money

December 2008

“I don't see why anyone is worried about the markets, their 401k's or their home values.

After all, you voted in the god of symbolism and followed his siren call for change so if this isn't working out quite the way you planned.......  
Ask not what you can do for your country,  ask what your Community Organizer is going to do for you..........or is that to you.”

~Yours Truly
The Professional Opinion

S&P 500 Index: 8829.04

An Outlook for the Stock Market

The bulk of the newsletter talks about the bottoming processes and recoveries from major stock market bottoms.  These are typically followed by major market upswings where the last place you want to be is in cash. The trick is knowing when to buy in.

Bob goes into some detail in how to determine when markets are in oversold conditions.  He uses a comparison between the DJ Industrial average and its 200 day moving average.  The largest differences occurred in the bear markets of 1974, 1987 and 2008.  In 1974 and 1987 there was a difference of @ 27% during the worst days of these markets and they were the standouts for over 60 years, that is until 2008.

In 2008 the difference between the DJIA and the 200 day moving average  reached a level of 34% on November 20.  Bob expects to see the gap narrowing going forward.

"Looking forward to the type of an uptrend that can be expected following this historic oversold reading, we note that the bear market bottom in the fourth quarter of 1974 produced a 73% advance in the S&P 500 index in 21 months. .......the 1987 bottom produced a 64.8 percent gain over 31 months. "

There are four factors which have the potential for contribution to a market recovery going into 2009:

- Monetary stimulus of historic proportions and dramatic increase in the monetary base.

- Dramatic decline in energy prices, putting more money back into the hands of the tax payer.

- A possible middle class tax cut (be interesting to see if our community organizer keeps his word)

- Another new fiscal stimulus package (enough for insulating the garage?)

Bob expects the financial news media to continue going into overdrive with their talk of Armageddon
and all things awful.  He says we will come out of this just like we always do.  There is some question
as to when.

Inflation and interest rates are expected to remain very low.  Consumer prices in October declined 1% and an extended period of disinflation is expected to continue for some time.


The Fed

The fed increased the monetary based by a historic 71.8%, flooding the financial system with liquidity in an effort to restore confidence in the  banking system and in the credit markets. 

The Fed Funds rate is expected to be cut by another 50 basis points in  the upcoming December meeting.

Portfolios

No changes to portfolios.  Dollar cost average in any new monies.

Gotta love these Canon IS Cameras.
California Quail from the Back Yard
Remember those box traps you may have made when you were a kid?  I wanted to get an extreme closeup of a California Quail and
decided to try a box trap baited with seed.  This young male and two of his buddies took the bait. The females seem to be a bit smarter.
I haven't  got a close-up of one of them yet  Perhaps they are camera shy.
  

Personal Portfolio
Year to Date
Another Month in the Bag.
I let go of another mutual fund and split the proceeds into Dow Chemical (DOW) and Altria (MO) which about does it, I think.  I set all dividends to reinvest in more shares so while we are at lows we haven't seen in a long time, I hope to pick up more shares at near historic price lows.
So far, GE, MAS, RF, BAC, ABK and BGS have all paid out dividends in the form of new shares.  That's about the only positive note, other than the GNMA fund is  performing nicely.

I suspect when the financial sector finally turns around, the other sectors will follow suit.

USU XL are actually two stocks I  have been trading in and out of for small profits.  I currently have XL, which may take a while to go into positive territory again.  At that point, I will buy some more USU.

What a Year
On My Own Now

Not that I haven't been for a year or two,  but I couldn't see why Bob Brinker elected to do nothing while everything tanked
around us.  During normal upsets,  I don't to anything but it was clear to me at least (took a while)  that this environment is anything but normal.  I therefore elected to do something about it.

In my opinion,  if you sell the mutual funds  on up ticks and buy quality, dividend paying stocks on down ticks even at these
levels - you could be doing yourself a world of good.  

And  another thing about mutual funds, if you are holding them in taxable accounts - you could end up getting the double whammy
at the end of the year  in the form of taxable distributions.  So to add insult to injury, not only will have your funds lost up to if not
40% more of their value - you will also get to pay Uncle Sam lots of taxes on the fund distributions.  That is not a pleasant experience.  This is worth giving some serious consideration to.  You can go on most fund sites or give them a call, and get
an estimate on the distributions the funds are going to pay out at the end of the year.

Going Forward

I took a step backwards and had a look at the stocks I bought and found what the value of those stocks would have been
had I owned them at the first of the year.  If those stocks return to those values,  I will have added almost 60% to the overall
value of the portfolio.  In the meantime, I am collecting more shares at cheap prices in the form of dividend distributions so
in theory, I should end up with even more.

I currently consider myself too young to be seriously looking at the interest bearing side of the portfolio but in a couple years
when hopefully this economy has turned around and our community organizer hasn't destroyed retirement plans by confiscating
same in return for a government guaranteed (why does this remind me of annuities) plans,  I will be adding a bond component
to lessen the volatility.

Portfolio Cost

I am not going to spend a lot of time on this but it is something frequently overlooked, especially those who choose to invest in
mutual funds.  I can include myself in this.
Take a minute or two, and add up all those estimated costs of the funds you own over the typical five year period.  It can be an
eye opener.  Add these costs to the taxes you pay on distributions in taxable accounts and then have a look at the dollars you
get to keep at the end.  It may give you pause.

The absolute lowest cost is owning individual stocks or bonds but unless you have sufficient assets, diversification can be a
problem.

The next lowest cost is exchange traded funds (ETF's), and then mutual funds.  You pay more in the form  of management fees,
but you can get adequately diversified.

The most expensive are managed accounts.  This can be in the form of an adviser like Adam Bold and the Mutual Fund Store
which charges a wrap fee (a percentage of your portfolio),  or at the worst an annuity which can take you to the cleaners.

Speaking of Adam Bold, Complaints about Same.

In retrospect this is not surprising,  but I have had a number of emails from customers of Adam Bold and his Mutual Fund Store franchise, expressing the dissatisfaction of seeing their monies invested with same lose 50% or more in value.  Most of these people had bad experiences with brokers and financial advisers and liked what they heard on the Mutual Fund Store show, so they decided to give Adam Bold a try.

If you are looking at your portfolio and the considerable lack of  performance year to date,  filing a complaint about same is probably not going to do you much good.  My advice would be to stay with the portfolio recommendations for the near future because bailing at this time is at best a 50-50 - proposition.

There are a couple things I could point out about Adam Bold and his Mutual Fund Store as a reminder of what kind of business this is.  Of course, this is only an opinion but it is probably worth doing some opining.

Fees and Expenses

What Adam Bold charges for management of a portfolio is what is commonly called a Wrap Fee.  He charges 'a small percentage' of your portfolio for 'expert management'.  The amount charged varies with the amount one invests.  The more the investment, the smaller the wrap fee.  Bear in mind that just like mutual funds, he gets his piece of the pie whether or not your account makes any money at all.

Here is some Franchise Information:

Going Defensive

The Mutual Fund Store version of a defensive posture to my knowledge has never been one of going to cash.  What Adam Bold does is select mutual funds with lower betas, in other words he chooses funds which will be less volatile than the overall market.  

For some reason and it is beyond my understanding, he will not recommend GNMA's (Ginny Mae's).  His commentary about same when a caller calls in and mentions GNMA's,  is along the lines of it is dumb and risky to invest in GNMA's and other bonds of this type with interest rates so low because of the risk to net asset value.  This is ignorant and short sighted.  Look at the price performance of GNMA's during the dotcom bust and the current trouble we are in.  Not much else, other than cash has been as safe as the GNMA.  I took 33% of my wife's portfolio to GNMA's some months ago and the only thing I regret is not doing it sooner.

If I was conspiratorial,  I would say the reason he wants nothing to do with GNMA's is because that is a Bob Brinker favorite over the years and he wants nothing to do with Bob Brinker picks.

Individual Stock Ownership

Individual stock ownership is anathema to the Adam Bold philosophy for 95% of investors.  His opinion is that most investors are not adequately diversified if they own individual stocks, taking on more risk than they should and I would tend to agree with that. However, Adam Bold says the only persons who should be invested only in stocks should have assets in the millions  - and on that point I disagree.  A general rule of thumb is that if you have 25 stocks spread out through different market sectors with no more than 4% in any one stock, you are diversified.

What is the lowest cost to your portfolio?  Individually owned stocks.  

How does Adam Bold and the Mutual Fund Store make their money?  

They can't make any money off of individual stock ownership.  They generate their fees by managing assets.  

The Mutual Fund Store - Filing a Complaint

I don't think the majority of customers would get anywhere by filing a complaint when it comes to poor performance.  The only exception to this in my opinion would be if a Mutual Fund Store counselor placed a customer's assets in the wrong types of investments - investments which run contrary to the needs, lifestyle and desires of a client.  

An example of this would be putting a single 80 year old grandmother's savings into a small cap aggressive sector fund specializing in Russia, when she wanted a stable, safe portfolio for income generation..  Adam Bold is not that stupid.  I doubt his counselors are  either.

The Mutual Fund Store - Is it worth it?

 I would say that if an individual is not interested in managing his or her own assets, one could do far worse than Adam Bold and the Mutual Fund Store.  Purveyors of high cost annuity products and other predatory salesman would do considerably more damage to to an investor's portfolio that Adam Bold's service ever would.  

I like listening to the shows when I can.  People call in with interesting questions and once or twice I've picked up some mutual funds I otherwise would not have known of.  People get educated about mutual funds, other types of investments and an understanding of  sharks swimming the waters, taking advantage of the ignorant.  He spends time with people, especially the elderly who are about to or have fallen prey to the predators of the investment world.  In times of financial crisis, those out to generate  commissions from investors by scaring them to death go into overdrive with their hype. It is nice to have someone out in radio land speaking to the problem.

A Request

I would be most interested in getting some feedback from a few Mutual Fund Store clients in the form of the general type of account they have (aggressive,  long term, retired) and the funds and their percentage allocations that make up those accounts.  I would have thought by now I would have seen a few typical portfolios on line somewhere, but they are elusive.

2010 Footnote:

Boy, the hits on this page have been going up and up for the last last year.  I would guess it has something to do with the economy at large.  In 2009 I listened to quite a few Mutual Fund Store shows and have been keeping track of the Adam Bold opinions about this recession, and comparing that to my thoughts about same.  

I have come to a few conclusions and will wrap them up in one generic comment:

Adam Bold has some pretty good advisers and I don't think they have been steering him wrong at all.  

I do think that investor risk or profit with the Mutual Fund Store has to be filtered a bit through the prism of what is best for the store itself, in that they make a profit first and then the best interests of the customer are fulfilled within the framework of the business.

That however is probably true for most businesses in that if you can't make a profit, why stay in business?

This is still better than getting sucked into fixed index annuities and other financial schemes which promise to limit on your downside in exchange for not being able to take advantage of any considerable upside.

And.........

I am still interested in seeing a few examples of a Mutual Fund Store portfolio.

I can get Cairn Terrier opinions until the cows come home but when it comes to finance,  information is tighter than a clam shell.

I know where this comes from.  For some reason, it has been considered taboo for practically forever to share with your kids what you generate for an income and what it truly takes to support the lifestyle your kids are used to living.  My parents were the same way.

Me,  I took a different route.  When the kids were seniors in high school, they knew exactly how much I and my wife made. Therefore, they also know exactly how much they would have to make to support the lifestyle to which they were accustomed.

The kids rapidly came to the conclusion that if they wanted to live the life we currently live, more education was a requirement and not an expensive afterthought to do in order to have that piece of paper which is considered important to those who do the hiring.

If you are of this mindset, you are probably not doing your kids any favors.  They end up living  in a fantasy land until all those bills you currently pay, are theirs.  Fantasy is big with this latest generation as I have said before,  Reality Bites.  The pain is lessened if you introduce your kids to the world of financial reality at the appropriate time.

This circles back to the original request for some portfolio examples.  People won't talk about personal finance and therefore do not educate others about about the things they did well, and those things they did not so well.  

Try doing something altruistic for a change.  Talk to your kids about the real world of finance.  What they will remember is not the $$$ of dollars you made or the $$$ of dollars you lost...........they will remember that you cared enough about them to talk to them at all about that taboo subject of family finance.

Mason Valley - Fall Scenery