling to restructure national budget obligations. Sorry boys….looks like the energy orgy is over and it’s time to sober up. I guess this might put a damper on their record of “checkbook diplomacy”, in their efforts to sway leftist or anti-West support in cash poor, vulnerable nations.

*Global warming will slow down

Okay, so I don’t have any scientific evidence to support this claim. But, I figure, if there’s less global demand for oil (and that includes oil guzzling China), then there’s less driving/flying/manufacturing, which means less carbon emissions, which means some slight relief for the ozone layer. Well….at least we can hope, right?

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

* Responsible bank lending

The days of easy credit are officially over. And while this is bad for some consumers, it’s the responsible thing for banks to do (not only for their balance sheets but for the economy as a whole). If there’s anything that we’ve learned from the sub-prime debacle, is that responsible lending is a critical component for a sound economy. Banks are reverting to their old ways…that is, prudent lending practices that were prevalent before the housing frenzy spiraled out of control. Borrowers will actually have to be credit worthy (gasp!) and will be forced to save for down payments in order to buy a home (gasp, gasp).

*Americans will FINALLY recognize the value in SAVING

It’s no secret, Americans are among the worst savers on the planet and that will come back to bite many of them in the tush right now (and of course in the future). A joint survey conducted by Princeton Survey Research Associates International for the National Foundation for Credit Counseling and MSN Money, found that Americans are largely unprepared for economic hard times–many don’t even have an emergency fund! I suspect that after we all survive this bitter dose of economic reality, many folks will learn their lessons and give serious consideration to saving for unforseen circumstances (like now) and also for their future. Sometimes it’s the negative experiences that teach us the best lessons and serve as a source of discipline and inspiration in later years

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4 Good Things to Come Out of an Economic Slowdown

This week it’s the Big 3 auto makers from Detroit who have extended their hands, trying to make a grab into big brother’s pocket: Ford, GM and Chrysler. Deciding whether or not to bail out the biggest three auto makers in the U.S. has been a daunting challenge for lawmakers in the lame duck Congress, where the rescue plan is stuck in the Senate after days of deliberations. Even the lame duck President does not want to make any commitments.

(From Yahoo Finance)
“Senate Majority Leader Harry Reid, D-Nev., canceled plans Wednesday for a vote on a bill to carve $25 billion in new auto industry loans out of the $700 billion Wall Street rescue fund. The Bush administration and congressional Republicans have rejected Democrats’ plan to dip into that pot of money. Warning of economic disaster, a bipartisan group of senators from auto industry states are trying to reach a deal on an alternative package. If an agreement can be reached, Reid said, the Senate still could vote on it as part of a measure to extend jobless benefits.”

All three CEO’s from the respective companies painted a grim picture of their financial position, despite having flown in to the two day hearings on their private corporate jets and expensive suits. Their claim, “Detroit’s automakers, hurt by a sharp drop in sales and a nearly frozen credit market, burned through nearly $18 billion in cash reserves during the last quarter, and GM and Chrysler both said they could collapse in weeks.”

The proposed legislation, now on life support, calls for the U.S. government to extend a 10 year, $25 billion loan to the companies. But, it is unclear where the government would lie in the pecking order of creditors the companies already have (ie. in case of default).

Frankly, the capitalist in me thinks they deserve to fail, as heartless as that sounds. Any MBA student from a reasonably reputable college understands the importance of maintaining a nimble corporate strategy and competitive advantage. Where have these smart guys been the last ten years as the Japanese automakers little by little encroached on their market? They lagged in innovation, technology and pricing. The albatross around their neck, the union known as the UAW (united auto workers), has systematically made their costs of production, labor, etc. unreasonably high in an increasingly competitive global marketplace. Something had to give. Either you make better cars, invest in fuel efficiency or cut your prices….otherwise, you are toast! Fast forward to today, when Americans have cut back on spending, banks have stopped lending as vigorously and consumer demand just dropped off a cliff. America cannot keep subsidizing companies whose leaders are blatantly incompetent, stupid or just plain greedy (or some combination thereof).

Now, I’m very sorry about the prospects of 1 to 3 million innocent people losing their jobs and potentially experiencing pension defaults. The impact could spell considerable discomfort in the short term to the economy and the financial markets. But, a bailout of these companies is not justified. Who’s next….the airlines, the farmers, the mid sized manufacturer in the industrial parks of Hialeah Florida, the corner flower shop? Give me a break!! As far as I’m concerned….farewell big 3…pigs get slaughtered and now it’s your turn to go. Good luck in Bankruptcy court.

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To Bail or Not to Bail…That is The Question

This is a side to side comparison of two of the best online financial sites: Yahoo Finance and Google Finance.  Yahoo is still the largest and most popular finance site by far but Google is serious about finance.  Let’s see how the two financial portals stack up against each other.

Speed

Google Finance: Typical fast-loading Google pages.  Google’s site is broad and doesn’t go deep.  Pages for individual stocks are only 1 page deep (Google links out for things like option chains, major holder, etc.)

Yahoo Finance: Yahoo Finance is fast.  As opposed to Google, Yahoo content resides primarily on Yahoo pages and Yahoo is responsible for page load speed throughout the site.  This can fluctuate as any large website can throughout the day.

Charting

Google Finance: Google primarily uses a simple javascript-loaded chart without any bling.  It loads fast and allows easy to manipulate x-axis (time period).  When you’re figuring out what a particular stocks has done over the past 17 days, the chart also calculates the return for a given time frame beyond the standard 1-day, 5-day, 3 month, etc. time period.  Google also plots news events onto their charts which is kind of cool (not necessarily tradeable).

Yahoo Finance: Yahoo Finance charts are much more robust.  Advanced charts have incorporated a similar charting function like Google’s and provides an overlay of numerous technical indicators (MACD, RSI).  Because these charts are so powerful, they also tend to be bulky and seize up.

Real Time Quotes

Google Finance: Google provides real time quotes both during market hours and pre- and post- market.  Google’s quotes on market indices tend to skew erratically during the transition to an open market as well as trails when the market makes large moves to the upside or downside.

Yahoo Finance: Yahoo also provides real time quotes both during market hours and off.  Yahoo’s premarket quotes are not as reliable as Google’s.  Yahoo occasionally doesn’t have a price premarket for a wide array of stocks.  Yahoo has a scrolling ticker as well for stocks that is personalized to the behavior of the user.

Breadth

Google Finance: Google gives basic info all on one page.  Anything more a user needs to link off.  News, financial info, blogs all included.  Very shallow, quick and dirty use.  Google does a good job bringing in blog content but lacks good, standardized PR content, still necessary in the research process.

Yahoo Finance: Yahoo provides an entire research environment.  All the content and data is supplied by Yahoo.  From major holders to options chains to blogs and PR, Yahoo is a virtual poor man’s Bloomberg.

Innovation

Google Finance: Google allows users to download data, making the site more portable than we’ve traditionally seen.  Google portrays the data environment well around a stock.  Beyond that, nothing particularly innovative about what Google’s done so far.
Yahoo Finance: Yahoo Finance is the 800lb gorilla and essentially helped to democratize financial information.  Yahoo has done a good job bringing in financial blogs in a controlled environment, using SeekingAlpha to help filter.  Charts are very powerful.  Not too much current innovation going on either on the surface.

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Investing 101: Should you use Google or Yahoo?

Recessions are inevitable, so it is only sound financial advice to tell you to plan ahead for them, even if you are currently experiencing a time of economic prosperity. If you are in a recession, there are steps you can take to keep it from impacting you too much.

The most dangerous thing that happens in a recession is job loss. As the economy slows down, people slow down their spending, and businesses suffer. This forces them to lay off workers, and those workers are the ones that suffer the most during a recession and most likely need financial help.

The best way to protect yourself from this possibility is to lay up some cash reserves. Economists recommend having three to six months worth of living expenses saved. This takes time, but you need to start working towards this goal in your financial planning.

Another danger of a recession is price increases. As companies try to make up for the lack of sales, they are often forced to raise prices. You can combat this by learning to cut coupons, shop sales, and stock up on your necessities when they are at a good price. Also, make sure you are only buying what you need. Save the “extras” for an occasional treat, but learn to tone down your spending habits. A recession is not the time to buy a lot of “extras.”

Finally, whether the economy is good or bad, make sure you do not take on too much debt. Your non-mortgage debt should be as close to zero as possible. If possible, keep your monthly payments that are going towards debt, including your mortgage payment, around 30 percent of your total monthly income. Anything more than this is dangerous, particularly during a recession. Learn to live without using your credit cards, as this is one of the most expensive and dangerous forms of debt.

Getting good financial help and planning through a recession is not as difficult as it might seem. Make sure you are saving your money, and limit your credit spending. Soon you will see the economy swing back toward the positive side, as it always does.

The goal of SingleMomFinancialHelp.com is to help women change the world through information and education. We are creating a support structure through which all women of the world can educate one another about where they have been, where they are right now and where they are going. With help from our site and the information and articles we distribute women will be more educated in finance, business, home matters, relationships, career and higher education.

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Need Financial Help During A Recession?

Now, I have to say, this tip is in the gray area between organizing and cleaning, but since I have several videos that border between organizing tips and other things (crafts, cleaning and interesting stuff) I am going to share this one.

Her dishwasher hadn’t completely drained the last two times she used it. She called the plumber who charged $50.00 just to come to the house. But he didn’t come when he said he would. She read on her sheet to use vinegar in the dishwasher to wash out the pipes. She used a gallon of vinegar without any dishes in it and ran the washer through a cycle. That took care of the problem. Imagine that one little idea saved her over $50.00!

Do you have any money saving organizing tips that we could use? If so, please share.

Marilyn Bohn is an energetic, lively, compassionate, hard working and creative organizer. She was born to organize! Before becoming a professional organizer she worked professionally in diverse environments. She is involved in her community, providing her clients with a broad base of experience and knowledge.  She is a member of the National Association of Professional Organizers (NAPO).

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Organizing Tips Saved $50.00

* Lower gas prices

In a time where already cash strapped consumers are witnessing the evaporation of their retirement accounts and house values, a little relief at the pump will be a welcome change. Gas prices have tumbled from their July highs of $4.11 a gallon down to just under $3 in many U.S. cities, due in large part to shrinking global demand. A happy by-product of this is the negative financial impact it will have on psycho oil-rich dictators like Chavez (Venezuela) and Ahmadinejad (Iran) who are now scrambling to restructure national budget obligations. Sorry boys….looks like the energy orgy is over and it’s time to sober up. I guess this might put a damper on their record of “checkbook diplomacy”, in their efforts to sway leftist or anti-West support in cash poor, vulnerable nations.

*Global warming will slow down

Okay, so I don’t have any scientific evidence to support this claim. But, I figure, if there’s less global demand for oil (and that includes oil guzzling China), then there’s less driving/flying/manufacturing, which means less carbon emissions, which means some slight relief for the ozone layer. Well….at least we can hope, right?

* Responsible bank lending

The days of easy credit are officially over. And while this is bad for some consumers, it’s the responsible thing for banks to do (not only for their balance sheets but for the economy as a whole). If there’s anything that we’ve learned from the sub-prime debacle, is that responsible lending is a critical component for a sound economy. Banks are reverting to their old ways…that is, prudent lending practices that were prevalent before the housing frenzy spiraled out of control. Borrowers will actually have to be credit worthy (gasp!) and will be forced to save for down payments in order to buy a home (gasp, gasp).

*Americans will FINALLY recognize the value in SAVING

It’s no secret, Americans are among the worst savers on the planet and that will come back to bite many of them in the tush right now (and of course in the future). A joint survey conducted by Princeton Survey Research Associates International for the National Foundation for Credit Counseling and MSN Money, found that Americans are largely unprepared for economic hard times–many don’t even have an emergency fund! I suspect that after we all survive this bitter dose of economic reality, many folks will learn their lessons and give serious consideration to saving for unforseen circumstances (like now) and also for their future. Sometimes it’s the negative experiences that teach us the best lessons and serve as a source of discipline and inspiration in later years.

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

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A Silver Lining in the Global Recession?

Here are some great blurbs from today’s Wall Street Journal to give us some perspective:

(Source: Wall Street Journal, Jason Zweig “What History Tells us About the Market“)

“In fact, the market is probably wrong again in its obsession over whether this decline will turn into a cataclysmic collapse. Eugene White, an economics professor at Rutgers University who is an expert on the crash of 1929 and its aftermath, thinks that the only real similarity between today’s climate and the Great Depression is that, once again, “the market is moving on fear, not facts.” As bumbling as its response so far may seem, the government’s actions in 2008 are “way different” from the hands-off mentality of the Hoover administration and the rigid detachment of the Federal Reserve in 1929 through 1932. “Policymakers are making much wiser decisions,” says Prof. White, “and we are moving in the right direction….”

” A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb….This collective stupor may very likely be the last stage before many investors finally let go — the phase of market psychology that veteran traders call “capitulation.” Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.”

I confess…the markets suck right now. But for goodness sake, let’s stop this Depression mindset and get on with life.

Cathy Pareto, MBA, CFP®, AIF® is the Founder and President of Cathy Pareto & Associates, Inc. For over twelve years, Cathy has been helping financial consumers and professionals understand the world of investments and finance with a sound, but down to earth money management approach. For over a decade Cathy was a Senior Financial Advisor for another Miami based investment advisory firm, where she managed over $200 million in assets for high net worth clients and retirement plans. She has extensive experience in retirement issues, asset allocation, investment selection, investment management, education planning, estate planning coordination, and asset protection strategies. Additionally, she was an Adjunct Professor and Faculty Coordinator for the CFP® Program at Florida International University’s College of Business.

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This is NOT the Depression….

This is a very common scenario. Children often refuse to make changes to a portfolio that they have received as an inheritance. Very often, this is due to sentimental reasons. In other cases, investors stick with a losing position for years in the hope that it will return to the original price they paid for it. However, this is not the best approach to investing.

We All Make Mistakes

Sometimes you may have a little extra money at your disposal, and you decide to invest it. Maybe a friend gave you a handy stock tip, or you read about a company that sounded like an interesting prospect. After doing some research, you decide to invest in this company because it seems like an obvious winner.  But when you receive your first statement, you see that the stock has dropped. So you decide to follow the policy of being patient. As time goes by, you keep checking, but the stock keeps dropping. Eventually, you become living proof of the old adage that patience is a virtue. The stock market may be moving up, but you are stuck with a loser.

In fact, chances are that if the stock starts dropping by 10, 15 or 30 percent, there could be problems with the company, and it may potentially pay to sell. However, many of us find it psychologically difficult to admit that we have picked the wrong stock. It’s hard for us to say that we made a mistake.

Opportunity Cost

Very often, the longer you hold onto an under-performer, the more money it costs. The reason for this is that the investor could have put his funds into something that actually made money. Therefore, stubbornly holding onto a losing stock will only cause financial harm to the investor. In economics, this situation is referred to as opportunity cost. Opportunity cost is defined as the cost of an alternative that must be forgone in order to pursue a certain action, or the benefits that could be received from taking an alternative action.

Profit from Losses

Never think that all is lost. Some good can actually be derived from losing stock positions. When the position is sold, the investor realizes the loss, which may have certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, although they may not realize it, for many investors tax-loss selling may be the most important way to reduce their tax bill. If done correctly, receiving the appropriate advice before making any trades, it can save the investor money and help diversify the portfolio in various ways.  

Working with licensed and experienced financial advisers can help you evaluate objectively whether you are holding bad positions. It is then worthwhile working with an accountant to create a tax-efficient portfolio. Many professional investors live by the credo that you should ride your winners and dump your losers. The reason is simple. There may be a reason why the stock is performing poorly, namely, that the company is not executing their business up to its potential. This indicates that is probably a good place for you, the investor, to avoid putting your hard-earned money.

There is a good chance that the relative that left the money for you as an inheritance would like you to gain from it. Speak with your financial adviser to see if your newly inherited portfolio matches your investment goals and needs and whether it is invested in an efficient manner.

Aaron Katsman is President of Global Investments at Profile Investment Services.  He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the U.S. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, SIA. For more information, go to www.profile-financial.com  or email aaron@profile-financial.com 

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Don’t Become Emotionally Attached to Your Stocks

I’d like just to put some thoughts down on how current events may impact investment research going forward and what that means for investors.

1. Investment banks are currently the best we’ve got in terms of researching companies.  I don’t mean to say that they are always (ever?) right, but my point here is that individual investors can never get as close to a company as does a sell-side equity analyst.  As outsiders, we’re left frequently to decipher using shadow-puppetry what’s actually going on inside a company.  Certainly, there are times and certain companies where analysts are equally outside but I’m just describing, not prescribing.
2. Fewer banks mean less research.  As investment banks consolidate into retail banks (as Merrill Lynch has with Bank America, for example), it ultimately means further consolidation in research departments as it doesn’t make sense to keep both brands separate and maintain separate teams.  This means fewer stocks actually covered with research and fewer opinions on those stocks already covered.  This is bad for investors as investors have proven that they, like many professionals, have an aversion to paying for research from independent research outfits.
3. Importance of New Rules of Investing (NROI) grows: In order to compensate for the loss of research, investors are going to continue to flock towards free web resources (see my Top 5 Investment Sites) to make their own decisions.  This is a huge opportunity for those competing in the Online Finance 2.0.  In addition to expert communities and pickybacking sites, look for a flurry of new models in addition to incremental changes online with new charting technologies, blog aggregation, etc.
4. Opportunity for Investor Relations firms who “get it”: As a buy-side analyst at a hedge fund, I always felt that Investor Relations firms were missing an opportunity.  In a the Web 2.0 world, as investment banks continue to consolidate research ops and struggle with their business model, investor relations firms can really innovate here with new distribution models for disseminating information, new models for interfacing with company executives, etc.  The old road show/press release model can be improved upon by those who get it.  Firms who “get it” have an opportunity to compete against the i-banks, albeit coming at the game from a different perspective.  Maybe, as the result of all of this, we’ll see the role of the IR firm change as well.

The investment industry has seen various modes of expansion/contraction throughout its lifecycle.  I believe that this stage is natural in this evolution.  This economic contraction for the industry happens to correspond to an expansionary period in web technologies so that when these firms emerge, they may be left behind in their research.  This is a huge opportunity for other participants.

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Treasury’s plan and what it means for investment research

Two quotes are attributed to Albert Einstein regarding compound interest. Einstein apparently referred to compound interest as “the greatest mathematical discovery of all time,” and on another occasion he claimed that it was the “eighth wonder of the world.” Although we don’t know if these quotes are accurate, there is definitely something magical about compound interest.

What is it?
Compound interest is the ability of an asset to generate earnings, which are then reinvested in order to generate their own income. In other words, the term “compounding” refers to generating earnings from previous earnings. The magic of compound interest transforms your hard-earned money into a very efficient tool for building long-term capital. For compounding to really work, however, it is necessary to reinvest all earnings over time. When an investor gives more time to his investments, he is more likely to optimize the income potential of the original sum.

Example
If an investor had $5,000 in an account that paid 5% annually in simple interest for five years, he would earn $250 a year. This would generate a total of $1,250 in interest. In this case, the interest rate and the yield are the same — 5% per year.
However, the same $5,000 investment paying 5% in compound interest could earn more. In this situation, if the money is reinvested and compounded annually for five years, it would produce a total of $1,381.41 in interest. This is because when the investor earns interest on his interest, the yield — an average of 5.52% per year — is higher than the actual interest rate at which he initially invested. This difference of 0.52% a year may seem insignificant, but we should also consider that the investor did not need to work to receive this money. Moreover, this half a percent could make a significant difference over a longer period, such as 20 or 30 years.
The Earlier the Better
When an investor starts investing at a younger age, he will benefit far more from compounding. To understand this further, let’s take the case of two investors named Tzivia and Moshe Aryeh, who are both the same age. When Tzivia was 25, she invested $15,000 at an interest rate of 5.5%, which was compounded annually. By the time Tzivia reached 50, she had $57,200 in her bank account.

Moshe Aryeh, on the other hand, did not start investing until he reached the age of 35. At that time, he invested $15,000 at the same interest rate of 5.5% compounded annually. By the time Moshe Aryeh reached 50, he had just $33,487 in his bank account.

What happened? Both Tzivia and Moshe Aryeh are 50 years old, and both invested the same amount of money ($15,000) at the same rate of interest (5.5%). However, Tzivia had $23,713 ($57,200 - $33,487) more in her savings account than Moshe Aryeh, even though he invested the same amount of money! By giving her investment more time to grow, Tzivia earned a total of $42,200 in interest while Moshe Aryeh earned only $18,487.

Annual Contributions
The above example clearly demonstrates the positive benefits of compound interest. Taking it a step further, imagine that Tzivia, who invested $15,000 at the age of 25, also adds an extra $2,000 a year to her account, where everything is invested at a rate of 5.5%. If she were to continue this disciplined investment approach until retirement (at the age of 65) she would end up with over $413,000. And if Tzivia were to add some risk to her investment profile in the hope of getting an even higher return, her nest egg at retirement could grow even more substantially.
The Cost of Waiting
As mentioned earlier, the two essential aspects for compounding to work are reinvesting the earnings and time. Each year that goes by without any investment will therefore affect your retirement. If you have 30-40 years until retirement, every year that you forego saving or investing money today may subtract between 1-5 years from your retirement.

Just Start
You don’t have to be wealthy to start investing. If you start saving early and make disciplined contributions, compounding may mean that you, too, can retire with a very large nest egg.
 

Aaron Katsman is President of Global Investments at Profile Investment Services.  He is a licensed financial professional both in the U.S. and Israel, and helps people who open investment accounts in the U.S. Securities which are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, MSRB, SIFMA. For more information email aaron@profile-financial.com

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Compound Interest Works For You

Diversify
To understand this concept more easily, we first need to define the meaning of diversification. Diversification is an investment technique that uses many varied investments within a single portfolio. The idea behind it is that a portfolio of different kinds of investments may, on average, yield higher returns and pose a lower risk than a single investment. Diversification tries to smooth out volatility in a portfolio caused by market, interest rate, currency and geopolitical risks. In laymen’s terms, don’t put all your eggs in one basket. It’s important to remember that diversification does not assure against a loss.

If you include bonds or FDIC-insured Certificates of Deposit (CDs) in your stock portfolio, it may take away some of the volatility of the portfolio, allowing for potentially, more stable returns over the long run.

Don’t Panic
Keep you eyes glued to your long-term goals. It’s important to remember that markets go up and down, and if you made a financial plan, it would have taken this type of market volatility into account. The worst thing you can do as an investor is panic and sell everything and then wait for the market to recover. The market tends to recover very quickly. Large market gains often come about in quick and unpredictable spurts, and missing just a few days of strong market returns can substantially erode long-term performance. Remember the famous investing principle of buying low and selling high. Investors who panic often end up selling low.

Rebalance
The third principle is for investors to update or rebalance their investment portfolios.  Rebalancing is necessary for two main reasons. First of all, it keeps your asset allocation in line with your risk level and, secondly, it keeps your portfolio in line with both your short- and long-term goals and needs.

Let’s use the following example: When you first decide to invest, you decide that an allocation of 70% stocks and 30% bonds seems right for your $100,000 portfolio. We can also assume that over the course of the past few years, the stock market moved up strongly, and bonds barely moved up at all.

Based on the assumption that all gains and dividends were reinvested, and you didn’t deposit or withdraw any money, you would find that the stock portion of the portfolio would be worth a lot more than the initial $70,000. On the other hand, your bond holdings would be worth little more than the $30,000 invested in them.

However, while it is true that over the last few years your portfolio in this case would have grown, it would unfortunately have also become riskier. The reason for this is because the portfolio would move from being a 70% stock and 30% bond allocation to an allocation of 80% stocks and 20% bonds.

In this situation, if you don’t rebalance and you have a riskier portfolio, when the market starts to drop, this could lead to a greater loss.  It is a good idea to implement these three tips, as they are a possible means to help you weather the storm of volatile markets.
Past performance is not a reliable indicator of future results. The S&P 500 index measures large-cap stocks and US stock market performance of leading companies in leading industries. An investor can not invest directly in an index.

Aaron Katsman is President of Global Investments at Profile Investment Services. He is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the U.S. Securities are offered through Portfolio Resources Group, Inc. a registered broker dealer, Member FINRA, SIPC, SIA. For more information, email aaron@profile-financial.com

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3 Investing Tips for Volatile Markets

What Are Dividends?

Dividends are the share of a company’s profits that it decides to pay to its shareholders.  They are an important part of the return that an investor receives from investing in shares, in addition to any increase in the share price.  Although companies are under no obligation to pay dividends, they usually choose to do so because dividends provide an incentive to invest in their shares. 

When a stock pays an 8% dividend yield, what does this actually mean? If a certain company is trading at $25 a share, and it distributes $2 a share in dividends, if this dividend is divided into the price of the stock, the investor receives 8%. This yield changes according to the price of the stock and the amount of money that the company decides to allocate. In the example given above, if the share price were to drop to $20 the dividend yield would be 10%. Conversely, if the price of the stock would move up to $50, the yield would be 4%.

How Do They Help?

Much research has been done on the impact of dividend investing versus non-dividend investing over the past 30 years. According to Ned Davis research, from January 1972 through 2005, the companies in the S&P 500 index that paid a dividend returned over 10% annually, while the non-payers returned a lowly 4.1% annually. Over time, more than 65% of the return on stocks has come from the compounding of reinvested dividends. Dividend-paying stocks tend to be less volatile than the non-payers because the dividend acts as an extra cushion in falling markets. Keep in mind, past performance is no guarantee of future returns.

Too Good to be True?

With all this in mind, it is still important to be careful when deciding whether to invest in a dividend-paying stock. When a certain company has a dividend yield of 15%, this may sound very attractive. However, a key factor to note is whether the company will be able to continue to pay or even increase the amount of the distribution. Historically, companies that cut the amount of money they distribute have very poor performance going forward.

Dividend Downside

On the other hand, many investors don’t like it when companies pay out dividends because they prefer that the available cash is reinvested in the company, growing its profitability.  Other investors say that if the company is in debt, some of the available cash should go into reducing or eliminating it. This school of thought is similar to what we learn in home economics. If a household is in debt, and suddenly the family comes into a large sum of money, all of its debts, loans and overdrafts should be paid off. It is better to use the opportunity to have a clean slate, rather than spending the newfound money on a vacation or other luxuries.

If you are considering investing in dividend-paying stocks, speak with your financial adviser to find out if it is appropriate for you.

The S&P 500 index measures Large-cap stocks in the US and stock market performance of leading companies in leading industries. An investor cannot invest directly in an index.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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Should You Invest in Dividends?

If you check out Apple’s chart (sorry wordpress.com doesn’t allow posting of javascript) and click on ‘B’, you’ll see that on June 10th, Apple reported a new iPhone with GPS and 3G capabilities, better battery life and improved audio quality.

Or, on Amgen’s chart, you can click on ‘L’ and see someone’s explanation for a continued slide in the stock price (which he/she attributed to a potential safety risk for Aranesp)

Google Finance has charts that attempt to pair up news events with movements in the stock price.  While it’s a really interesting cause-effect, Google Finance unfortunately doesn’t capture the news or information that is affecting stock price movement.  I attribute this to 2 reasons: 1) Sometimes it’s just impossible to explain price movement (sorry, financial commentators) 2) Google’s news set is in some cases unexplicable weird and picks up stories that seemingly have little impact.

Anyway, these charts powered by wikinvest are interesting for financial bloggers and may ultimately do a good job of providing numerous opinions as to what’s affecting individualk stocks at any given moment.  It would be very interesting for someone to look into the accuracy of wikinvest’s annotated charts and provide some metrics at some point (if this is possible to track).  If anything, these charts improve on Google’s charts (which I happen to like) by overlaying wiki-like UGC on top of stock charts.

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Wikinvest makes everyone into a chartist

1-Pad and Pencil. Start to carry around a pencil and a small notepad and every time you make a purchase, write it down. Now this may sound incredibly tedious, but I am not saying that you need to do this for the rest of your life, rather try this for a month or two. Don’t just write down what you bought but also the cost and also whether it was a ‘crucial’, ‘luxary’, or ’semi-important’ purchase. By doing this, at the end of the month you can get a great idea of exactly what your expenses are, and when you compare it against your income, you can see where the money is going. Did you really need that $3.50 coffee, when the cup you drink at the office is free? Maybe you can brown bag it for lunch an extra day a week, instead of going out for lunch, and save an extra few bucks.

You can set a goal of how much you want to save every month, and then just start eliminating some of the ‘luxaries’ that you pamper yourself with.

2- Cash is king. We live in a world where we are constantly immersed in consumerism. Every time we turn on the TV, radio, even the internet, we are hit with a slew of advertisements encouraging us to buy something. Not only should we buy the product but if we can’t afford it, no worries, charge it and use a payment plan.

While this is great for the company peddling its’ wares, it’s a recipe for fiscal disaster for consumers. I like to encourage people to use cash. Go to the ATM, withdraw the amount of cash that you will need for the week, and limit yourself to use only that amount of money. This will also make you think whether each purchase is necessary or not. It make you understand that there is a consequence to your purchase. If you buy that $3.50 cup of coffee, that may come at the expense of buying a loaf of bread for your kids.

Try implementing these two tips, and it will help you get on the path to financial stability.

Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.

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2 Tips to Help You Save More Money

So, it got me thinking about 3 important reasons to discuss finances with kids:

1. logistics: it happens that parents pass away without ever telling children where their assets are located.  In my job as a financial planner, I see this occur with more frequency than you’d expect.  Children spend the time post-mortem looking for and tracking down assets.  Bequeath the assets or give them away but don’t lose them.  Keep your kids in the loop.
2. ethical inheritance: use these discussions to impart your values on your children.  Let them know why you worked so hard all your life.  Explain to them how you manage the work/life conundrum.  These discussions, however awkward, mean a lot to your children, while you’re around and after.  AS Penny mentioned in the article linked to above, it’s also a great forum to explain divergence in inheritances between family members.  I remember my grandfather, OBM, showing me his mother’s will which effectively left nothing to him and all to his siblings because he had done well in business.  He understood what he mother meant by her actions and in fact, respected her for such decisions.
3. wealth transfer: how frequently we see new clients coming into money for the first time in their lives while in their late 50s and 60s.  Their parents lived to a ripe age and left money for their middle-aged children.  Frequently, as we see the baby boomers retire, this requires the children receiving inheritance to learn basic asset management skills and/or shop around for an advisor.  The sooner the children are brought into the circle of trust, the sooner and quicker they can start scaling the knowledge curve required to manage money responsibly.

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Circle of trust: 3 reasons to discuss finances with your kids