Archive for January, 2010

Welcome Back To 10,000 … Sort Of

Tuesday, January 19th, 2010

“Tonight we’re going to party like it’s 1999.”


There was much celebrating on Oct. 14, when the Dow Jones Industrial Average closed above 10,000.  It was the first time the Dow reached that mark since October 2008 and it marked great progress from the 6,547 close on March 9, 2009.

Still, as Dorsey Wright & Associates wrote in an analysis, it’s sobering to recognize that the Dow is right where it was 10 years ago.  That’s more than 2,500 days of market openings and closings with a net result of zero growth.

Given the events of the past couple of years, it’s no wonder we’re celebrating!  But this is one parade that merits some steady rain, if not a downright downpour.

First, consider why the Dow has rallied.  When the market collapsed, there was so much money sitting in cash, it stimulated the market.

How?  If your money were fully invested in the market, there would be no potential for new net demand, unless you bought on margin.  If you were completely in cash, all of that money would represent new potential demand for equities.

When too much money is on the sidelines, a bottom is reached and demand sends stocks back up.  Once the markets start to recover, “momentum investing” takes over.  Hence, the 53% increase in value for the Dow.

However, as Daily Finance put it, “Breaking the key psychological level of Dow 10,000 is one thing.  Holding onto those gains is quite another.”  Without strong fundamentals, the five-digit Dow is unlikely to long.

No Recovery For Most Investors

Tuesday, January 19th, 2010

Two factors make reaching the 10,000 milestone for the Dow what Dorsey Wright calls “the quintessential Pyrrhic victory” for many investors around the world.

First, bond funds attracted net deposits of $209.1 billion in the first eight months of 2009, while stock funds drew just $15.2 billion.  For every new dollar moving into equities, $14 was moving into bonds.

This shows that investors who lost money in the collapse of 2008 were moving what was left to the perceived safety of bonds, just as the market bottom materialized.  This is not unusual.

Second, according to Dorsey Wright, the continued decline of the U.S. dollar has meant that foreign investors in U.S. markets have not been made whole.  Far from it.  They gained more dollars as the market recovered, but each dollar is worth significantly less.

In terms of the Euro, the Dow would need to rally an additional 45% to return to its October 1999 levels … and that’s assuming no further decline in the U.S. dollar.  The Dow would have to recover 46% for Australian and Canadian investors to recover.  At least when priced in the yen, the Dow is within less than 20% of its 1999 levels.

Some believe the current rally is a “fool’s rally,” which is not grounded in solid market fundamentals.  If that’s true, it may be a long time yet before most investors’ portfolios return to the level they were at in 1999.

Roth IRAs May Be Antidote To Rising Taxes, Market Losses

Friday, January 15th, 2010

Your retirement portfolio hasn’t fully recovered from the recent bear market, the economy is weak and your taxes will soon be going up.  So what can you do about it?


Starting next year, anyone will be able to convert traditional IRAs, including SEP-IRAs and SIMPLE-IRAs, to Roth IRAs.  Currently, conversions are allowed only for individual taxpayers or couples filing jointly with less than $100,000 a year in taxable income.

Those who convert either a portion of their assets or all of them should be aware that converted assets will be taxable as income during the year in which the conversion takes place.  Assets on which taxes have already been paid – i.e., IRA contributions above the allowable limit for deductions – will not be subject to taxation when converted.

Financial professionals typically recommend deferring tax payments as long as possible, so why would anyone want to do something that would increase their taxes, possibly even putting them into a higher tax bracket?

In many cases, paying taxes now will cost far less than paying taxes later.   Once taxes are paid on Roth assets, those assets can grow tax-free, as long as the assets are held in the Roth IRA for at least five years and the owner is 59½ or older before taking any distributions.  Under current laws, assets can even be passed on to heirs without being subject to income taxes.

Advantages of Converting in 2010

While you may consider converting to Roth IRAs over a period of years, the quicker you convert, the more you may benefit, for several reasons:

  • If you convert in 2010, resulting income taxes can be spread over two years.  This is a one-time opportunity.  For years after 2010, taxes will be due during the year in which the conversion is completed.
  • If your portfolio gains in value, the base on which taxes are due will be higher if you wait to convert.  If your assets increase in value, you will have to pay taxes on any gains when you convert.
  • Convert in 2010 and you will be able to pay taxes at today’s lower rates.  Tax cuts approved by Congress in 2001 are scheduled to expire in 2011, resulting in an automatic tax increase.  Someone paying taxes at a 25 percent rate today, will be paying at a rate of 28 percent; the 28 percent rate will increase to 31 percent, the 33 percent rate will increase to 36 percent and the 35 percent rate will revert to 39.6 percent.

In addition, many believe tax rates will rise further to pay for new government programs, such as the economic stimulus package and possibly healthcare reform.

  • The younger you are when you convert to Roth IRAs, the longer the timeline during which those assets can grow tax free.  In fact, conversion to Roth IRAs may not be worthwhile if you are retired or close to retirement.
  • The rules may change.  Because Congress will be looking for new sources of revenue, Roth IRAs could become a less attractive means of reducing taxes.

Other Considerations

If you are unable to convert in 2010 because you cannot afford to pay taxes on the assets converted or because it would put you into a higher tax bracket, there are still plenty of reasons to convert at least some traditional IRA assets to a Roth IRA in the future.

Converting a portion of assets to Roth IRAs can reduce post-retirement taxes by putting the owner in a lower tax bracket.   The taxpayer can, for example, take distributions from the traditional IRA up to the point where income would put the taxpayer into a higher bracket.  Then additional funds, as needed, can be distributed from the Roth IRA tax free.

As when contributions are made outright to a Roth IRA, taxes paid are not included as part of the contribution.  You will still be able to contribute new funds to a Roth IRA or traditional IRA up to the $5,000 limit ($6,000 for those 50 and older) during the year in which you make the conversion.

Before converting, be certain to consult with a tax advisor to determine the tax implications, as conversion may put you in a higher tax bracket.

The Risk of Doing Nothing

Wednesday, January 13th, 2010

I have a confession to make.

When I first became an investment manager, I followed the “buy and hold” strategy that almost every investment manager in the industry follows.  That strategy served my clients well through the 1990s, as the stock market soared.

In the new millennium, though, as the market turned down, I couldn’t understand why my colleagues were advising their clients to sit tight.  There were plenty of warning signs leading up to the crash that began in September 2000.  Yet the firm I worked for was telling their clients to “buy and hold.” 


This passive strategy made no sense to me.  Weren’t we being paid to provide investment advice?  If investing were about doing nothing, couldn’t our clients just do it themselves?

Doing nothing, it turned out, carried a big risk.  Over a 30 month period, the S&P 500 sank 49%.  Those who were heavily invested in small-cap stocks lost even more.

I saw that those who were retired, or nearing retirement, could not afford the risk of buying and holding.  That’s when I became an active manager.

The change has served by clients well.  There is never a guarantee of making money, but client assets were protected when I advised my clients to sell off their stock investments in 2008.  While investors following the “buy and hold” strategy saw their portfolios plummet in value, my clients did not.

Clients are, of course, interested in having the highest possible total return.  Long-term, the best way to achieve that goal is to seek high returns during bull markets, but to protect client assets by avoiding risk during bear markets.

Why So Many “Buy and Hold”

Active management seems like common sense to me.  But I often wonder why so many investment managers still cling to the “buy and hold” strategy.  Possible reasons include:

  • Everyone is doing it, so it must be right.
  • They’re doing what their company requires them to do.  If you work for a big brokerage, active management is not an option.
  • It’s easier than active management.
  • They don’t know that there is an alternative.
  • Admitting that your strategy is wrong would result in shareholder suits.
  • Overall, “buy and hold” is good for the market.  If every investor sold off their stock in September, the market would have collapsed.
  • It’s what they were taught when they learned about managing investments.

Investment managers will likely continue to stick with their “buy and hold” strategy for many years.  Investors, though, have other options.

Knowing When To Sell

Wednesday, January 13th, 2010

“Investors spend most of their time deciding what stock to buy. They spend little if any time thinking about when and under what circumstances their stock should be sold. This is a serious mistake.”

William O’Neil, founder of Investor’s Business Daily

Whether you’re investing for yourself or for clients, knowing when to sell is as important as knowing when to buy.

Today’s market is an ideal example of why this is so.  Many investors feel like they are reliving the stock market decline that took place from the spring of 2000 through 2002, when investment portfolios declined by an average of 40 percent or more.

Yet many investors are living in denial.  They won’t look at their investment statements, because they fear their hard-earned life’s savings has been cut in half.

If you’re one of those investors, it’s time to face reality and to understand how you got here in the first place. Unless you make it a point to learn what went wrong and why, history is likely to repeat itself.

Most people, both investors and advisors, got hurt by the 2000 to 2002 downturn because they either never learned or failed to practice sound investment rules and principles. Because the ’90s provided one of the longest bull markets in history, many investors perceived investing in the stock market as a sure thing.  To lose heavily was unheard of; all you had to do was buy technology stocks on every dip, because they always came back and increased in price.

Investors didn’t grasp the realities of market risk or how to guard against major losses. They didn’t have any way of knowing if the market was headed up or turning down. Worst of all, they didn’t have any sell rules!

Today, we all know investing in the stock market can be hazardous to your wealth. We have witnessed two vicious bear markets in this decade alone.  Investors were recently down 50 percent as a result of the current bear market, which means they need a 100 percent return just to break even.

It took 6.8 years for investors invested in the S&P 500 to break even from the last bear market.  Investors heavily invested in NASDAQ stocks during 2000 through 2002 never made it back to break even and they are being hit by another bear market.

Investors can save themselves a great deal of money by adopting one simple rule from William O’Neil, who wrote many books on how to invest successfully.

His number one rule is to cut your losses short to prevent much greater losses. He suggests that if a stock falls 8 percent below your purchase price, sell it. While an 8 percent decline isn’t enjoyable, it’s a lot easier to make up an 8 percent loss than it is to make up a 50 percent decline.

By incorporating this one rule, your investment portfolio will recover from losses a lot sooner and you’ll minimize the pain of worrying about your future retirement.

Why Diversification Matters

Friday, January 8th, 2010

Diversification is a term most investors understand as “Don’t put all your eggs in one basket.” While that phrase captures the essence of what not to do with your investments, it helps to understand why this is sage advice.

Let’s consider a portfolio comprising U.S. large-cap, mid-cap, and small-cap stocks. While most individual investors would consider this a diversified portfolio, it’s not. That’s because it’s vulnerable to various sources of risk that could lead to a less-than-desirable rate of return.

Macroeconomic Factors and Market Risk

First, there is the risk that comes from fluctuations tied to various aspects of the general economy, such as the business cycle, inflation, interest rates, and exchange rates. None of these macroeconomic factors can be predicted with certainty, and all affect the rate of return. This type of risk is referred to as market risk or non-diversifiable risk. No matter how many stocks you own, this type of risk remains even after extensive diversification. In other words, if someone invests in many stocks all exposed to one market (such as the U.S.), the portfolio is not diversified enough.

Marketplace Factors and Diversifiable Risk

In addition, various marketplace factors can affect a stock value. For example, if a company makes a change in management or loses market share to a competitor, its stock value could decline. Diversifying by investing in numerous stocks spread across various economic sectors minimizes the impact of any single stock. In other words, investing in stocks spread across many different countries and investment types will result in less exposure. This is called non-systematic risk or diversifiable risk.

But what happens if all stocks are affected by the business cycle and you have all your investments in that particular economy, e.g., the U.S. economy? During 2000, 2001, and 2002, the Standard and Poor 500 index’s annual returns were the following, respectively: -9 %, -12 %, and -24%. That means a portfolio invested only in the U.S. stock market – even if across large-, mid-, and small-cap companies – would have fared poorly. A diversified portfolio representing international stocks, large-cap growth stocks, large-cap value stocks, large-cap blend, small-/mid-cap stocks, bonds, and cash returned  -3.69%,-8.06%, and -14.78% during that time period. While not an ideal rate of return, the declines were considerably less than that experienced by someone whose portfolio risk was not spread among many countries and alternative investments.

Making the Right Diversification Choices

Proper diversification can help buffer the declines from market risk or the non- diversifiable risk that remains even after extensive diversification. One way to diversify is by investing in a single diversified mutual fund that represents the basic asset classes of stocks, bonds, and cash. However, a host of alternative investments – such as hedge funds, real estate, commodities, currencies, and international stocks and bonds – provides the opportunity for further diversification. In times of market uncertainty it may be wise to hire an advisor who understands risk management, optimization techniques, and incorporates flexible strategies in her investing methodologies.

Trustee vs. Co-Trustee

Friday, January 8th, 2010

Today I received a phone call from a dear and close friend about her eighty something year old father. She was vacationing with him and the topic of his trust came up.

He mentioned to her upon his death a very well known bank would serve as trustee. My friend was taken back by the idea of some stranger taking on the role of corporate trustee and making decisions for her and her family members.

I thought about her comments and put myself in her position. I personally would not want an impersonal bank serving as trustee for my family’s fortune. Immediately I think of a stranger as uncaring and mean-spirited especially if they are making decisions on my behalf and not granting my request. Who’s side are they on and why would I trust them?

In my career I have seen plenty of situations where a family member has been unhappy with the corporate trustee and co-trustees decision for not giving in to their demands. Sometimes the trustee is strict and probably should give in to a beneficiary’s request and other times I believe the trustee has performed his or her duty by saying no to a relentless beneficiary.

As I explained to my friend, be careful what you wish for. The responsibility that comes with being a trustee is a daunting task. Do not confuse duty and responsibility with privilege. Being a trustee is a duty and responsibility; it can also be hard work. The trustee has a fiduciary duty to the other beneficiaries, not privileged access to funds. A trustee of a trust is not an owner of the assets that are inside the trust. The trustee is a manager or agent of the trust and has the responsbility of following the grantors wishes.

In my friend’s situation, I think her father did the right thing. She has sibilings that are carefree with money and who would immediately put their interest before hers and severely punish her for not giving in to their demands. In this situation I applaud her father for taking the appropriate action and hiring a corporate trustee.

Remember, a corporate trustee should be able to think objectively and follow trust instrustions without emotion, unlike a child of the deceased who will be emotionally involved and who may or may not have biased opinions about another beneficiary’s request for money. So don’t take it personally when you are not named trustee or co-trustee of your parents trust. Be thankful you avoided the burden and responsibility of saying “NO” to sibilings or other family members.

Nine Common Investing Mistakes

Wednesday, January 6th, 2010

Individual investors often jump into the investing arena without having a financial plan in place. The risk? Committing common investing mistakes that end up lowering overall returns. Avoid the mistakes below and you’ll be equipped to make better investment decisions.

Mistake #1: No Investment Plan. You’ve heard it before; “If you don’t know where you’re going, how will you ever get there?” Don’t feel bad if you don’t have an investment plan. You’re not alone. Many professionals do not have a formal investment plan; even investment professionals managing money for others!

First, your portfolio should encompass all your assets and liabilities, including real estate, automobiles, and even less marketable investments such as art, stamp, or coin collections. The full spectrum of investments must be considered because the returns from all these investments interact, and these relationships impact the investment portfolio. Next, you need to consider your investment objectives. Third, a clear understanding of your time horizon and expected future return is critical to devising an investment plan that meets your goals. Finally, your tolerance for risk will play a large role in the types of investments best suited to you.

Mistake #2: Unclear Financial Goals. Just as you need a solid strategy in order to accomplish your business goals, you need a plan to reach your financial goals. And that requires a clear understanding of both short- and long-term goals across all aspects of your life. For instance, do you want a retirement home in Cabo? When and how much will you need to make that a reality? Do you plan to send your kids to college? How many kids, when, and what colleges? Is it important that you donate to charities – even once you’re retired? All of these considerations – and more – need to be figured into your plan.

Mistake #3: Imbalance between Risks and Expected Returns. Given a choice between two assets with equal rates of return, would you select the asset with the lower level of risk or the higher level of risk? While most people gravitate toward the lower level of risk, some take on too much risk without realizing the potentially devastating impact on their portfolio. You need to understand your tolerance for risk and how that fits into your overall plan. And you need to set realistic expectations about the returns you’ll realize. If you put your money into a certificate of deposit, the risks are low – and so are the returns. When you invest in BBB bonds, the risk is higher, but so are the potential returns.

Mistake #4: Lack of Diversification. A properly diversified portfolio – in other words, one containing assets with differing rate-of-return characteristics – should provide a more stable rate of return. If you are investing in Large, Mid, and Small Cap stocks and think you have sufficient diversification, think again! Even though your holdings represent different market-capitalized companies within the U.S., that’s not sufficient to minimize risk. In today’s market environment, the U.S. market indices are moving in the same direction. A well-balanced portfolio represents a variety of asset classes, investment styles, and markets – both domestic and international.

Mistake #5: Buying High. Don’t follow the herd and chase performance of hot stocks or market sectors. Yesterday’s winners can quickly become overvalued and correct to normal valuations – and that’s usually painful to one’s bottom line. Instead of chasing after hot stocks here and there, smart investors continually evaluate their investments in light of the current economic climate and adjust their portfolio accordingly. Of course, this strategy requires diligence and keen insight into a variety of market factors. You may be best served hiring a money manager who knows how to navigate the waters.

Mistake #6: Selling Low. We all know the old adage “buy low/sell high” but investors often lose sight of this. Don’t get greedy and watch your gain disappear. Similarly, do not hold on to losing assets hoping to make back your initial investment when you could be selling and buying assets that are moving up. It’s far better to cut your losses and shift assets into more promising investments.

Mistake #7: Getting Emotionally Attached to Investments. Too often, investors become emotionally attached to certain stocks and fail to sell – even when it’s painfully obvious that they should. Whatever the reason for holding on to a losing stock – sentimental attachment, pride and ego, or even denial – you’re only hurting yourself by holding through thick and thin. (If you’re thinking “But you just said to ride out market highs and lows”, keep in mind this is about individual stocks, not the overall portfolio). Remember a 25% decline takes a 33% increase to break even*. Review your investments on a regular basis and initiate corrective measures if necessary.

*If you invest $100,000 and your account depreciates by 25% to $75,000, you then need a 33.5% return to go from $75,000 back up to $100,000.

Mistake #8: Short-term Trading. If you are not trained in short-term trading techniques, do not adopt a short-term trading methodology. Successful short-term trading isn’t just a matter of logging on to an online brokerage account once in a while and buying and selling. It requires a significant investment in time and research, and a keen insight into market fluctuations and historical trends. Only the truly skilled trader succeeds in the short term. For everyone else, transaction costs and losses typically outweigh any gains.

Mistake #9: Setting Unrealistic Expectations. If your investments are spread across varied asset classes (as they should be), do not make judgments about one aspect of your portfolio based on the performance of a completely different investment. For example, don’t expect your bond return to be in line with returns on international markets. (It’s like comparing apples to oranges). The whole idea of a diversified portfolio is to minimize the risk from any single investment. So, by definition, your various asset classes should perform differently. Instead, compare each asset class to its associated benchmark.

By incorporating a few simple rules into your investing plan, you’ll avoid the common mistakes of investing. Remember – if you periodically update your plan and stay focused on your long-term goals, you should be pleasantly surprised at your returns.

Financial Advisors: Making Sense of All of Your Options

Wednesday, January 6th, 2010

As you seek help with your investment decisions, it’s useful to understand the different types of financial professionals and how each can help you achieve your various financials goals.

Are you confused by the variety of professionals who call themselves experts at managing money? Does your head spin when you hear the following terms tossed about: certified financial planner (CFP), stockbroker, money manager, investment advisor, and financial consultant?

While many of the names overlap in one way or another, with an understanding of each professional’s role you can quickly decide which is appropriate for your situation without sitting through endless meetings. In this article, I’ll help you understand the roles of CFPs, stockbrokers, and money managers.

CFPs: Ideal for Financial Plans

A CFP has broad knowledge in various areas of finance (including the creation of personal budgets) insurance, and estate planning. These professionals can customize an individual financial plan that is tailored to your financial situation, whether it’s saving for retirement or college tuition, or buying a second home. In addition to creating a financial plan, they can guide you through important financial decisions such as buying insurance, setting up a will and trust for your heirs, refinancing a home, or paying off credit card debt. Once your financial plan is established and you’ve made financial decisions about insurance and trusts, the next step is to either manage the money yourself or hire a professional money manager.

Stockbrokers: Guiding Investment Decisions

If you choose to manage the money yourself, you may want to seek the help of a stockbroker. With access to economic commentary, research reports, and various investment instruments, stockbrokers can help you make informed investment decisions.

These professionals can also manage your money for a fee. Usually this entails enrolling a wrap-fee program, which bundles multiple investment services for a single fee. In this scenario, the brokerage firm selects pre-qualified outside money managers to manage its clients’ investments. The broker will create an asset allocation for you and choose the most fitting investment manager based on your investment style and asset classification. Keep in mind that this approach can be expensive, with fees typically ranging anywhere from two to three percent of assets per year.

Money Managers: An Affordable Alternative

As an alternative to working with a stockbroker, you can work directly with a money manager. Generally, money managers charge lower fees than those associated with traditional WRAP fee programs or those paid to a financial advisor who manages mutual funds. Money managers are responsible for making buy-and-sell decisions pertaining to a specific investment strategy. They typically have a thorough understanding of financial statements and how the economic cycle impacts future investment decisions. In a sense they are similar to the fund manager at a financial institution who is making the buy-and-sell decisions for a mutual fund.

Instead of investing in a mutual fund, you will invest in individual securities that the money manager purchases on your behalf. Whereas you have no contact with the manager of a mutual fund – nor insight into their investments – your relationship with a money manager is completely transparent. That means you will see every transaction – including fee-related ones – associated with your investments.

Make Informed Decisions about Your Investment Future

Hiring a financial service professional can seem overwhelming, but with a little homework you can make informed decisions regarding your investment future. Once you have an understanding of what type of professional would best suit your style of investing, the next step is to meet with the financial advisor to determine if his or her personality and style are right for you.

Women and Investments

Tuesday, January 5th, 2010

What issue do you think women worry about most? You might guess spending quality time with the family, time management, health, reducing stress, or maybe the environment?  While this is from the pre-9/11 era, is still interesting to consider the March 2000 gallop poll shows the top answer was their finances. This response may surprise you now, but consider the following list of financial issues unique to women (results from a women-and-money incubator, and research by William L. Anthes and Bruce W. Most): 

  • “Women are more intimidated than men about financial issues
  • Women earn less money than men
  • Women are less prepared for retirement
  • Women receive smaller retirement benefits
  • Women live longer than men
  • Women are poorer in retirement than men
  • Women are more conservative investors than men”

My name is Brenda Wenning and I am an investment manager. Many of my clients are women investors and with all these “strikes” working against them, my business mission is, first and foremost, to protect and improve their financial health by actively managing their investment risk.

A benefit of my service is the straight forward communication I have with clients. People tend to be afraid of what they don’t understand and in order to have a secure and comfortable financial future, you can’t be afraid of investing. So, I take my role of trusted advisor and educator very seriously. Watch this space for interesting facts, figures and ideas on investing and how you might improve your investment performance in the future. If you have an investment question or comment, please let me hear from you.