Financial Symmetry News & Views

Posts Tagged ‘investing’

Investing in gold is on the tip of many investors’ tongues these days. The fact that gold has tripled in value over the last seven years and recently has been hovering at a price of $1,100 an ounce, has certainly helped.  This is coupled with the realization that gold has outperformed most of the major asset classes over the past several years.  But, is this enough evidence to make it worth investing a significant portion of your portfolio in gold?

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.

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.

After going through multiple investment bubbles, a severe credit crisis, and two painful recessions, the “Lost Decade” for stock investments has come to an end.   In fact, the latter half of 2009 left us with a rather robust recovery and the idea that we may be participating in a sustainable economic recovery.

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?

When selecting mutual funds to use in our client’s accounts we use various quantitative and qualitative factors to evaluate if we believe a fund can add value.  Morningstar is the most widely used source of mutual fund data and analysis, so we rely on their data for a significant portion of our research.  One thing we have learned over the years, however, is to take their star ratings with a grain of salt. This is because the star ratings are really a measure of past performance and are not an indicator of what the future will hold.

“Advisor Perspectives” recently reviewed the predictive ability of the star rating system over a full market cycle and the results of their study were similar to our experiences.  In a recent letter published by Robert Huebscher, he states, “We concur that the ratings are not an effective forward-looking measure, but that is not how they are used in the industry.  By calling this calculation a rating, Morningstar imparts at least the implicit endorsement of higher- rated funds and an expectation that their relative performance advantage will endure.”

To read the full article and learn more about fund performance over a full market cycle go to:

http://www.advisorperspectives.com/newsletters09/Morningstar_Ratings_Fail_over_a_Full_Market_Cycle.php

Will Holt, CFP®, CPA was recently quoted in the Saturday Evening Post.

Will discussed tax-loss harvesting, an important but often over-looked tax strategy.  Click here to read the article, “Taking the Sting Out of Investment Loses” by Russell Wild, MBA.

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.

When researching mutual funds to invest client funds, we evaluate numerous aspects including corporate culture, manager experience and compensation, research philosophy, and expenses. One of our primary concerns is that fund managers have their interests aligned with those of shareholders. In our view we find one of the best measures of this to be if managers invest significantly in their own funds. Consistent with recent studies by Morningstar, this also seems to be indicative of better performance.

The recent issue of Investment News details these findings:

“…funds whose managers invest $1 million or more of their own money in their fund ranked in the 42nd performance percentile, on average, over the five-year period through July. That means they outperformed 58% of their peers.”

To read the full article click here: InvestmentNews

The following is written by Allison Berger, CFP®.

Given current economic conditions, is a weak dollar a good or a bad thing?  There are strong opinions on this matter from both sides of the issue.  Paul Krugman, an economics professor at Princeton and a columnist for The NY Times makes a compelling case for a weakening U.S. dollar being good news.

He writes:

“The truth is that the falling dollar is good news. For one thing, it’s mainly the result of rising confidence: the dollar rose at the height of the financial crisis as panicked investors sought safe haven in America, and it’s falling again now that the fear is subsiding. And a lower dollar is good for U.S. exporters, helping us make the transition away from huge trade deficits to a more sustainable international position.”

While we agree with Professor Krugman that a lower dollar can help to even out our trade balance, if it falls too low, however, it could create unwelcome inflationary pressures. The Federal Reserve will look to prevent an inflationary event by tightening the monetary spigot which includes raising interest rates.  Krugman argues that this would be a disastrous policy move at this stage of the economic recovery.  He was an ardent proponent of government intervention in the form of stimulus and believes that we didn’t do enough.

Click here for the original article, “Misquided Monetary Mentalities.”

The CFP® board requires financial planners to attain a significant amount of continuing education to keep their designations current.  So this week Allison and Chad attended the FPA of the Triangle’s 2009 Annual Symposium.

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?

New research has found that men are more likely to take larger risks in their financial decision making than women. Using a sample set of a group of MBA students the researchers looked for a correlation between higher levels of testosterone and a willingness to take a chance on a less likely outcome if the potential payout was greater. After graduation, more male students will follow a career path into investment banking or trading on Wall Street where the stakes are always high.

http://www.fa-mag.com/fa-news/4408-testosterone-may-affect-financial-risk-aversion.html

Back in March, many investors were wrestling with the emotions of wanting to preserve whatever money they still had.  Generally, this thought process involved convincing themselves that cash or CD’s were safer investments than stocks.  Using a little hindsight, those decisions to move into “safer” investments, do not seem as appealing after a 50% increase in the S&P 500 index since then.  This type of behavior is a classic example of the typical mistakes that investors make at turning points within the markets.  In a recent Wall Street Journal article, “Playing it Safe Can Hurt Returns,” you can see examples of how impulsive moves to safe investments can negatively influence your investments.