Financial Symmetry News & Views

Author Archive

Feeling a little nervous about the recent drop in the market? You’re in good company as it’s perfectly normal in this type of environment.  In fact, we’d be surprised if the drop had not made you nervous as that is what the majority of people feel after a rise over 14 months long.  Here are a few tips to remember that should calm your nerves:

Reverse Your Emotions

Successful investing requires turning emotions on their head.  When most people are nervous is the time to see opportunity, and when most people are fearless is the time to be scared.

The stock market did worse during the 2000’s than it did in the 1930’s! Do you remember how you felt in September of 2002?  Or even last February 2009? These periods are when many people were giving up on the stock market.  Fear had brainwashed their rational decision-making skills. If they would have realized in 2002 that their investments were about to go on a multi-year bull market ride, would their fear have been as pronounced?

On the other hand, people’s attitudes of early 2000 and October 2007 were ripe with optimism and fearlessness.  This is a direct contrast to the fear and pessimism that are now dominant.  Optimism makes people overpay for opportunity, while fear makes them overpay for safety.

It’s important to recognize that we will continue to have economic scares in the future (as we always have in the past).   Economic Cycle Research Institute had a recent write-up about the lag effect in people’s perception after a recession.

Take Inventory of Your Short-Term Holdings

What percentage of your investments are in safe areas?  The basic rule of thumb is to have 3-6 months of your living expenses in a safe place with little risk.  This allows you some breathing room for the money you have invested in the markets.  Knowing that you have a cushion of cash and bonds to access for your everyday expenses gives riskier investments time to ride through the stock market dips.

*Photo Credit: pasukaru76

Morgan Stanley Smith Barney is offering as much as 330% of a brokers annual production to join the firm.

Bill Ramsay, CFP®, was recently quoted in the November 2009 Investment Advisor magazine.

In the cover story “Reassessing Risk” by Olivia Mellan, Bill discusses his views on risk tolerance:

“My experience is that many people’s tolerance is directly correlated with recent market performance, so we shy away from questionnaires. I’m also wary of the way people can misjudge odds due to things like familiarity bias or the structure of questions.”

…

“We then discuss with clients how that [performed] under different market conditions, and look for their wince point to gauge whether their tolerance is lower than their capacity. If their tolerance is lower, we’ll lower the max equity exposure.”

Click here to read the entire story on InvestmentAdvisor.com.

Bill Ramsay, CFP®, recently participated in his third Triangle Business Journal roundtable event.  The 2009 Financial Roundtable: Wealth Strategies was held at the Triangle Business Journal office on September 29th, 2009, with the full article appearing in the October 16th, 2009 issue.

Bill also participated in the Triangle Busniess Journal’s rountables on August 23, 2007 and July 18, 2006.

Please contact our office at (919) 851-8200 for a copy of the full article.

Paid subscribers of the Triangle Business Journal may click here to access the full article through their website.

With unemployment high, requests for loans from friends and family members are on the rise.  This can put a potential lender in a difficult position.  They do not like to see someone they care about having financial difficulties, but they also know that personal loans can become gifts as default rates are high.

There is also a risk of bruised feelings due to misunderstandings about repayment expectations.

To reduce the risks and potential damage to an important relationship, clearly spelling out terms and expectations up front is vital.

Virgin Money can help you document a personal loan with their Handshake Basic service.  And their Handshake Plus service can even handle payment processing.  Review their Personal Loan Guide, and pass it along to whomever you are considering loaning to or borrowing from.

There are two primary types of client relationships in the world of financial investments.  The sales model represented by brokers versus the fiduciary model represented by Registered Investment Advisors.

The following is a good example of the pitfalls of the sales model:

CIT Debt Sold to Widows Has Fine Print Pimco Resists

Notice that FINRA, the self regulatory authority for brokers says:

“….it’s investigating whether the risks associated with the securities were adequately disclosed.”

Well here is an example of so called disclosure:

CIT Group Inc. Prospectus Supplement

It is our opinion that it is ridiculous to expect most Americans to be able to adequately interpret 72 pages of “disclosure” (and this is only the supplement to the initial disclosure document).

Yet the world of FINRA regulation provides the framework for a Prudential spokesman to proclaim:

“As with all bonds, investors choosing to sell the notes before maturity may sell them at market value to other investors and face certain risks, which are fully disclosed at the time of issue…”

In other words, buyer beware.

The inherent problems and conflicts of interest with the sales model is why we choose to operate as Registered Investment Advisors.  Our regulatory framework is the Investment Advisors Act of 1940, which requires that we act in our client’s best interest.  We believe this is the best framework for client relationships.  The SEC is responsible for supervision under the Act, and they have unfortunately been underfunded for the last several years.  We hope that will be corrected as we feel more of the public should be served by Registered Investment Advisors.

All data is not created equal.  The following chart would seem to indicate
that US stocks are more expensive and overvalued then they’ve ever been.

http://www.chartoftheday.com

The rest of the story is that the last 12 months of earnings are not
representative of what earnings will be going forward.  Our best estimate is
that at current price levels, the PE ratio is actually around 13 to 17.  Most
definitely not the most expensive market in history.

Much of our research effort involves separating good data from bad data,
which is essential to gain and maintain a competitive edge against other investors.

Bill Ramsay, CFP®, was recently quoted on BankInvestmentConsultant.com.   Bill was contacted by Donna Mitchell regarding current pending home sales and affordability.

Here is Bill’s response:

“The housing market is not going to be the engine leading us out of the recession, but clearly it is going to be less of a drag than it has been or should be.”

Click here to view the original article entitled  Pending Home Sales and Affordability Numbers Jump Higher.

Bill Ramsay, CFP®, was recently quoted on Financial-Planning.com.  Bill was contacted by Donna Mitchell regarding the topic of a new partnership between Fidelity Investments and Kohlberg, Kravis, Roberts & Co.

“Too many of them do not do well, and the frenzy that exists when the IPO market is hot makes the problem worse as the average investor tends to significantly overpay when their gambling switch is turned on.”

“Exclusive access also denotes an understanding that Fidelity markets KKR’s IPOs sufficiently, regardless of whether they have an opinion about whether it is likely to be a good investment.”

Click here to view the original article, Fidelity, KKR in Partnership to Sell IPOs to Retail Clients

Summary written by Financial Symmetry’s Bill Ramsay.

Hyman Minsky was an economist who developed a theory about financial markets that seems to nearly perfectly describe the path of this crisis. In fact he wrote extensively about it in 1986, right before Greenspan became our Fed chairman. It is too bad that Greenspan apparently hadn’t read Minsky or didn’t put enough weight on his teachings or the problem might not have become so large.

Currently there are countless descriptions, speculations and rantings about the causes of the financial crisis and what should or should not be done. Many are good. Many more are bad, often due to ideological beliefs and/or lack of understanding money and financial systems.

The following article is perhaps the best I have read so far. It comes from Paul McCulley of PIMCO. In it he describes how Minsky’s hypothesis applies to the current crisis.