Archive for January, 2012

Earn Baby Earn

Posted: January 26, 2012 in Uncategorized

Another day another bang up earnings report. So far this week we have seen AAPL, CAT, NFLX, SBUX all outperform analyst estimates. Regardless of these great earnings reports stocks are still underowned across the board. With the large outflows from equity mutual funds over the last few years many investors are sitting in fixed income at the moment. Obviously the last few years has driven a generation of investors out of the market. The fear has been palpable, but as we talked about yesterday fear can crush your portfolio. In the current environment the risk is to the upside. Though the Fed is planning on keeping rates low through 2014, essentially begging investors to jump back into risk based assets, many are keeping it safe and staying in fixed income. Unfortunately for these investors current yields on fixed income are very low, many are eating into their principal just to get the necessary income to live their lifestyle. Generating yield in this environment is tough. On one hand the events of the last few years have had investors running scared for a safe place to put their money, which strictly from a psychological point of view makes sense. On the other hand however,yields in these “safe” assets are so low that you almost have no chance to outpace inflation. Whats an investor to do? Current trends suggest that at current levels the market is a bit over bought. Ok, so if you are a trader now may be a good time to take profits from your long positions. If you are investor however now may be the time to over come your fear and rebalance your portfolio. Look for companies/funds that pay a solid dividend and have solid earnings to give you stability and income. If the earnings reports of the last week are any indication companies are becoming lean, mean, earning machines.

Once upon a time long long ago the average person would work 30 years for the same company, retire at 65 with a gold watch and a pension. Life was grand and the “average investor” was not worried about VIX readings, QE 1,2,3, Apple Earnings, High Frequency Trading, or any other financial buzz word for that matter. But all of a sudden pension obligations became to hot to handle and BOOM retirement saving is now up to you the individual.

Beginning in the 80’s employers left the margin squeezing pension programs on the shelf and began introducing the much discussed 401(k) plan. The advent of the 401(K) plan has turned the “average investor” into a willing or “unwilling market participant. All of a sudden the stock market was no longer just for the wealthy, the wicked or the gambler, now the market is for everyone. Over time the shift from an entitlement society to a self-sufficient society has brought millions of new market participants and a sea change in the psychology of the investor.

There are no shortage of theories, research papers, and books on investor psychology, many have tried to pin down what causes investors to react and how you as an advisor, trader, broker, or asset manager can capitalize on it. Whether its monthly market sentiment charts, VIX readings, or surveys there is a billion dollar industry trying to figure out how the investor feels. In my opinion trying to quantify how the investor feels is fools gold. It’s not hard to tell that the world is at a cross roads. Between the crisis of 2008 here in the States or the current situation in the Euro Zone there has not much for investors to feel good about the last few years.

Many like to say that the last 10 years has been a lost decade in the market. The .SPX and the NASDAQ are about where they were at the turn of the century. In between 2000 and 2011 the market has been a cyclical bear market. Too often the average investor will react to the news they here on Fox or CNBC, they don’t see a distinction between an investor or trader. When the market is driven down 3% in a day by traders many average market participants feel like they must get out before it’s too late and they lose everything.When the market is driven up 3% by the same traders the average investor feels like they have to jump into the pool head first or they will miss their opportunity to become rich. This is obviously a flawed logic.

Stock market psychology to me is not an acute science, quite honestly if you read the news headlines on any given day you can get a sense of the average investor feels. The biggest driver of this psychology; fear. Am I going to retire? Will I survive my retirement? How am I going to pay for college? These types of questions are what keep the average investor up at night. These questions are what drives an investor to buy and sell with the market. These are the types of questions that cause an investor to be a failed investor or an investor no more. Ideally investors would not have an emotional, visceral reaction when dealing with their investments. Unfortunately this is  not the case. Investors who lost 40% of their portfolio’s are fearful that it will happen again. Investors who timed it perfect and doubled their money are convinced it will happen again as well, it’s all a matter of perspective.

When it’s all said and done fear and greed are the biggest drivers of the market for the average investor. Will this change? Probably not, all we can do is sit back and watch as generations of investors continue to make the same mistakes time and time again. Everytime the market corrects or the economy sputters you hear the words “this time its different”. Bullshit, the only thing that is different are the characters. They will get in and out of the market too late or early. Many will say that investing is a scam and that they will never get into the market again. In fact close to 35% of Generation Y (born between 1980-1990) have said they will never invest in the stock market. Thats fine, we don’t need them, if the fear of losing money in a bad market forced you to forego investing all together you’re clearly not cut out to be an investor. But you must remember that you do not save for retirement, you invest for retirement. They say those who don’t know history are bound to repeat it, I can only hope this turns out to be false, otherwise we are going to have years of volatility to come.

Where can I get Income????

Posted: January 11, 2012 in Uncategorized

One of the more interesting conversations I get to have with my clients is how we are going to generate income for their retirement. With so many solutions available this tends to be a loaded question. In my experience many clients have no idea how to live off of their money when  retirement comes calling. The income distribution phase of financial planning is the ugly step sister compared to the fun asset accumulation phase. No longer are we talking about generating alpha, beta coefficients, and performance. Rather we are talking about IRA distributions, RMD’S, and yield.

Many brokers turn to annuities for income, some will utilize mutual fund portfolios’, others will use laddered bonds, while others rely on dividend paying stocks. Needless to say there are a million ways to generate income in retirement . For me and my clients there is no magic bullet. Introducing an income plan that stays in line with the needs and risk tolerance of the client is paramount. I personally believe in using a diversified approach to investing as well as generating income.

While some variable annuities promise to pay income for life no questions asked I am quite skeptical. Most companies hedge their reserves against the 10 year treasury and you all know what the 10 year in currently yielding. I am just as guilty as any other broker/advisor using these products. At the time they seem like a great idea, especially in the market environment of the last 3 years.Guranteeing principal, income or both while participating in the market is great,but I have a sneaking suspicion that the glory days of these investment vehicles is behind us.

Others will use REIT’S and only REIT’S to generate said income. Many times older and undereducated investors will be sold these programs believing they are stable and safe. One firm in particular is guilty of misleading sales practices regarding these investments. Older investors are herded into a banquet hall and promised the moon: 8% income, no risk, stable principal, and liquidity only to find out that the entire story is fiction. I suppose Poppy is not who you thought he was. I am not here to say all REITS are bad, I use them in my practice for 5-10% of my high net worth clients portfolios. In no way however am I promising the moon, when used as a diversifier REITS (non traded) can smooth out volatility and provide a generous income. They should not be your only source of income however.

All in all the most important thing I can do is educate and inform the general public about whats out there. There are tons of investment programs available to the public and by and large most are on the up and up. However many in my industry like to abuse or misrepresent what they are proposing to clients. Generating a solid income stream for a client is not rocket science. Listen to your clients, understand their goals, risk tolerance and time horizon. Its amazing what you can accomplish when you actually listen. I was told early on in this business you want to be interested not interesting.