Archives for February 2012

Top 9 Tips for the Successful Investor in 2012: Tip #9

9 – Seek the help of a professional

A recent Dalbar study revealed that from 1986 to 2005 the average investor earned 3.90% before taxes while the average stock mutual fund made 9.30% and the S&P 500 grew by 11.90%.  Individual investors are emotional by nature and have a bad habit of buying near peaks and selling near bottoms, exactly the opposite of what they should be doing!  If that sounds familiar to you, it’s time to seek qualified help.

If your portfolio was decimated in 2008 (contrary to popular belief, plenty of RIAs had respectable returns) and you were told to “stay the course”, or worse yet, to sell everything in early 2009, it’s time to find another qualified professional to help you achieve your retirement goals.  If you are confused by what’s going on in the financial markets or economy, don’t sit still without getting your questions answered.  If you are and have been sitting with the same portfolio allocation (especially just in stocks and bonds) for years, you’re long overdue for a change.

If you just want to bounce an idea off someone, would rather not handle your own portfolio or are just plain tired of not making money, seek the help of a qualified professional.  Interview at least two firms to get a feel for who does what and how.  Look for an individual who offers independent advice as a Registered Investment Adviser (RIA) and not just a product salesperson, peddling the latest mutual fund or variable annuity. An RIA is a fiduciary and by law, must put your best interests first, and his/her second.

Top 9 Tips for the Successful Investor in 2012: Tip #8

8 – Prepare for higher taxes

No matter who is to blame (it’s really irrelevant at this point), the Great Recession and subsequent government bailouts, programs and stimuli are resulting in trillion dollar plus budget deficits as far as the eye can see.  To correct this, the government can cut spending and shrink government and/or raise taxes.  In all likelihood, there will be a combination of both which should result in continued subpar growth with rolling bouts of weakness as the country works through its problems.

The successful investor should prepare for higher taxes after the election, especially regarding dividends and interest.  They may not all be called “taxes”, but in the end, it will mean less money for Americans and more for Uncle Sam.  Many states have already raised income taxes to plug holes after the stimulus money ran out, but they have also increased sales taxes as well as removing tax exemptions from certain goods and services.  2012 is a transition year and we should expect modest tax increases on higher income earners and huge increases on estate taxes, not to mention the surtaxes beginning next year to fund ObamaCare.

While President Obama and Congress successfully compromised in December 2010 to avoid the largest tax increase in history, the truth of the matter is that it was only a Band-Aid.  Americans agree that our tax system is a complete mess and the entire code must be simplified and overhauled.  The bipartisan deficit reduction commission gave Congress the cover to do so, but once again, partisan politics got in the way.  At this point, it appears as though comprehensive tax reform with fewer brackets, lower rates and much fewer deductions won’t be discussed until after the election.

Top 9 Tips for the Successful Investor in 2012: Tip #7

7 – Residential real estate begins the stabilization process.
It’s no secret that the real estate bubble has burst and many areas of the country are left in ruins.  It was no secret in 2008 that the energy bubble burst.  And it was certainly no secret that the dotcom bubble burst 10 years ago.  The problem is that it was only apparent to the masses after the initial collapse occurred!  The chart below can be applied to any bubble or mania as they are largely based on psychology and human nature just doesn’t change.

The Making of a Bubble and Burst

In 2012, the operative word in residential real estate will be “stable”, the first time that can be said in many years.   The government spent trillions of dollars trying to save the real estate market and they are not done.  But similar to Europe’s problems, the ONLY solution here is T-I-M-E and the process is entering its fourth year.  The glut of properties on the market is being soaked up naturally by demand (see chart below) and the largest lenders are finally unclogging the bowels of the system.  Water finds its own level and so does real estate.

Housing starts are very, very slowly growing again as you can see below and the nascent real estate stabilization should begin to get back to historical growth rates of 5%.

The three biggest tailwinds of the past 25 years, declining mortgage rates, demographics with the baby boomers and easy access to capital, are no longer blowing. Rates currently sit at record lows.  While they could certainly scrape along the bottom for months, quarters or years, I think we all know that they are not going much lower. The refinance, home equity party of the past 25 years is over, for a long, long time.

No doc, low doc, no income verification (aka liar) loans are a thing of the past.  Bank balance sheets have been getting stronger every month and quarter as they proactively address problems, tighten lending standards and hoard cash.  The days of easy money are long over and, in fact, it’s downright difficult to get a mortgage without putting 20% down!

With so many potential homebuyers no longer able to secure a mortgage, baby boomers becoming a net seller of real estate and the interest rate environment unable to improve substantially, stability is the most likely path after the decimation in prices.  And that is not such a bad thing if the residential real estate market can eventually get back to trending towards historical growth rates of 5%.

Top 9 Tips for the Successful Investor in 2012: Tip #6

6 – “I’m from the government and I am here to help!”

Those were Ronald Reagan’s nine most terrifying words. Not a new worry, but the biggest risk to the financial markets and economic recovery is politicians running even more amuck, especially with the hugely important election this year here and others around the globe.  Before long, all of the talk will turn to the two presidential candidates, Barack Obama and likely Mitt Romney with their dizzying array of media blitzes with half truths and partial facts.  Unfortunately, politics and the financial markets are forever linked.  With the power to tax and spend, the government has the ability to restrict and stimulate.

The problem isn’t as much a lack of intelligence as it is the strange fog that clouds their judgment at crucial moments.  No sooner does Congress get elected than they start campaigning for reelection and paying back their debts to special interest.  The best solution would be to extend their terms to 8-10 years, but not allow anyone to run for reelection.  That way, no one is worried about campaigning or beholden to lobbyists.

As sad as it is, the stock market typically performs best with gridlock in Washington.  That comes in the form of a split Congress or the Executive Branch from party and Congress from the other.  The most rewarding investment period of the modern investing era began when Newt Gingrich and the republicans won Congress in November 1994 and worked with Bill Clinton, not against for the next 6 years.

The President and Congress both moved toward the center, from the left and right respectively and the American people were the big winners!  In 2012, it’s unlikely that either party’s leaders will have learned their lessons from ObamaCare, the debt ceiling debate or the Bush/Obama tax cut extensions.  True bipartisanship is absolutely needed to get America going again.

Top 9 Tips for the Successful Investor in 2012: Tip #5

5 – Look for the U.S. economy to continue to slog along

When economies emerge from recession, Gross Domestic Product (GDP) tends to accelerate very quickly and in steep fashion as consumers who have held off purchases begin to buy and companies who became lean and mean during the cleansing are not left with much inventory. That’s in “normal” times.

What we experienced in 2008 and 2009 was the bursting of a credit bubble and subsequent deleveraging (reducing debt). Recoveries from credit busts are very different from that of “normal” recessions which are usually caused by corporations becoming too fat and bloated. As we witnessed in the 1930s, it takes time and patience for the economy, corporations and individuals to return to a sense of normalcy.

Let’s not forget that it took decades to leverage up (borrow) to the point of collapse and history suggests that it will take about one third as long to fully deleverage and right the ship. Once the U.S. economy began to stabilize in 2009, it was in for a long period of sloggy growth, hampered by the effects of the credit bubble bursting. GDP growth should see periods where the economy teeters on recession along with times where it seems like it’s all systems go. It would not be unexpected to see growth rates range from -1% to +3.0%.

During this recovery, unemployment is expected to remain stubbornly high with muted progress as you can see from the solid red line on the graph below. It is going to take time, patience and some more pain before the employment picture really brightens this decade.

One of the big surprises is that while the economy has technically recovered what it lost, it is doing so with at least 6.6 million fewer jobs. And that’s why it still feels so difficult for most. The chart below perfectly depicts this.

Another item that should not be ignored is that corporations are making record profits with their smaller workforce and wages have not grown at all. It may be good news for Corporate America, but not so for workers.

Corporate Profits versus GDP

Two of the more outside the box indicators of economic activity can be found below. The first is an index of architectural billings. If architects are billing well, that usually translates into increased economic activity 6-9 months down the road, similar to the effects of Federal Reserve monetary policy. Over the past two years, you can see that billings have been plus or minus 10% of the neutral 50 line, another piece that supports a sloggy economy. This behavior should continue.

Architectural Billings

The next chart shows how restaurants are performing, another indicator of the average family’s health. Similar to the architecture billings, activity fell off a cliff in 2008, recovered sharply and has been in a range for almost two years.

Restaurant Index

The previous two charts, along with others before that, support an economy that will quietly trudge along for some time with subpar growth and occasional bouts of weakness as the world digests the aftermath of the credit crisis. There is a light at the end of the tunnel this decade from which the opportunity exists for a 20-30 year period of economic and market peace and prosperity. Just have patience!

Top 9 Tips for the Successful Investor in 2012: Tip #4

4 – Don’t get complacent!

After a horrific climate in late 2007, 2008 and early 2009 where most asset classes were decimated, the last 9 months of 2009 saw tremendous “bounce back” where most people began to feel better as their portfolios and the economy stabilized.

Don’t get complacent and lazy, thinking the markets going to party like it’s the 1990s all over again. That time will come later this decade. The modern investor has a short memory and has been burned over and over again by drinking the Kool-Aid that Wall Street sells. The global economies and markets are in a longer-term hangover period with digestion and retrenchment, trying to recover from the massive debt and leverage party. It took decades for the “celebration” to envelope the world and it’s not going to get fixed in just one painful year.

It’s going to take years and years to correct all that ails us and we haven’t seen the last trap door or sink hole. From this period, the potential exists for another multi decade run of economic and financial market peace and prosperity. Stay active and focused!

Top 9 Tips for the Successful Investor in 2012: Tip #3

3 – Beware the “Money Magazine Jinx”.

What worked well last year isn’t likely to be repeated next year. When the popular publications like Money and Fortune give kudos to a particular investment’s success last year, it’s usually close to the end. That’s been the case the vast majority of the time in bull and bear markets with geographic regions like Asian emerging markets, asset classes like commodities, mutual funds like the Fairholme Fund and Legg Mason Value Trust, sectors like technology and energy along with individual stocks.

My favorite examples of this were Time magazine naming CEO Jeff Bezos Man of the Year in 1999 and US News & World Report running a cover story entitled AOL Rules as the merger with Time Warner was announced (see below). Did you see who was recently on Time’s cover?

AOL - Time Warner Merger on US News & World Report Cover

Be VERY careful chasing the winners from year to year, but ESPECIALLY when the popular publications celebrate them! What stands out to you as the big winners from 2011?

Top 9 Tips for the Successful Investor in 2012: Tip #2

2 – Asset allocating among stocks and bonds hasn’t worked well this century and it’s unlikely to work in the next decade.

Modern Portfolio Theory (MPT), which espouses fixed portfolio allocations of stocks and bonds, may not be dead, but it’s critically wounded and has hurt hundreds of thousands of pre-retirees and retirees just in the past 12 years. Folks who retired in 1999 and 2000 have been decimated TWICE in 10 years.  Not only were they drawing income off of their portfolios to live on, but those assets were declining sharply in price from 2000 – 2002 and again in 2008 – 2009.

The first bear market (as seen below) saw the S&P 500 sink by roughly 50%, needing 100% gain just to get back to breakeven.

Stock market chart

Dotcom Bubble Burst 2000 - 2002

The recent debacle (below) plunged the popular index even more than 50%.  Now imagine you are withdrawing the same amount of money each year, but your portfolio is at lower and lower values.  Can you say… RUNNING OUT OF MONEY?

stock market chart 2008 - 2009

Financial Crisis Collapse 2008 - 2009

The successful investor in the New Economy doesn’t only subscribe to MPT (fixed allocations of stocks and bonds).  They not only own stocks and bonds, but other important assets as well, like currencies, commodities and REITS.  The REALLY successful New Economy investor also employs different strategies that don’t all go up or down together.  Those who protect against inflation and deflation with asset and strategy diversification have the potential to be the survivors and winners!