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THE MARKETS
Two steps forward, one step back might be an appropriate description of the financial markets these days.
We started the week on a good note as the National Association of Realtors said existing home sales rose 10.1% in October to the highest seasonally adjusted annual rate since February 2007. Later in the week, the Commerce Department said new home sales rose 6.2% in October, which was well above the number that economists surveyed by MarketWatch had expected. And, the Labor Department said 466,000 Americans filed for unemployment benefits for the week ending November 21. That was the lowest number since September 2008. The stock market liked these numbers and by Wednesday of last week, the S&P 500 index had hit a 13-month high, according to MarketWatch.
Then came Thursday. As most of us were celebrating Thanksgiving, Dubai World – the investment arm of the country of Dubai, announced that it was delaying repayment on much of its debt. That surprise announcement sent stocks, bonds, and commodities around the world into a tailspin. By Friday, cooler heads prevailed and the decline in the U.S. market was limited. For the week, the S&P 500 was flat.
This week, investors will likely focus on the early read from “Black Friday” sales to determine if the consumer has any oomph left. Additional news from Dubai may also move the markets. While the S&P 500 is up about 60% from its March 9 low, last week’s surprise news from Dubai indicates that there may be lingering effects from the recession for some time to come.
| Data as of 11/27/09 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
| Standard & Poor's 500 (Domestic Stocks) |
0.0% |
20.8% |
21.8% |
-7.6% |
-1.5% |
-2.5% |
| DJ Global ex US (Foreign Stocks) |
-0.7 |
36.0 |
44.8 |
-5.3 |
3.6 |
0.9 |
| 10-year Treasury Note (Yield Only) |
3.2 |
N/A |
3.0 |
4.5 |
4.3 |
6.2 |
| Gold (per ounce) |
2.3 |
34.1 |
43.3 |
22.2 |
20.9 |
14.8 |
| DJ/AIG Commodity Index |
0.3 |
15.4 |
10.2 |
-7.8 |
-2.6 |
4.0 |
| DJ Equity All REIT TR Index |
-2.9 |
15.3 |
31.3 |
-15.0 |
-0.6 |
10.1 |
Notes: S&P 500, DJ Global ex US, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not available.
Nearly 80 million baby boomers1 are rapidly approaching retirement age and many of them have a problem, a very BIG problem. The problem stares them in the face every month when they look at their retirement plans, savings accounts, and brokerage statements. That problem is money, or more precisely, the lack of it.
Unlike most of their parents, who earned guaranteed pensions that promised a fixed monthly check when they retired, many baby boomers are responsible for managing their own retirement accounts2. And the markets have been particularly unkind over the past decade leaving millions of baby boomers woefully short of the retirement funds they hoped to have at this stage in life3.
To illustrate this point, let’s go back to the fall of 1999. We’ll use a hypothetical 52 year-old that wants to retire at age 62 and has $500,000 in a 401(k). A free computer program is used to estimate the future value of the 401(k) in 10 years assuming ongoing contributions equal $15,000 annually and the employer match is $3,000 annually. The program uses what some used to consider a “reasonable” 10% annual return, which is much less than what stocks had averaged for the 20 years prior to 19994.
The program calculates the 401(k) will grow to almost $1,600,000 in 10 years if everything goes according to plan5. Let’s assume the funds earned the average of the S&P 500 Index over the previous 10 years. This hypothetical investor would probably have been very disappointed to learn that the plan had much less money than the program projected 10 years earlier. In this example, it would have less than $700,000 compared to the original estimate of almost $1,600,0006.
And, while this is a hypothetical example, it’s clear that in light of the worst decade for stocks in a generation, many baby boomers may need help managing their finances7. Hiring a professional financial advisor doesn’t guarantee baby boomers will be able to make up for years of poor investment performance in their retirement plans.
But, a growing number of forward thinking advisors are utilizing a variety of resources that may help their clients’ retirement funds better withstand stock market volatility.
- Targeted Diversification. Up until this most recent bear market, many people thought diversifying among stocks and bonds was enough to cushion the blow from large market declines. That turned out to be a false sense of security as stocks plunged around the world. Today, financial innovation has opened up new investing opportunities that may allow a more targeted approach to diversification. These new opportunities may enable advisors to develop portfolios that are not as closely aligned with the ups and downs of the stock market. Prudent use of these new opportunities may improve long-term performance, or at least help reduce volatility.
- Treasury Inflation-Protected Securities (TIPS). Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation and are backed by the U.S. government. The principal increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater. TIPS pay interest twice a year at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
- Advance and Protect Strategies. It’s impossible to precisely “time” the stock market’s often nonsensical ups and downs. However, some trading strategies have managed to provide “clues” as to the general expected direction of stocks based on a variety of data. The goal is to take advantage of the “Advances” in market prices while “Protecting” those gains from precipitous declines. And, while no such system can guarantee success, most investors like knowing a strategy is in place that may reduce their exposure to sharp market declines in the future.
Risk and uncertainty are facts of life. But there may be ways to reduce exposure to those risks by utilizing appropriate tools and resources. And that’s where a professional financial advisor can potentially add value to their clients. By helping them understand their options, and implementing the ones that make sense, advisors may help their clients avoid the worst of future financial storms.
Sources:1 http://www.prb.org/Articles/2002/JustHowManyBabyBoomersAreThere.aspx, 2 http://www.ifebp.org/PDF/webexclusive/06feb.pdf, 3 http://www.cbsnews.com/video/watch/?id=4952855n, 4 Thomson-Reuters Investment Software, 5 Ibid, 6 Thomson-Reuters Investment Software, 7 http://www.aarpfinancial.com/content/Learning/retPerspectives_hinden_0708.cfm
Experts have developed many rules of investing some of which work better than others. It would make our lives easier if we found some rules that worked in all situations and at all times, but, of course, we haven’t found those rules, yet! Nonetheless, here are several from veteran investor and market observer Dennis Gartman that are worth considering. Gartman published these rules in a book edited by John Mauldin titled, Just One Thing.
RULE # 1
Never add to a losing position. Gartman says the market knows best and, if an investment is going down in value, then you should get out, not add more.
RULE # 2
Mental capital trumps real capital. Yes, you lose money (real capital) by holding onto a losing position, but Gartman says the emotional cost of holding onto a losing position is even more costly as you toss and turn about what to do. Better to take your loss and move on to something more promising.
RULE #3
Sell markets that show the greatest weakness; buy markets that show the greatest strength. This is similar to the old saying, “The trend is your friend.” You may not agree with the trend, but the market doesn’t really care what you think; it responds to what the majority of investors think.
RULE #4
Keep your trading system simple. Some of the most “sophisticated” investors were the biggest losers in 2008. Gartman says, “Complexity breeds confusion; simplicity breeds an ability to make decisions swiftly, and to admit error when wrong. Simplicity breeds elegance.”
RULE # 5
Do more of that which is working and do less of that which is not. Sounds simple, doesn’t it? Essentially, it’s add to your winners and sell your losers.
Rules-based investing is only as good as the “programmer” of those rules, the investor’s ability to implement those rules, and the markets’ desire to follow those rules. In reality, the financial markets reflect the combined actions of investors around the world. Trying to come up with rules that accurately reflect this human herd at all times in all situations is, if not impossible, right next to it. However, rules can be helpful as a guide.
Test your knowledge then be ready to shudder when you see how others did on this Pew News IQ Quiz.
Thanks for your trust & confidence,
ken@fordwealth.com | 201-798-7992
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