(Written October 2009)
During the past decade, income focused investors have faced a remarkable period of interest-rate volatility. In the past 10 years ending in 2008, the Federal Reserve adjusted the federal funds target rate, which influences the interest rates that consumers pay and bondholders earn, 41 times.
One way to help manage interest-rate risk and cash flow from income focused investment is to construct an investment ladder. This allows the investor to benefit when the rates are high and to help minimize the effect when rates are low. Implementing a ladder investment strategy is easy and can be done with bonds, CDs or annuities.
Step by Step Using Bonds
Bonds, which are debt obligations of the issuer, are issued with maturity dates ranging from a couple of years to 30 years or more. Interest payments are generally every six months with the face value of the bond due at maturity. The interest rate paid by bonds is established when the bond is issued. If interest rates later rise, the issuer will pay a below market interest rate. Conversely, if interest rates fall, the issuer is straddled with paying an above market rate interest rate.
Although the interest paid by the issuer will remain constant, the principal value of a bond may fluctuate with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. Investors seeking to achieve higher yields may also face a higher degree of risk. The interest earned may also be taxable at both the state and federal level.
To set up a six-year bond ladder, you would purchase five different bonds with maturity dates of two, three, four, five and six years, respectively. If these are new issue bonds, you will earn an interest rate close to the prevailing market rate. When the first bond matures after two years, you purchase a new six-year bond to keep the ladder intact. Each year when the bond matures, you simply purchase a new six year bond. If interest rates have risen, you benefit from having cash available to invest in a new bond at the higher rate. If interest rates have fallen, only a portion of the portfolio is subject to the lower rate.
An alternative to buying individual bonds is to invest in a bond mutual fund or ETF. Interest is paid monthly instead of semi-annually and you don’t have to worry about reinvestment interest rates.
Using Annuities
Annuities come is many flavors ranging from simple savings annuities to complex variable annuities. The ones we are interested in for an annuity ladder are the short term, no fee and no commission savings annuity. This type of annuity is available from several insurance companies. They can be purchased for various time periods ranging from two to ten years or more and generally have a minimum investment amount with $20,000 to $50,000 being common. These annuities offer a fixed rate of return for a fixed period and the purchaser has no market risk.
For example, in mid September 2009, a simple $100,000 2-year saving annuity contract can be purchased earning 1.75%. A $100,000 5-year saving annuity will earn 3.65%. You can buy this directly from the company with no fees, no commission or salesperson involved. You simply give them a check for $100,000 and in two years they give you back a check for about $103,560. The 5-year annuity would earn about $20,000. Unlike bonds and CDs, the tax on the interest earned on an annuity is deferred.
Constructing an annuity ladder is similar to that of a bond ladder, but you may be limited to the term lengths offered by a single company. For example, some companies offer 2, 5 and 10 year saving annuities. Others offer may offer 3, 5, 7 and 10 year terms.
The interest rate paid on an annuity contract is also influenced by the Federal Funds Target Rate. Like bonds, you will want to keep the ladder short with five to six years probably being the limit. To construct a two-year annuity ladder, purchase a two-year annuity this year and one year later purchase another two-year annuity. When the first one comes due, you may be able to do a 1031 exchange into another two-year annuity which may be paying a higher rate of guaranteed return. The 1031 exchange will allow you to defer the tax on the interest earned.
If a company allows for a three-year annuity contract, the ladder is constructed over a three year period. Or you could build a five year ladder by buying a five-year contract every year for five years. The longer the ladder the more stability the annuity ladder will offer but may subject you to interest rate risk.
Using CDs
Constructing a CD ladder is very similar to the bond and annuity ladder but with more choices. Term lengths on CDs range from three months to five years. In mid-September 2009, the highest rate available on a one-year CD is 2.15% APY.
To construct the CD ladder, buy five separate CDs with maturity dates of 1, 2, 3, 4 and 5 years. As the first one matures reinvest in a new five-year CD. Unlike annuities, you will pay the tax on the interest earned each year even if the money earned will not be received until the CD matures.
With CDs it pays to shop around. You may purchase the CD from practically any bank located anywhere within the USA. Interest rates vary widely between banks with a high today of 2.15% APY down to a low of 1.25% APY. You can find current rates on www.bankrate.com. It may also pay to call the bank directly to request quotes or check the bank’s Web site.
There is no trick to CD laddering. Only due diligence is required in order to minimize risks. You may pay a surrender charge if you cash in a CD before its maturity.
Income investing using a ladder strategy can help provide stability during periods of interest-rate volatility. Remember to read all the fine print before purchasing.
Where to Use a Ladder
All three ladders will create taxable income so it would be wise to consider which investment vehicle: a Traditional IRA, Roth IRA or Saving Account would be the most appropriate. The Roth IRA would by far be the best location because all income is receive tax free after you reach 59 ½. It would not make sense to place an annuity ladder in a Traditional IRA. An IRA already has deferred tax status. It’s a duplication of effort. Both the bond and CD ladder would fit nicely in any of the three investment vehicles.
Written by David Snellen
© 2009 USA Living Financial Group
Thursday, November 5, 2009
Create a Personal Pension Plan
(Written August 2009)
“If you ask what is the single most important key to longevity, I would have to say it is avoiding worry, stress and tension. And if you didn’t ask me, I’d still have to say it.” – George Burns
A steady stream of income will go a long way toward eliminating worry, stress and tension in one’s life. The catch however, is how to create a no stress stream of income.
Many people have pensions earned while working for a larger corporation or a government entity. Others choose to buy an immediate annuity. This involves giving an insurance company a sum of money in exchange for a defined period of income. The defined period could be for a short term like 10 or 20 years or for life.
For those of us who do not have a pension and choose to not give up control of our money, one option is to create a personal pension plan. A personal pension is not something you buy, it’s an investing strategy. And if planned properly the income from the personal pension can be tax free!
An individual investor has three choices for saving money. They are tax deferred, tax free and taxable accounts. Tax deferred accounts include IRAs and deferred annuities. There are significant differences between an IRA and a deferred annuity. An IRA is funded with pretax money and the invested amount along with the earnings is taxed upon withdrawal. A deferred annuity is funded with post tax dollars, but the earnings are tax deferred until withdrawal. Tax free accounts are Roth IRAs. With a Roth IRA, the invested money is taxed in the year earned but the growth is not taxed. Both tax deferred and tax free accounts have age limitations and other withdrawal consideration. Consult with your tax professional. The taxable accounts include bank savings account, CDs, money markets, checking accounts and similar type accounts.
How to Create a Personal Pension Plan
During the working years maximize your savings in a 401(k), IRA or Roth account. If you have the 401(k) option, try to invest at least 10-15% of your income. At a minimum, invest at least enough to meet the company’s matching contribution.
If you don’t have the 401(k) option, then your saving choice should probably be a Roth account. You can invest up to $5,000 ($6,000 for 50 & older) this year. You pay tax on the money this year but future earnings can be withdrawn tax free after reaching the age of 59½.
The tax free earnings are significant. For example, a single $5,000 deposit growing at 8% a year for 20 years will create over $18,000 of tax free income. Another example. Investing $5,000/year for 20 years at an average annual growth of 8% will grow to over $205,500. Upon reaching age 59½, this $205,500 could be invested in a combination of government and corporate bonds earning an average return of 6%. This amounts to about $1,025 of tax free income each month. Not bad for a personal pension in which the principal isn’t touched and you don’t have to retire to get it.
Portfolio Organization
When creating a personal pension look at the tax deferred, tax free and taxable categories as a holistic portfolio with distinct parts but coordinated to work together. IRA assets can be withdrawn upon reaching the age of 59½ and reinvested in the Roth account. Or the IRAs asset can be re-characterized into the Roth IRA at any time. Both the withdrawal and re-characterization are taxable events. The Roth account is invested for growth and to create a tax free cash flow. See your tax professional to discuss the re-characterization option.
Portfolio Diversification
An investment portfolio should consist of three distinct allocations of stock funds, bond funds and cash. This applies to 401(k), IRAs, Roth IRA and investment saving accounts. This approach allows for growth and cash accumulation. Stock funds include investments in US and foreign stocks. Stock funds are volatile but over time will be the heavy lifers in a portfolio. Bond funds are the monthly income generators and investors have many choices from high yield corporate bond funds to Government issued bonds both foreign and domestic. Cash has a zero correlation with stocks and bonds and works very well to reduce the portfolio volatility. The allocation percentage is variable and should be discussed with your investment advisor.
Creating growth involves moving a portion of the stock equities capital appreciation into the bond allocation. The remaining portion and any dividends allow for growth in the stock equities. This is taking some of the profits and placing it in a lower risk investment while allowing for growth. Adding equity profits to the bond allocation will increase the monthly income generated by these funds. The bonds can retain the monthly dividends or put them in the cash account.
The cash can be used to adjust the portfolio allocation or possibly flow into another account. For example, the IRA cash could flow into the Roth IRA via re-characterization. Roth IRA cash account being fed by bond funds could create a tax free monthly cash deposit into a money market or checking account. See you tax professional to discuss the tax issues with IRA re-characterization
Creating a personal pension is possible but requires planning and a saving strategy. When is the best time to start planning for a personal pension plan? Today.
© 2009 David Snellen - USA Living Financial Group
“If you ask what is the single most important key to longevity, I would have to say it is avoiding worry, stress and tension. And if you didn’t ask me, I’d still have to say it.” – George Burns
A steady stream of income will go a long way toward eliminating worry, stress and tension in one’s life. The catch however, is how to create a no stress stream of income.
Many people have pensions earned while working for a larger corporation or a government entity. Others choose to buy an immediate annuity. This involves giving an insurance company a sum of money in exchange for a defined period of income. The defined period could be for a short term like 10 or 20 years or for life.
For those of us who do not have a pension and choose to not give up control of our money, one option is to create a personal pension plan. A personal pension is not something you buy, it’s an investing strategy. And if planned properly the income from the personal pension can be tax free!
An individual investor has three choices for saving money. They are tax deferred, tax free and taxable accounts. Tax deferred accounts include IRAs and deferred annuities. There are significant differences between an IRA and a deferred annuity. An IRA is funded with pretax money and the invested amount along with the earnings is taxed upon withdrawal. A deferred annuity is funded with post tax dollars, but the earnings are tax deferred until withdrawal. Tax free accounts are Roth IRAs. With a Roth IRA, the invested money is taxed in the year earned but the growth is not taxed. Both tax deferred and tax free accounts have age limitations and other withdrawal consideration. Consult with your tax professional. The taxable accounts include bank savings account, CDs, money markets, checking accounts and similar type accounts.
How to Create a Personal Pension Plan
During the working years maximize your savings in a 401(k), IRA or Roth account. If you have the 401(k) option, try to invest at least 10-15% of your income. At a minimum, invest at least enough to meet the company’s matching contribution.
If you don’t have the 401(k) option, then your saving choice should probably be a Roth account. You can invest up to $5,000 ($6,000 for 50 & older) this year. You pay tax on the money this year but future earnings can be withdrawn tax free after reaching the age of 59½.
The tax free earnings are significant. For example, a single $5,000 deposit growing at 8% a year for 20 years will create over $18,000 of tax free income. Another example. Investing $5,000/year for 20 years at an average annual growth of 8% will grow to over $205,500. Upon reaching age 59½, this $205,500 could be invested in a combination of government and corporate bonds earning an average return of 6%. This amounts to about $1,025 of tax free income each month. Not bad for a personal pension in which the principal isn’t touched and you don’t have to retire to get it.
Portfolio Organization
When creating a personal pension look at the tax deferred, tax free and taxable categories as a holistic portfolio with distinct parts but coordinated to work together. IRA assets can be withdrawn upon reaching the age of 59½ and reinvested in the Roth account. Or the IRAs asset can be re-characterized into the Roth IRA at any time. Both the withdrawal and re-characterization are taxable events. The Roth account is invested for growth and to create a tax free cash flow. See your tax professional to discuss the re-characterization option.
Portfolio Diversification
An investment portfolio should consist of three distinct allocations of stock funds, bond funds and cash. This applies to 401(k), IRAs, Roth IRA and investment saving accounts. This approach allows for growth and cash accumulation. Stock funds include investments in US and foreign stocks. Stock funds are volatile but over time will be the heavy lifers in a portfolio. Bond funds are the monthly income generators and investors have many choices from high yield corporate bond funds to Government issued bonds both foreign and domestic. Cash has a zero correlation with stocks and bonds and works very well to reduce the portfolio volatility. The allocation percentage is variable and should be discussed with your investment advisor.
Creating growth involves moving a portion of the stock equities capital appreciation into the bond allocation. The remaining portion and any dividends allow for growth in the stock equities. This is taking some of the profits and placing it in a lower risk investment while allowing for growth. Adding equity profits to the bond allocation will increase the monthly income generated by these funds. The bonds can retain the monthly dividends or put them in the cash account.
The cash can be used to adjust the portfolio allocation or possibly flow into another account. For example, the IRA cash could flow into the Roth IRA via re-characterization. Roth IRA cash account being fed by bond funds could create a tax free monthly cash deposit into a money market or checking account. See you tax professional to discuss the tax issues with IRA re-characterization
Creating a personal pension is possible but requires planning and a saving strategy. When is the best time to start planning for a personal pension plan? Today.
© 2009 David Snellen - USA Living Financial Group
Monday, February 23, 2009
Top Five List - Feb 20, 2009
A review of the Top Five best performing securities by asset class contains no real surprises or change from the weeks before. The ranking uses the Sharpe ratio as the primary sort. Download the complete list at 2009-02-20 Top Five.
Summary: All asset classes are showing similar patterns of trending upward from the lows of 6 to 12 months. The annualized 4 week average return is -3.4%, 3 month is -0.4%, 6 month is -27.0%, 9 month is -30.9% with the 1 year is -22.8%. This ripple should roll through the periods so we should expect relatively better (i.e. less negative) returns in the outer periods. The 4 week decline may indicate a forthcoming further dip. Government bond funds currently provide the best risk adjusted investments, followed by Corporate Quality bonds, then Precious Metals and Municipal Bonds.
Asset Allocation - The Vanguard LifeStrategy (VASIX) is on top, but that's no real victory as this fund and the other four have all posted negative returns for the trailing 12 months.
Bear Market - These funds short the market and have been top performers since last spring. The iShares Short Treasury (SHV) is on top becasue of its low standard deviation compared to its mean. UltraShort Russell 1000 Value had the best Geometric Average at 46.%. The Short DOW 30 (DOG), UltraShort Financials (SKF) and UltriShort S&P 500 (SDS) follow.
Commodity - PowerShares DB Commodity Idx (DBC) is on top, but all five have negative 12 month trailing returns. Interesting, International Coal Corp. (ICO) which is a stock is second on the list. (Disclosure: I have a position in this stock.) All the commodity funds have standard deviations greater than 23.5.
Communications - Fidelity funds own this asset class. The top three, Select Wireless (FWRLX), Select Telecommunications (FSTCX) & Telecommunications (FTUAX), posted positive returns for the trailing 4 Week & 3 Month period.
Comsumer - Fidelity has four of the top five in this class but all have negative returns for the 12 month trailing periods. Fidelity Select Chemicals (FSCHX) is followed by Consumer Staples (FDAGX), Select Leasure (FDLSX), Vanguard Consumer Staples (VDC) and Fidelity Select Industrial Equip (FSCGX).
Corporate High-Yield Bond - Vanguard (VWEHX) is on top followed by Ishares (HYG), American Funds (AHITX), PowerShares (PHB) and USAA High Yield (USHYX). This class has positive returns for the 3 month trailing period but the 4 week perod returned to negative returns.
Corporate Bonds - This class is holding up well considering the credit issues. All five funds are showing positive trailing returns and the individual standard deviations are less than the individual means. On top is FPA New Income (FPNIX) followed by four of the Vanguard funds. The Short-Term ETF (BSV), Short-Term Index (VBISX), Total Bond Market (VBMFX) and the Total Bond ETF equivalent (BND).
Diversified Emerging Market - This class has positive returns for the 3 month trailing which is in sharp contrast to the -40.0% to -50.0% trailing 6 month period. The 4 week period is averaging about 0% returns. This may be a class worth watching. On top is iShares Chile (ECH), followed by iShares Brazil (EWZ), Fidelity Latin America (FLTAX), BLDRS Emerging Markets (ADRE) and American New World (NEWFX).
Financials - Negative for the 12 month trailing periods. Standard deviations are less than the negative means which means no anticpated positive returns anytime soon. Fidelity Select Brokeage (FSLBX) tops the list.
Foreign Corporate Bonds - Has positive 3 month trailing returns and standard deviations exceed the means. PowerShares Emerging Mkts (PCY) is on top floowed by Templeton Global Bond (TPINX).
Foreign Large Cap -No life here. All negative for trailing 12 month periods.
Foreign Mid Cap - Three of the five funds have life spans of less than 12 months. Third Avenue Intl (TAVIX) is on top followed by Vanguard Intl Explorer (VINEX).
Foreign Small Cap - Only three funds in this class and all three are negative for the trailing 12 months.
Global Real Estate - Negative 12 month trailing returns across the board, high negative means and Sharpe ratio ranging from -2.6 to -3.1.
Government Bonds - Positive 12 month trailing but clearing trending downward. This class may go 4 week negative following 3 of the 5 funds which already have. On top is SPDR Interm term (ITE) and it has a -1.0% 4 week return. Vanguard GNMA (VFIIX) has a 0% 4 week return which contrasts with the 3.0% 3 month, 5.0% 6 month, 5.0% 9 month and 14.0 % 1 year return.
Healthcare - The Biotech ETF (BBH) is on top and the only one of group with a positive geometric average. Fidelity Biotech (FBTAX) is distant second.
Inflation Protected Bonds - All five are showing positive 4 week and 3 month returns although the 4 week is less than the 3 month. Across the board relatively stable with group standard deviations around 5.0. On top is Blackrock IP (BPLBX) then SPDR TIPS (IPE), Vanguard IP (VIPSX), iShares TIPS (TIP) and Fidelity IP (FIPAX).
Large Cap Equity - All dead with the CGM Mutual (LOMMX) being less dead than the others. The CGM Focus (CGMFX) (Disclosure: I have a position in this fund) and Rydex S&P Equal (RYE) have -7.0% means with standard deviations of around 21.8%. The fourth entry is the John Deere stock (DE) is has been really beaten up followed by Van Kampen Growth (ACPAX).
Mid Cap Equity - As a whole worst than the large cap class. On top is Fidelity Select IT (FBSOX).
Municipal Bonds - All positive returns for 12 month trailing. Low standard deviations, means between -0.8 to 1.9 and Sharpe above 0.0. Leading is Fidelity Advisor Sh Int Muni (FASHX) then Vanguard Int Term (VWITX) and iShares Muni Bond (MUB).
Natural Resources - Potash Corp (POT) well ahead of the other four. However, this stock is a wild bet with an annual standard deviation of 55.2%. It has a 1 year return of 51% with a 9 month return of -57%, a 6 month returns of -52% then 3 month of 20% and a 4 week return of 21%. A wild ride.
Pacific/Asia - All five showing life in the 3 month period but back to around 0% for the 4 week period. Better considering the 6 monh to 1 year where -27% to - 47% is the norm. Overall class average is less than the Diversified Emerging Market class. The China funds own four of the five slots. On top is iShares China (FXI) then Templeton China (TCWAX), SPDR China (GXC), Matthews Asia Pacific (MAPIX) and iShares Hong Kong (EWH).
Precious Metals - Gold has pushed these funds skyward with double digits for the top three entries. Leading is SPDR Gold (GLD) with annuallized Geometric Avg of 16%. Then PowerShares Gold (DGL) at 14%, ProwerShares Prec Metals (DBP) with 13%. iShares Silver (SLV) and Market Vectors Gold (GDX) both had single digit returns at 6% and 5% respectively.
Real Estate - Vanguard REIT (VGSIX) is on top but this is no great achievement. As a group Real Estate ranks with the Financials in value. Real Estate posted trailing returns in the range of -11% to -69%.
Small Cap Equity - 4 week and 3 mon ranging from 2% to -7% is better than 6 months to 1 year which varied between -16% to -47%. Four week is down from 3 month.
Technology - Slightly better than Small Caps. iShares Biotech (IBB) had a 5% 3 month followed by a -1% 4 week return.
Utilities - Worst than Technology and on par with Financials and Real Estate.
World Stock - Lowest of the 29 asset classes.
Summary: All asset classes are showing similar patterns of trending upward from the lows of 6 to 12 months. The annualized 4 week average return is -3.4%, 3 month is -0.4%, 6 month is -27.0%, 9 month is -30.9% with the 1 year is -22.8%. This ripple should roll through the periods so we should expect relatively better (i.e. less negative) returns in the outer periods. The 4 week decline may indicate a forthcoming further dip. Government bond funds currently provide the best risk adjusted investments, followed by Corporate Quality bonds, then Precious Metals and Municipal Bonds.
Analysis by USA-Living Financial Group. Past performance is NOT an indicator of future performance.
Wednesday, October 1, 2008
September 30, 2008 Investment Analysis
By now, you have probably heard enough bad news about the economy from the talking heads and the legions of ‘experts’ who are so willing to offer their opinion. Investment success is all about seeing the big picture despite the market’s noise. The daily financial media and the evening news are all about creating noise. Every blip on the Dow does not have a deep meaning nor will it predict a trend. It is impossible to analyze a daily event and state with any measurable degree of accuracy what the market will do in the future.
When the headlines are screaming doom, look at the numbers. We are no where near the “Great Depression”. In terms of our daily lives, the highways are still clogged with cars, high-end restaurants are full. Airlines are flying full airplanes. Unemployment is about 6% compared to 25% during the Great Depression. Per capita income adjusted for inflation is about five times what is was during the Great Depression. Food prices are still high and “Help Wanted” signs are posted in many stores windows here in S. FL. These are not indicators of the US economy being on the verge of the next Great Depression.
Financial securities like mutual funds have declined in value over the past 12 months. For long term investors, this creates opportunities to employ dollar cost averaging to buy more shares with the same dollar amount. Yesterday, September 29, 2008, the market experienced a 777+ drop closing at around 10,365. Scary in its own right but this is where the market was in mid July 2006. Today, the market recovered 485+ of yesterday's drop. This is trader fear and greed in full display and is the reason why simple dollar cost averaging is the best investment strategy. When will the market begin to trend upward? No one knows. But when it does, the mutual fund shares you purchase today will increase your net worth faster than the shares you purchased last year at this time.
The decline in mutual fund values has also created an opportunity for harvesting some tax write-offs. If you sell funds in a taxable account for less than you paid, you can subtract the loss from gains elsewhere in your portfolio and if you have more losses than gains, you can write-off up to $3,000 of the losses against ordinary income. This is known as a tax swap. In a tax swap you can sell a losing fund and reinvest the proceeds in another fund. The net effect is you may be able to save on taxes but stay fully invested so you’re ready for the rebound. Your portfolio will have the same net value because you do not remove money from the portfolio. We simply move money from one fund to another and write-off the loss. You should review this strategy with your tax planner.
I continue to be asked about the safety of fund money. Your investments are safe and insured. Mutual funds held at firms like Van Kampen are protected by the Investment Company Act of 1940. When you invest your money, it goes to a bank custodian. The fund managers directs the investments but never holds the securities. Should Van Kampen fail, which is extremely unlikely, your account with its full value would simply be transferred to another firm, like Fidelity or American, etc. If you have questions about the safety of your money, feel free to contact me or Van Kampen directly.
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 shares 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 economy will not collapse, the world will not end and at some point in the future the market will start trending upward and when it does, it will likely move to a new record high.
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.
David Snellen
Registered Investment Representative
Capital Choice Investment Advisors, Inc.
954-302-3628
When the headlines are screaming doom, look at the numbers. We are no where near the “Great Depression”. In terms of our daily lives, the highways are still clogged with cars, high-end restaurants are full. Airlines are flying full airplanes. Unemployment is about 6% compared to 25% during the Great Depression. Per capita income adjusted for inflation is about five times what is was during the Great Depression. Food prices are still high and “Help Wanted” signs are posted in many stores windows here in S. FL. These are not indicators of the US economy being on the verge of the next Great Depression.
Financial securities like mutual funds have declined in value over the past 12 months. For long term investors, this creates opportunities to employ dollar cost averaging to buy more shares with the same dollar amount. Yesterday, September 29, 2008, the market experienced a 777+ drop closing at around 10,365. Scary in its own right but this is where the market was in mid July 2006. Today, the market recovered 485+ of yesterday's drop. This is trader fear and greed in full display and is the reason why simple dollar cost averaging is the best investment strategy. When will the market begin to trend upward? No one knows. But when it does, the mutual fund shares you purchase today will increase your net worth faster than the shares you purchased last year at this time.
The decline in mutual fund values has also created an opportunity for harvesting some tax write-offs. If you sell funds in a taxable account for less than you paid, you can subtract the loss from gains elsewhere in your portfolio and if you have more losses than gains, you can write-off up to $3,000 of the losses against ordinary income. This is known as a tax swap. In a tax swap you can sell a losing fund and reinvest the proceeds in another fund. The net effect is you may be able to save on taxes but stay fully invested so you’re ready for the rebound. Your portfolio will have the same net value because you do not remove money from the portfolio. We simply move money from one fund to another and write-off the loss. You should review this strategy with your tax planner.
I continue to be asked about the safety of fund money. Your investments are safe and insured. Mutual funds held at firms like Van Kampen are protected by the Investment Company Act of 1940. When you invest your money, it goes to a bank custodian. The fund managers directs the investments but never holds the securities. Should Van Kampen fail, which is extremely unlikely, your account with its full value would simply be transferred to another firm, like Fidelity or American, etc. If you have questions about the safety of your money, feel free to contact me or Van Kampen directly.
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 shares 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 economy will not collapse, the world will not end and at some point in the future the market will start trending upward and when it does, it will likely move to a new record high.
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.
David Snellen
Registered Investment Representative
Capital Choice Investment Advisors, Inc.
954-302-3628
Thursday, August 21, 2008
CLient Letter
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.
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.
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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