As you are aware, it has been a painful first half of 2008 for the US and world stock markets. During these rough market periods, you must remember that the economy is a self-correcting mechanism. It moves from a high called a peak downward via a contraction to a low side trough. From here it experiences an expansion carrying it back to a new peak. Historically each successive peak tends to be higher than previous peaks. This is how the market has averaged about a 10% growth over the past 100 years or so. The length of time between when the contraction ends and the expansion begins (the trough) varies but usually lasts between 6 to 18 months. The upward expansion phase can last for years given investors a false sense of well being as if the good times will last forever.
Sometimes if the contraction is deep enough a recession will occur. Recessions are marked by increased unemployment, businesses closing down and a reduced demand for goods and services. Recessionary periods dot the American economic landscape. During 1837 - 1843 it was the collapse of a large insurance company combined with falling grain prices and land speculation. In 1873 it was the collapse of a major bank. Twenty years later another recession followed the failure of a railroad company. The Great Depression and Black Tuesday occurred in October 1929. In more recent times, it was the oil crisis of the mid 1970's, the saving and loan bailout in 1981 and who could forget the dot-com meltdown in the early 2000s. And today we have the housing market and credit issues. The takeaways are that these economy cycles exist, they will happen at random intervals and economists can’t agree on what causes them.
I monitor the market closely and weekly analyze every single security owned by every one of my clients. This includes Fidelity, Van Kampen and several other mutual fund families along with selected stocks, ETFs and the appropriate indexes. I plot and cross reference each fund’s performance vs. other funds in its category and how it is performing vs. the appropriate index. Monthly, I review each client’s portfolio to see if adjustments to the portfolio are justified. In an earlier letter, I said that Small Cap and Mid Cap type funds are historically the first to respond to any market upturn. I am starting to see signs of life in both the Van Kampen Sm Cap Value fund and Fidelity Sm Cap fund. This is also reflected in the ETFs that track the Russell 2000 indexes. No one knows the future direction of the market. Even my market analysis is simply looking at and comparing the trends. These down periods average anywhere from 6 – 18 months. So hopefully, the market may start to improve soon.
It’s sometimes hard to remember when all we hear is how bad the economy doing, is that our investment window is 10 – 20 years in the future. We invest today for a return at some future point in our lives. Taking a long term view means you are not concerned with day to day, month to month or year to year variations. In fact, the current market slump is a good thing for long term investors. The single share price (NAV) of many funds is about where it was 18 – 24 months ago thus allowing you buy new shares at a relatively cheap price. The more shares you have the greater the future value of your investments.
Three things to keep in mind. 1) Ignore the talking heads. Successful long-term investors look beyond the headlines. Radio and TV tends to focus on daily events and convey the ‘sky is falling’ message. 2) Much of the current market’s large daily market swings is caused by profit taking. Market traders can create elasticity in the stocks because they can make money on market movement be it up or down. 3) Diversification is the key to surviving and thriving in the financial markets.
The best strategy right now is to continue to make bi-weekly or monthly deposits into your accounts. This lets you take advantage of dollar cost averaging which means a dollar invested today will buy more than a dollar did a year ago. No one, not your friends, not the talking heads, not your family or other self proclaimed “experts” can predict the market’s future. But you can rest assured, that the US or world economy will not collapse, that at some point in the future the current slump will end and when it does, the market will likely move to a new high before starting the next cycle. Another thing you can bank on is the market will experience two or three or more “the world is ending” scenarios within the next 15 – 20 years. That’s the economy cycle. The current slump is the second one this decade.
You will notice I am using a different letterhead. Although I offer the insurance and mortgage products of Capital Choice and my securities business is offered through CCF Investments, Inc., I am legally independent of both firms. The name of my firm is USA Living, Inc. and I offer my services to Capital Choice and CCF Investments via USA Living, Inc. The change in letterhead and business cards is so I can market my Web site at www.usa-living.com. This is not a change as far as you are concerned and requires no action on your part. CCF Investments is still your broker/dealer of record and I am still the Registered Advisor Representative watching over your portfolio.
If you have friends or relatives who need the services of a professional financial representative please have them contact me. Know that I will provide them with the same high level of service and support I provide to you.
Please feel free to contact me via email at david.snellen@ccfinvestments.com or by telephone at 954-302-3628 to discuss any question you have concerning investments, retirement or estate planning.
Thursday, August 21, 2008
Monday, August 11, 2008
Financial Planning
The past year of market volatility has clearly shown that making investment decisions based on one, three, five or ten year average returns will blindside you when the market starts trending downward. It simply takes too long for a market turn down to be reflected in long term averages. Some people say that long term investing should only consider long term windows. This may be true, but I would prefer that my client's portfolios not drop 25% before the downward trend is acted upon.
The economy is a self-correcting mechanism. It moves from a high called a peak downward via a contraction to a low side trough. From here it experiences an expansion carrying it back to a new peak. Historically each successive peak tends to be higher than previous peaks. This is why the market has averaged about a 10% growth over the past 100 years or so. The length of time between when the contraction ends and the expansion begins varies but usually lasts between 6 to 18 months. The expansion phase itself can last for years given investors a false sense of well being as if the good times will last forever.
Sometimes if the contraction is deep enough a recession will occur. Recessions are marked by increased unemployment, businesses closing down and a reduced demand for goods and services. Recessionary periods dot the American economic landscape. During 1837 - 1843 it was the collapse of a large insurance company combined with falling grain prices and land speculation. In 1873 it was the collapse of a major bank. Twenty years later another recession followed the failure of a railroad company. In more recent times, it was the oil crises of the mid 1970's, the saving and loan bailout in 1981 and who could forget the dot-com meltdown in the early 2000s. And today we have the housing market collapse and credit crises. The takeaway is that these economy cycles exist, they will happen at random intervals and we must learn to live with them.
Knowing the cycle occurs is one thing, but seeing your portfolio drop by 50% is quite another. An ideal investment strategy would be to take profits during the expansion phase of the economic cycle and protect the profits during the contraction phase. One passive investment strategy could be to take 50% of the equity capital gains and distributions earned as the market expands and move them to a mutual fund or ETF that has less volatility than the market. This could be a money market fund or preferably a bond fund that pays more interest. This effectively locks in profits and works to reduce the volatility of your portfolio. The 50% left in the equity accounts gives them room to grow and hopefully increases the amount transferred to the bond fund or money market account each year.
The 50/50 strategy may be too conservative if you are in your twenties. A better ratio may be the decade approach. If you are in your 20’s, then reallocate 20% of the gains to a bond fund and leave the 80% in the equities. When you reach 30, change the allocation to 30/70. In your 40s to 40/60. When you reach 50, do a careful review of your allocation percentage between your conservative investments and your equity investments. By this time you will likely have experienced five or six major market contractions and probably a couple of deep recessions. And you will know how to adjust the reallocation ratio to ensure you meet your target goals by the time you reach 60. The ratio can also be adjusted year to year taking more profits when times are good and less when the market is contracting.
What investment strategy you use is not as important as having one in the first place. The secret to accumulating wealth is time, having a diversified portfolio and a strategy for protecting your gains. If you are unsure how to put together a diversified portfolio then hire a financial planner. You will pay for the service, but usually the money they make you will far exceed their fees.
The economy is a self-correcting mechanism. It moves from a high called a peak downward via a contraction to a low side trough. From here it experiences an expansion carrying it back to a new peak. Historically each successive peak tends to be higher than previous peaks. This is why the market has averaged about a 10% growth over the past 100 years or so. The length of time between when the contraction ends and the expansion begins varies but usually lasts between 6 to 18 months. The expansion phase itself can last for years given investors a false sense of well being as if the good times will last forever.
Sometimes if the contraction is deep enough a recession will occur. Recessions are marked by increased unemployment, businesses closing down and a reduced demand for goods and services. Recessionary periods dot the American economic landscape. During 1837 - 1843 it was the collapse of a large insurance company combined with falling grain prices and land speculation. In 1873 it was the collapse of a major bank. Twenty years later another recession followed the failure of a railroad company. In more recent times, it was the oil crises of the mid 1970's, the saving and loan bailout in 1981 and who could forget the dot-com meltdown in the early 2000s. And today we have the housing market collapse and credit crises. The takeaway is that these economy cycles exist, they will happen at random intervals and we must learn to live with them.
Knowing the cycle occurs is one thing, but seeing your portfolio drop by 50% is quite another. An ideal investment strategy would be to take profits during the expansion phase of the economic cycle and protect the profits during the contraction phase. One passive investment strategy could be to take 50% of the equity capital gains and distributions earned as the market expands and move them to a mutual fund or ETF that has less volatility than the market. This could be a money market fund or preferably a bond fund that pays more interest. This effectively locks in profits and works to reduce the volatility of your portfolio. The 50% left in the equity accounts gives them room to grow and hopefully increases the amount transferred to the bond fund or money market account each year.
The 50/50 strategy may be too conservative if you are in your twenties. A better ratio may be the decade approach. If you are in your 20’s, then reallocate 20% of the gains to a bond fund and leave the 80% in the equities. When you reach 30, change the allocation to 30/70. In your 40s to 40/60. When you reach 50, do a careful review of your allocation percentage between your conservative investments and your equity investments. By this time you will likely have experienced five or six major market contractions and probably a couple of deep recessions. And you will know how to adjust the reallocation ratio to ensure you meet your target goals by the time you reach 60. The ratio can also be adjusted year to year taking more profits when times are good and less when the market is contracting.
What investment strategy you use is not as important as having one in the first place. The secret to accumulating wealth is time, having a diversified portfolio and a strategy for protecting your gains. If you are unsure how to put together a diversified portfolio then hire a financial planner. You will pay for the service, but usually the money they make you will far exceed their fees.
Hunting Stand
I got back yesterday from a quick trip to my place in MO. I have 245 acres about 120 miles SSW from St. Louis. Its a vacation home although every trip means lots of work either to maintain the yard or care for the farm. I grow trees so its not like its a big deal. But I still like to keep the tails clear and take care of the wildlife food plots.
This trip was to mow the yard and work on finishing my second prototype of a hunting stand. Its main use will be to hunt turkeys and wild pigs. I have a lot of deer on the property but I don't hunt them. Taking their picture is more fun.
Turkeys and pigs are another story. Turkeys are fun because they are hard to hunt. I use a crossbow which means you must be fairly close. 30 yards is about the maximum range. The crossbow will shot much further and it very accurate out to 50 yards and beyond. But the bolt traveling at 330 fps requires about 27/100's of a second to travel the 30 yards. The turkey will hear the release and see the bolt in flight and move before it strikes them. So 20 yards is a better distance or even 10 yards.
The pigs are feral pigs and the state encourages hunting them year round. They are a nuance and will destroy a good food plot or crop. I have a lot of wild pigs on the property but haven't yet shot one.
For the past couple of years I have hunted on the ground using a pop-up blind. Its ok, and I managed to get turkeys with them. But I hate being on the ground. Bugs up my shirt, mice crawling around and where there are mice, there are snakes and I hate snakes! Not afraid of them, just hate them. So I have been looking at buying a tree stand or some sort of hunting platform that is off the ground. Free standing hunting stands can be expense. And I don't particularly care for the lean against a tree type stand. The answer was to build a hunting stand that suited my purposes.
The basic requirements included a relatively large, flat platform from which I could use a crossbow. A crossbow is different from a bow in that horizontal space is required to allow for the movement of the arms. In the pop-up blind, I had to sit well to the rear and was limited in which direction I could shoot. I like to be hidden as much as possible so having the ability to conceal myself was important. I also like a roof for shelter from rain drops and bird poop.
My first attempt was a four foot platform upon which I could attach the pop-up. It's
attached to the tree for stability, very roomy and actually works very well. The downside was the size. The pop-up has a base of a little over 5x5 which creates a lot of waste when using a 4x8 sheet of plywood and 8' lengths of 2x4's. This is a great hunting stand for turkey or pig. You are not quite out of line of sight but you are off the ground and don't need to worry about snakes.
To optimize the use of the wood, I decide to work with a 4x4 platform. I also wanted more height. With height you have to be concerned with personal safety and stability. Side rails would be necessary for safety. And strong enough to resist a decent amount of sideways pressure. A sturdy platform with side rails will be top heavy so it must be securely attached to a tree. I like to use two 1/2" stainless steel bolts placed 4' to 6' off the ground. Since the stand will be in place year round, attaching it lower on the tree will subject it to less movement as the tree moves in the wind.
I sketched a design and figured I needed 13-2x4x8; 4-4x4x8; 1-4x8x3/4" plywood, about
2 lb of 3" deck screws and 8-2x4 zinc attachment connectors. The lumber is pressure treated. I was able to buy this for about $120 at the local lumber yard. The connectors are used to attach the vertical 2x4s to the horizontal floor. It required the better part of two days but I finally stood it up. About four hours were spend correcting early design errors. So it should be possible to build this in a day. An important building point: check the lumber before you get home, be sure it is not warped. Notice the left rear leg. That twist is not a picture angle error. Three of the four legs have a twist of about 15 degrees.
The top front rail is removable to allow ease of getting in and out. It's held in place by two 1 3/4" L brackets. Not visible is the X shaped pattern inside the second level of horizontal leg supports. These braces are necessary to provide a filling base for the forklift. Also not shown is the roof and the ladder. Both will be assembled after the stand is in place. The sides will be covered with burlap or maybe enclosed with 1/4" plywood. I will make that decision after I attach the roof.
Installation will require a truck to haul the stand and a forklift to stand it up and position it. I had thought seriously about delivering it to the site in two pieces and do final assembly there. But the distance to the site is only a little more than a mile and I would invariably need something from the shop, so I decided to deliver it pre-assembled. The first stand was located about a quarter of a mile from the shop and required six trips before it was finished.....
The hunting stand will be installed in September in time for turkey season. Check back then for an update.
Dave
This trip was to mow the yard and work on finishing my second prototype of a hunting stand. Its main use will be to hunt turkeys and wild pigs. I have a lot of deer on the property but I don't hunt them. Taking their picture is more fun.
Turkeys and pigs are another story. Turkeys are fun because they are hard to hunt. I use a crossbow which means you must be fairly close. 30 yards is about the maximum range. The crossbow will shot much further and it very accurate out to 50 yards and beyond. But the bolt traveling at 330 fps requires about 27/100's of a second to travel the 30 yards. The turkey will hear the release and see the bolt in flight and move before it strikes them. So 20 yards is a better distance or even 10 yards.
The pigs are feral pigs and the state encourages hunting them year round. They are a nuance and will destroy a good food plot or crop. I have a lot of wild pigs on the property but haven't yet shot one.
For the past couple of years I have hunted on the ground using a pop-up blind. Its ok, and I managed to get turkeys with them. But I hate being on the ground. Bugs up my shirt, mice crawling around and where there are mice, there are snakes and I hate snakes! Not afraid of them, just hate them. So I have been looking at buying a tree stand or some sort of hunting platform that is off the ground. Free standing hunting stands can be expense. And I don't particularly care for the lean against a tree type stand. The answer was to build a hunting stand that suited my purposes.
The basic requirements included a relatively large, flat platform from which I could use a crossbow. A crossbow is different from a bow in that horizontal space is required to allow for the movement of the arms. In the pop-up blind, I had to sit well to the rear and was limited in which direction I could shoot. I like to be hidden as much as possible so having the ability to conceal myself was important. I also like a roof for shelter from rain drops and bird poop.
My first attempt was a four foot platform upon which I could attach the pop-up. It's
attached to the tree for stability, very roomy and actually works very well. The downside was the size. The pop-up has a base of a little over 5x5 which creates a lot of waste when using a 4x8 sheet of plywood and 8' lengths of 2x4's. This is a great hunting stand for turkey or pig. You are not quite out of line of sight but you are off the ground and don't need to worry about snakes.To optimize the use of the wood, I decide to work with a 4x4 platform. I also wanted more height. With height you have to be concerned with personal safety and stability. Side rails would be necessary for safety. And strong enough to resist a decent amount of sideways pressure. A sturdy platform with side rails will be top heavy so it must be securely attached to a tree. I like to use two 1/2" stainless steel bolts placed 4' to 6' off the ground. Since the stand will be in place year round, attaching it lower on the tree will subject it to less movement as the tree moves in the wind.
I sketched a design and figured I needed 13-2x4x8; 4-4x4x8; 1-4x8x3/4" plywood, about
2 lb of 3" deck screws and 8-2x4 zinc attachment connectors. The lumber is pressure treated. I was able to buy this for about $120 at the local lumber yard. The connectors are used to attach the vertical 2x4s to the horizontal floor. It required the better part of two days but I finally stood it up. About four hours were spend correcting early design errors. So it should be possible to build this in a day. An important building point: check the lumber before you get home, be sure it is not warped. Notice the left rear leg. That twist is not a picture angle error. Three of the four legs have a twist of about 15 degrees.The top front rail is removable to allow ease of getting in and out. It's held in place by two 1 3/4" L brackets. Not visible is the X shaped pattern inside the second level of horizontal leg supports. These braces are necessary to provide a filling base for the forklift. Also not shown is the roof and the ladder. Both will be assembled after the stand is in place. The sides will be covered with burlap or maybe enclosed with 1/4" plywood. I will make that decision after I attach the roof.
Installation will require a truck to haul the stand and a forklift to stand it up and position it. I had thought seriously about delivering it to the site in two pieces and do final assembly there. But the distance to the site is only a little more than a mile and I would invariably need something from the shop, so I decided to deliver it pre-assembled. The first stand was located about a quarter of a mile from the shop and required six trips before it was finished.....
The hunting stand will be installed in September in time for turkey season. Check back then for an update.
Dave
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