What Apple & Indonesia Can Teach You Abou Investing

(from Dan Solin's Huffington Post blog, 8/30/2011 - click here for the original post)

You wouldn't think Apple and Indonesia have much in common. On the surface, they don't, but they can still teach you a lot about investing. Let's start with Apple.

Apple made the news recently with two major events. It is locked in a battle with Exxon over which is the most valuable company by market capitalization -- a remarkable turnaround. Apple has a market value of over $344 billion. Then Steve Jobs announced his resignation at Chief Operating Officer for health related reasons.

According to a thoughtful blog by Weston Wellington of Dimensional Fund Advisors (not available online), it was not so long ago that the financial media was trashing Apple. In February 14, 2005, Robert Barker, in an article in BusinessWeek stated "...Apple doesn't tempt me..." I wonder what did. Maybe Lehman or Bear Stearns!

Steven Gandel weighed in with an article in Money on March 24, 2004. He quoted Transamerica portfolio manager Chris Bonavico who opined that Apple stock is "...crap from an investor standpoint."

Many analysts credit the remarkable sales of its Apples Stores as the key to Apple's success. In a quote attributed to David Goldstein, Channel Marketing Corp, which appeared in an article in BusinessWeek on May 21, 2001, Mr. Goldstein gave Apple "two years before they're turning out the lights on a very painful and expensive mistake."

What can you learn from these comments about Apple stock? Read the financial media if you find it entertaining. It's useless (and potentially harmful) as a source of reliable financial advice.

What about Indonesia?

The financial media was preoccupied with the downgrade by Standard & Poor's of the credit rating of the U.S, which lowered its rating from AAA status to AA plus. The new rating places the U.S. below the United Kingdom, Canada and even the Isle of Man.

Many investors viewed the lower rating with alarm and considered it a precursor of low stock returns for decades to come. The data tells a much different story, and may indicate there is no better time to invest in U.S. stocks and bonds.

In another blog, Wellington notes that Standard & Poor's rated the credit of Indonesia a "B" in July, 2001, which placed it in the "junk" category. Over the past decade, its credit rating has never risen to investment grade.

Investors in the Jakarta Composite have earned a total return of a whopping 29% per year over the last decade, ending June 30, 2011. According to Wellington, "If the Dow Jones Average had kept pace with Indonesian stocks over the past decade, it would be over 104,000 today."

Here's the lesson to be learned from Indonesia: A low (or reduced) credit rating on sovereign debt does not necessarily correlate to lower stock market returns. This is the opposite of what many investors and financial talking heads believe.

Most investors get their financial information from the financial media or brokers. As Dr. Phil would say: How is that working for you?
 Dan Solin is a Senior Vice President of Index Funds Advisors (ifa.com). He is the author of the New York Times best sellers The Smartest Investment Book You'll Ever Read, The Smartest 401(k) Book You'll Ever Read, and The Smartest Retirement Book You'll Ever Read. His new book, The Smartest Portfolio You'll Ever Own, will be released in September, 2011. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.

When I'm 64

It wasn’t listening to Paul McCartney sing “When I’m 64” at his recent concert that inspired this week’s blog, but the fact that in 2011, another baby boomer turns 65 about every 10 seconds. Although age 66 is when you will reach Full Retirement Age for Social Security benefits, there are several decisions that need to be made regarding your Medicare coverage when you are 64.

• If you are already receiving Social Security, you do not need to apply for Medicare and will be automatically enrolled in Part A (hospital or inpatient care) and Part B (doctor’s visits or outpatient care). You will receive your Medicare card about three months before you turn 65. 
• If you are not collecting Social Security, you can apply for Medicare at age 64 and 8 months. The easiest way to do this is to apply online.
• If you have Part B coverage through an employer plan, your Medicare card will instruct you how to proceed. You should check with your former employer to see if your retiree coverage reverts to a Medicare supplement at age 65.

If your employer does not provide any coverage when you turn 65, you will need to decide whether to purchase a Medicare supplement (also known as Medigap) policy plus Part D (drug coverage) or whether a Medicare Advantage (Part C) policy makes more sense. This choice will be driven by your current health and the prescriptions you take.

When I helped my mother-in-law apply, it made more sense for her to buy a Medigap policy combined with Part D for her prescription coverage. The monthly cost was higher than Medicare Advantage, but her out- of-pocket exposure was significantly less. She had some health issues such as osteoporosis and high blood pressure and takes several medications on an on-going basis. When she had to have a Pacemaker put in the following year, she didn’t have any additional expenses associated with her operation.

It is very important to choose the proper plan because you can only change your Medicare coverage once a year. We can refer you to a specialist to help you decide what type of coverage is most appropriate for your situation.

The costs associated with Medicare coverage continue to change. Part A is subsidized through payroll taxes, but Part B and Part D premiums are based on your Modified Adjusted Gross Income from your tax return. The basic monthly premium for Part B starts at $115.40 and can be as high as $369.10. The Part D premium is $0 for couples making under $170,000 but increases to $69.10 for couples earning over $428,000.

Just like any other aspect of your financial plan, we are here to help you determine the most effective way to cover your healthcare costs in retirement.

Christine L. Carleton, CFP®
clcarleton@taaginc.com
http://www.taaginc.com/

Accountability

Have you ever noticed how much better people behave when they know they’re held accountable?

My husband and I belong to a dinner group that holds events at independent restaurants, and for each dinner, we are asked to bring a bottle of wine to share. At first some folks were bringing wine that no one wanted to drink, so we began labeling the wines with the name of the person who brought it. Immediately, the quality of the bottles brought to share improved significantly!

During the last several years of economic and stock market gyrations, the issue of accountability could have saved us all lots of grief. If mortgage companies were held accountable for the home loans they made to consumers, they might have been more honest about the reality of the borrowers’ ability to repay the loan. If the rating agencies had been truly accountable to investors, who used their ratings to make purchase decisions, junk mortgages would not have been magically transformed into AAA investments by Standard & Poor and Moody’s. The lack of confidence in our financial system – caused by the lack of accountability – created the domino effect of losses beginning in 2007.

Recently, I went back and reviewed a book I’d read that was published right after we experienced the Crash of ’87 – when the US stock market experienced a 22% drop in one day, followed by similar drops in the international markets. "Liar’s Poker", by Michael Lewis, tells the story of his experience as a bond salesman for Salomon Brothers in the years before the crash. One passage in the book really illustrated the conflict of accountability to clients vs. the firm:

Who do you work for? That question haunted salesmen. Whenever a trader screwed a customer and the salesman became upset, the trader would ask, “Who do you work for anyway?” The message was clear: You work for Salomon Brothers. You work for me. I pay your bonus at the end of the year. So just shut up, you geek. All of which was true, as far as it went. But if you stood back and looked at our business, this was a ridiculous attitude. A policy of screwing investors could lead to ruin. If they ever caught on, we’d have no investors. Without investors, we’d have no business.

The only justification – if you call it that – I ever heard for our policy came unwittingly from our president, Tom Strauss, himself a former salesman of government bonds. At lunch with one of my customers, he offered his opinion: “Customers have very short memories.” If that was the guiding principle of Salomon Brothers in the department of customer relations, then all was suddenly clear. Screw’em, they’ll eventually forget about it!

The issue of accountability to investors was raised again in a recent New York Times article, The Mutual Fund Merry-Go-Round. David Swensen, Chief Investment Officer at Yale University and the author of the article, discusses how the mutual fund industry uses market volatility to produce profits by convincing investors that they need to move in and out of funds, chasing the “best” performers. This activity benefits the mutual fund industry and the brokers who receive a commission to sell them, but not investors, who are virtually guaranteed to sell low and buy high. (The blog, Why DFA?, outlined why we use a specific mutual fund company to implement our investment philosophy, and avoid the conflicts outlined in the article).

Meanwhile, the profits made by these mutual funds, brokerage firms and insurance companies are used to make large campaign contributions to politicians and payments to lobbyists who are working to keep the “fiduciary standard” (putting the client investor’s interests first at all times) from being applied to them. It is highly unlikely that these industries will ever be subject to the same standard that Registered Investment Advisors like the Asset Advisory Group have to follow. The push for change will have to come from investors, not the government.

Who does your advisor work for? How are they compensated? Are they more accountable to a company and the products they sell than they are to you? Every investor needs to ask these questions. If they did, the quality of advice brought to the table would improve significantly!

Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/

What Do We Do Now?

Let’s get up to speed first

Last week, Congress & the White House came to a zero-hour agreement to raise the debt ceiling, covering the nation’s short term debt needs.  While there were some cuts made in future spending, the greater challenge of creating long term, meaningful solutions was left to a Congressional committee, charged with presenting a deficit reduction bill to Congress by Thanksgiving.
Friday evening Standard & Poor’s, an agency that rates the quality of various securities, debt obligations, governments and other entities reduced its rating of the U.S. government’s long term debt from its highest rating tier, AAA to the second highest rating tier, AA+.  There are varying opinions as to the validity of this decision, whether it was warranted or not and what it truly means for the economy, both in the U.S. and abroad over the long term.  Standard & Poor’s ultimately felt the current plan for reducing the debt is far from sufficient and that it needs to see more action from the government before improving their outlook.  As of this writing, the other ratings agencies have held the United States’ AAA status, but have warned that they, too, are concerned.

The world markets responded to these events in a very negative fashion on Monday, speeding up some already brisk downward moves from the week prior due to continued tension in Europe and slower than expected growth in various sectors here in the U.S.  Tuesday, the Fed released a statement confirming that interest rates will likely stay put for the foreseeable future.  Along with some positive corporate earnings, this news drove the market up nearly 4% and the Nasdaq up more than 5% on an extremely volatile trading day.

We continue to believe that the best defense in any market is to have a broadly diversified, low cost portfolio that is thoughtfully rebalanced to track with our client’s long term goals and tolerance for risk.  That said, we wanted to take this opportunity to provide our view on some commonly asked questions surrounding recent events. 

Are my cash & short-term bond funds safe?

In a word, yes. The money market funds we utilize are of very high quality and will continue to provide safety and security for our clients’ cash reserves.  Much the same, the remainder of the fixed income side of the portfolios, while subject to market fluctuation, are all short term, high quality bond funds.  Using these tools helps protect our clients from a number of factors.  For example, the debt downgrade impacts long term U.S. debt, but its short term rating has remained unchanged, meaning the impact of the S&P downgrade is likely to be minimal.

What can we do?

For most of us, the option to pull out of the market is the worst possible scenario, as can be illustrated by the late afternoon rally on Tuesday.  We will take action by continuing to look for opportunities to buy low and sell high as the volatility provides rebalancing opportunities.  Sticking with our long term discipline served us very well in 2008 and 2009 as the purchases we made during the worst of times have produced the strongest returns since.

While this sometimes feels like a “do nothing” response, it isn’t.  The truth of the matter is, to quote author and financial planner, Carl Richards, “The time to prepare for a crisis is long before you find yourself in one.  It’s not a good idea to figure out how a parachute works after you jump out of the plane. Financial plans and asset allocation models are built for the long term. Large fluctuations in market value are expected and are necessary as the downswings provide the buying opportunities that we’ll take advantage of in future upswings.  How one responds to these temporary fluctuations over a lifetime of investing is what really tests us as investors.

This is the first time the U.S. debt rating has been downgraded.  Is this time different?

No. While the look and feel of this crisis has different characteristics of the prior crisis, which had a different look and feel than the one prior to that, these issues, while incredibly painful and emotional, tend to appear and behave like most financial crises in hindsight.  They are part of the natural economic cycle of booms and busts, the constant battle between fear & greed.
Corporations around the world continue to collectively be healthier than they’ve been in quite some time.  Many are sitting on larger than usual cash reserves and earnings have remained strong overall.  Famed economist Burton Malkiel recently said, “Panic selling of U.S. common stocks will prove to be a very inappropriate response...no one can tell you when the stock market will end its decline, but there are some things we do know.  Investors who have sold out their stocks at times when there have been very large declines in the market have invariably been wrong.”

Who should I be reading? What should I focus on?

The best answer is that you should be reading your favorite books and magazines, and focusing on that which you can control and enjoy.  If this current economic situation fits that bill, below are some excellent articles that help breakdown what has occurred of late and a variety of responses.

Resisting The Urge to Run Away - Ron Lieber, New York Times, August 5, 2011

Your Neglected Stock Market Backup Plan - Carl Richards, New York Times, August 8, 2011

Don’t Panic About the Stock Market – Burton Malkiel, The Wall Street Journal, August 8, 2011

This crisis will come and this crisis will go. The same goes for the upswings. When they will occur is something that no one can tell you with any degree of accuracy, certainty or consistency. It’s tough to feel positive in the midst of so much uncertainty, but take solace knowing that if you stick to your disciplined plan and stay focused on long term results, you’re prepared.

Chip Workman, CFP®
cworkman@taaginc.com
http://www.taaginc.com/

A Morality Litmus Test For Your Broker

(from Dan Solin's Huffington Post blog, 7/12/2011 - click here for the original post)

It's bad enough that Ponzi schemers continue to thrive. The limits these schemers will go to get your money know no bounds. According to a recent report, three former members of the PTA used their connection with a grade school in Los Angeles to bilk investors out of $14 million. The women allegedly represented they had the exclusive right to sell products from a local dairy to various Disney enterprises and others. They promised returns of up to 100 percent.

40 investors used their life savings and took out second mortgages to pony up their "investments."  According to investigators, some of the money was spent on vacations, hotels, cars and gambling.

In another scheme, Christopher Pettengill pleaded guilty to a variety of fraud charges. He was charged with concealing information from investors about a foreign currency program, while touting the investment as low risk. Mr. Pettengill admitted making a personal credit card payment of $11,369 from proceeds of the fraud.

These schemes share a common theme: The promise of high returns without commensurate risk. But even if you are too smart to fall for this kind of scam, your investments may still be in danger. You need a morality litmus test before you entrust your retirement savings to any broker or adviser.

A timely case in point is J.P. Morgan Securities. In a release dated July 7, 2011, the SEC charged this venerable firm with fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states, generating "millions of dollars in ill-gotten gains." According to Robert Khuzami, Director of the SEC's Division of Enforcement, "Municipal issuers and investors didn't stand a chance against the fraudulent strategies JPMS and others used to guarantee profits."

JPMS settled these charges by paying $51.2 million which will be returned to the affected municipalities and $177 million to settle parallel charges brought by federal and state authorities. As is typical in these matters, JPMS neither admitted nor denied the allegations in the complaint.

JPMS and its colleagues in the securities industry manage trillions of dollars of assets. Most of this money is actively managed, meaning they attempt to add "alpha" by beating designated benchmarks. The fact that overwhelming data indicates most active managers add "negative alpha", has had limited impact on these clients to date.

Investors "don't stand a chance" when dealing with brokers who view breaking the law and paying relatively trivial fines as a minor cost of doing business.

Just because it's business as usual for them, doesn't mean you should abandon your moral and ethical principles and continue to patronize them. A collateral benefit of using your moral compass is that your returns are likely to increase when you discover the benefits of a globally diversified portfolio of low management fee stock and bond index funds -- something your local broker is unlikely to discuss with you.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog.