photo credit: tao_zhyn

The uncertainty in the economic environment as a result of the government’s growing deficit has provided the perfect storm for gold’s move to the top of the list for investors. With the risk of heavy inflation and a weaker dollar, people’s fears have driven them toward the implied security that gold can hold during these conditions.  To make matters worse, the exaggerated rise in gold since 2003, only compounds investors “being left out” reflex.  It’s very difficult to see and hear how an asset class is rising and not want to be a part of it.

In our evaluation of assets, we lean toward long-term trends.  If you look at a chart of gold prices since 1975 (like the one below), you notice that the price of gold had a similar run in the late seventies hitting a record of $750 an ounce or so in 1980.  Moving forward to 1999 the price was closer to the $300 an ounce range.  Taking a look at the chart, if you invested in gold in 1980, you would have had to wait 27 years just to earn your money back.  This example emphasizes the importance of understanding where you are in a market cycle, before investing in a specific asset class.

photo credit: ethan bloch

The speculative nature of investing in gold is eerily similar to the speculation that we observed with oil in 2007-2008.  With both of these asset classes, there have been multiple reports in the news of how high the prices might rise, which is one of our clearest warning signs for an overheated investment.  One of the latest price targets being promoted for gold was that it could rise to $5000 an ounce.

It’s important to remember that gold itself is not a cash-generating asset.  It may be tangible, but if you are holding gold it can actually cost you money in the transportation and storage of it.  In this article, Vitaliy Katsenelson does a nice job describing the concept of gold as an investment.

At the beginning of every month, during what we’ve coined our long-term investment “Outlook” meeting, our investment team gets together to debate different investment ideas of where we each see opportunity in the marketplace, while also trying to identify potential risks that could trip us up.  This process involves detailed discussions in which we compile a healthy collection of economic data and opinions to determine where the financial markets may be headed.  One of the things we have learned in our meetings is that a big part of being a successful investor is understanding where and how you have a competitive advantage over another investor.  A key to identifying these opportunities is knowing which sources are worth listening to vs. which ones are using biased assumptions to create support for their opinions.  After formalizing how these scenarios may or may not develop, we investigate specific ways that we can position our clients’ assets with the expectation that their portfolios will most advantageously benefit.  So without further ado, following is a summary of a few of the issues we discussed in our January “Outlook” meeting:

• Even though the unemployment percentage still hovers around 10%, this could be yet another positive for future stock market growth.  Typically, high unemployment coincides with the start of an economic expansion which is good for the stock market.

• Consumers and US corporations continue to improve their balance sheets.  Both groups have built up a healthy amount of pent-up demand which will likely continue to fuel the recovery.

• The average age of a car on the road is now 9.5 years old (which is the oldest average ever) and 2009 saw new car sales reach their lowest unit level since 1982, even with the added cash for clunkers steroid shot.

• China is now the largest consumer of cars in the world, which increases global demand for oil however; at some point other energy sources will become viable which would reverse this trend.  We realize that as oil prices rise, pressure for alternatives will continue but in the short-term we are not decreasing our energy holdings.

• One of the pressing primary risks is how smoothly the hand-off will be from government stimulus to private sector growth.  It’s important to remember that discussions about the removal of stimulus funds, interest rate increases, the speed of recovery and inflationary threats are a part of all economic recoveries and are typical for a bull market as it climbs its wall of worry.

• On average the market experiences a 10% drop at some point every year, so it’s not out of the realm of possibility that these lingering fears could cause some short-term market fluctuations.

• We feel that US high quality dividend focused companies’ likely hold the most opportunity for 2010.  However, we’re still allocating a significant portion to foreign stocks as a way to add diversity to client portfolios as well as provide a hedge against the US dollar.

• We still see little threat of inflation in the short term as the world has substantial under utilized resources. It will likely take years to re-employ those resources, though we may still get an up tick in inflation in the medium term.

How did your investments fare during the Lost Decade?

In response to the many fears and uncertainties that arose during the recent economic crisis, The National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation sponsored multiple financial advice events around the country as part of the “Your Money Bus” tour.  On Tuesday January 19^th, the “Your Money Bus” rolled in to downtown Raleigh, in partnership with NC State Treasurer Janet Cowell’s office.

With unemployment hovering around 10% and dramatic swings in the stock market, the need for financial advice was very apparent in the crowd of more than 85 that showed up at the State Government Complex in downtown Raleigh.  The impressive turnout of people came with a wide mix of questions that dealt with everything from how much and in which accounts they should be saving to which debts they should be paying down the quickest.

Partners of Financial Symmetry, Allison Berger and Chad Smith, participated in the event for the second consecutive year.

“We’ve really enjoyed being involved with the ‘Your Money Bus’ tour over the last two years.  It’s a great opportunity to spread financial literacy and make a difference in our community.” -Allison Berger

“Volunteering our advice has been a neat way to provide people with action steps that can help them gain some peace of mind when dealing with their finances.” -Chad Smith

Should I be trying to hit the same number every month?

Comparing expenses on a monthly basis can be another source of frustration. There are many fluctuations that occur throughout the year, like holidays, summer vacation, and surprise home/car maintenance issues.

This is why it’s most helpful to measure your progress against a rolling year period. For example: You’ve just finished November, so you will want to measure December 1st of last year to November 30th of this year against the calendar year amount of your budget. If the amount is more, then you know you are a little ahead of pace and you should scale back.

If you’ve been diligent enough to hang in there for a year of budgeting, then you are fortunate enough to have a full year of meaningful comparison points.  So for this month, it would be best to investigate how January 2010 is comparing to January 2009’s data.  Barring any unusual spending activities in Jan. 2009, you should have some useful targets to compare to this year’s spending.

Performing this exercise monthly can greatly improve your overall financial picture as it allows you to have greater control over your regular expenditures.

How many categories should I be using?

Trying to determine which category your expense should go can be very confusing when you have forty to choose from.  Add in multiple subcategories for each of the main categories and you’re about ready to pull your hair out.

Luckily, Quicken allows you to edit the category list which should be your first action step when loading the software.  We recommend using 8-10 categories that will capture all of your spending.  This list includes:

• Clothing
• Communication (Phone, TV, Internet)
• Discretionary (Cash, Travel, Fun, Church/Charity Contributions)
• Food (Dining Out, Alcohol, Groceries)
• Debts (Mortgage, Equity Line, Car Payments, Credit Card or Student Loan Payments)
• Education (Books, Private School, College Tuition)
• Health & Hygiene (Gym Membership, Doctor Visits, Prescriptions)
• Household (Maintenance, Home Improvements)
• Investments (Roth/IRA Contributions)
• Risk Management & Financial Services (Bank Charges, Insurance)
• Taxes
• Transportation (Gas, Repairs, Car Insurance)

By practicing these two steps you should be well on your way to becoming a successful budgeter.

Can You Trust Your Financial Advisor?

Written by Chad Smith, CFP®.

This issue is actually gaining more momentum in the media and in Congress of late.  We’ve provided some information below on recent progress in the efforts being taken to fight this predatory fraud. The following article, published in the Wall Street Journal, provides a real example of elderly fraud and tips of how best to avoid incidents in the future.

A Family’s Fight to Save an Elder From Scammers

Tips for Avoiding Telemarketing Criminals

Some telemarketing pitches are blatantly fraudulent, and you should know the signs, which include:

• Asking you to pay for a prize you’ve won. It’s illegal for any company to ask you to pay or buy something to win a prize, or to claim that paying will increase your chances of winning.
• Asking for upfront fees. It’s illegal for telemarketers to ask for a fee upfront if they claim it’s likely they’ll get you a credit card, loan, or to “repair” your credit.
• Pressure to act immediately.
• Refusal to send written info. Legitimate agencies, charitable or otherwise, should not be reluctant to send you written information about their program or organization.
• Requests for personal financial information. Requests for your personal bank account numbers, or other private information, is a huge warning sign. Never give out your information to an unknown caller.

Ways to fight Elderly Fraud

NC Attorney General’s Consumer Protection Office 1-877-5-NO-SCAM

Fraud Fighter Line 1-800-646-2283

NC Task Force Chair 919-716-6000

Website that compiles recent scams:

The NC Division of Aging and Adult Services Senior Consumer Fraud Task Force

New legislation has also been introduced recently in Congress that would accomplish the following objectives to fight elderly fraud…

• Charge an additional $50,000 civil fine for each violation that is targeted or is committed against a senior.
• Create a national grant program for states to protect seniors from misleading financial advisors claiming to specialize in seniors
• Direct the FTC to establish a one-stop-shop for consumer education on mail, telemarketing and Internet fraud against seniors.
• Establish a grant program to give states and local organizations the resources they need to initiate local mail, telemarketing and Internet fraud prevention and education programs for seniors.
• Declare a “National Senior Fraud Awareness Week” in May – coordinated with Elder Abuse Awareness Month – to increase public awareness of the enormous impact that mail, telemarketing and Internet fraud have on senior citizens in the U.S.
• Initial workshops to educate seniors on how to recognize risk factors and learn about who can help them if they are exploited.

Remember if something sounds too good to be true, it probably is!

“Seniors should be aware that the issue is not if, but when they will be targeted by sophisticated scam artists. Sharing information about how best to prevent these communications and where to report it when they occur, empowers seniors with the tools to fight back.” Chad Smith, CFP®

To request Chad as a speaker at your event, contact him at csmith@finsym.com.

One of the presentations by fellow FPA member, Dennis Stearns, provided some quality economic research that should lend some interesting discussion in our next Investment Outlook Committee meeting.  Here is a summary of some of the interesting ideas he discussed during the presentation:

• Behavioral Finance (the intersection between psychology and finance) will play a larger role in investor decisions going forward
• The Great Depression was no comparison to the Current Recession with respect to length or severity
• Deep Recessions usually mean strong recoveries
• Be aware of uncertainties and how they can impact scenario planning
• Barclay’s new research on a Composure Index, which measures an investor’s composure in the face of financial uncertainty, might be a nice addition to gauging risk tolerance.
• Pay attention to SuperTrends (Globalization, Technology Accelerators, Global Age Wave)
• Four different ways we can reduce the Federal Deficit (tax, save, inflate and grow)
• How will the explosion in internet media change the way we deal with a more sophisticated and confused client?
• How will Long-Term Care Insurance be affected if a cure for Alzheimer’s is found? or if average lifespan increases to 125?

Chad Smith, CFP® was recently quoted on wsj.com. In the article, “Financial Advisers Look Local,” Shelly Banjo profiled several ways Financial Symmetry was reaching out to clients in the Triangle. Some of these initiatives included working with charitable organizations, educating younger couples, and providing information on the company’s blog.

Download pdf of article

” Anyone who did what Wall Street analysts advised last March has only losses after the biggest stock market rally in seven decades.

Citigroup Inc., Bank of America Corp. and more than a dozen other firms told clients to purchase European energy producers and U.S. drugmakers while selling banks and retailers, according to combined rankings compiled by Bloomberg. An investor who used $10,000 to buy companies in the highest-rated industries and bet on declines in the lowest since the advance began on March 9 lost everything and would owe as much as $6,000 to cover bearish trades, the data show… “

The lack of forward thinking by brokerage house research departments has been a constant theme in our research meetings over the years.  In fact, a central premise of our research process challenges us to explore the reasons why a source may be recommending a specific area of the market.  We attempt to evaluate the lens through which a source views the investing landscape.  This can help us understand whether they have a  motivation and/or bias that skews their opinion.  Digging deeper allows us to zero in on the “why”, which goes a long way in helping us identify opportunities for better returns.